In most people’s minds, including those of Microsoft executives, Google is Microsoft’s primary challenger and worst nightmare. While Microsoft can take on Apple, IBM and other challengers in a direct manner, it simply doesn’t have the business model to go head-to-head with “the cloud”.

Google monetizes its activities through advertising, and it does so with bewildering success. Only Yahoo competes, but it doesn’t compete strongly. Microsoft has declared its intention to usurp Google’s grip on search traffic several times, only to subsequently watch its own share of the search market decline.

Google’s dominance of search and indeed its mastery of web advertising wouldn’t matter too much to Microsoft, were it not for the arrow that Google is pointing directly at Microsoft’s heart. That arrow goes by the name of “Google Apps”, which Google is already serving from “the cloud” for free; email, calendar, word processing, spreadsheet, presentation software etc. Right now, only a trickle of small businesses and colleges are adopting Google Apps. It doesn’t sound game changing – does it?

1. The uptake of Google Apps will increase significantly in 2008.

Watch Google gradually enhance Google Apps as we pass through 2008. There is a both an engineering model and a business model driving Google’s activity. Google Apps are not “as good” as Microsoft Office and will not get as feature rich any time soon. But they will get “good enough” fairly quickly and when they do they’ll start to drain revenues from the Redmond giant. I expect to see Google get aggressive about providing communications capability through 2008 (see my prior posting on this) and use this to outmaneuver Microsoft via the cloud – delivering “office plus communications”.

Microsoft is in the unfortunate position of not being able to respond to this without “eating its own children”. It will prefer to nurse a declining office products revenue stream than to switch business model. Either way it loses. In chess they call it “zugszwang”. Microsoft has to move one way or the other and whichever move it makes, it loses out.

2. Google will become the top IT vendor in 2008.

I think it will happen this year, especially if there’s a recession in the US. Google will weather a recession slightly better than Microsoft. (Read Jesse Chan’s Fishtrain posting for more on Google’s value). Microsoft had a good year last year; it did well with the XBox, and it did well in its server business, and it did reasonably well on the desktop, despite Vista problems. But I don’t see it as sustainable. Google’s revenues are virtually guaranteed to grow.

Share prices aside, the technical trends are all on Google’s side. Google is the master of cloud computing and its day is surely dawning. The commercial advantage Google’s business model has over that of Microsoft simply increases with every advance that either Metcalfe’s Law or Moore’s Law delivers.

We are gradually entering the “age of the cloud” – with both software and computer power being delivered as a service – and for better or for worse, Google is becoming “the Microsoft of the Cloud”.

Note: There are 7 forecast postings for 2008. The others are:
Forecasts for 2008: #1 Chips & Virtualization
Forecasts for 2008: #2 The Server
Forecasts for 2008: #3 The PC Market
Forecasts for 2008: #5 Communications Convergence
Forecasts for 2008: #6 The Application Layer
Forecasts for 2008: #7 Security