Microsoft Corp launches an updated version of its Office software on Wednesday, aiming to keep its grip on the hugely profitable business application market while countering the challenge of free online alternatives from Google Inc.

The world's largest software company is upgrading its popular Word, Excel, Outlook and PowerPoint applications, and rolling out its own online versions to keep up with the new class of mobile, web-connected users that have emerged since the last upgrade in 2006.

Most are expecting the Office franchise -- which Microsoft says has 500 million users -- to retain its dominance in the business world. But Office could be facing the beginning of an erosion of its must-have status.

Every time Microsoft releases a new version of Office, they get a bump up in revenue, said Toan Tran, an analyst at Morningstar. But how big of an upgrade is this? They might have a harder time getting people to update.

Microsoft is expected to trumpet a list of improvements on Wednesday, such as editing photos in Word, using video in PowerPoint, collaborating on documents and managing e-mail conversations in new ways.

But the most interesting facet is Microsoft's move into the cloud -- allowing users to manipulate documents stored on remote servers from anywhere -- where Google has been setting the pace.

They're coming into our playing field, said Dave Girouard, the Google executive leading the company's charge into business applications. They (Microsoft) have conceded that this is the future and now we think our products and services will get a lot more consideration.

Google Docs -- stripped down versions of Microsoft's core programs -- are available over the Internet with no need to download software. They are free for personal users and $50-per-user per year for companies. Google says it has picked up 25 million users since launching almost four years ago.

That is only a fraction of Microsoft's 500 million, but is growing quickly.

Word and Excel are pretty secure -- Excel is embedded in an uncountable number of business processes, so that would be pretty hard to rip out, said Tran.

But Microsoft faces more pressure in email and calendar programs, the areas most amenable to online and mobile use, where Google already has a strong foothold.

Google has made a lot of inroads there. Microsoft is going to face pressure there over time. They are probably going to have to cut prices to some extent, said Tran.

That could put the brakes on one of Microsoft's most formidable profit engines.

Microsoft's business division -- which gets 90 percent of its sales from Office -- averages around $2.8 billion profit per quarter. That is 47 percent of Microsoft's total profit so far this fiscal year, second only to Microsoft's core Windows franchise.

Businesses account for the vast majority of that. According to the latest data from tech research firm Forrester, 81 percent of companies are running Office 2007, compared with only 4 percent using Google's online equivalent.

A Forrester poll indicates almost a third of existing Office users plan to upgrade to Office 2010 -- which will be available to them from Wednesday -- within 12 months.

Ordinary consumers get the chance to buy Office 2010 next month, at prices ranging from $119 to $499, depending on the level of sophistication.

It will take at least a year before it is clear whether Microsoft has a winner and the extent to which customers are migrating to online versions and lessening reliance on installed software.

Google is not the threat that it will be once the 'virtual desktop' becomes a no-brainer, said Richard Williams, an analyst at Cross Research, referring to the practice of accessing software over the Web. That's the time Microsoft really has to worry about.

(Reporting by Bill Rigby and Alexei Oreskovic; editing by Andre Grenon)

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