A deal announced yesterday between Google and systems integrator Capgemini has Microsoft reacting with fear today. Google’s agreement puts them one large step closer to challenging the dominance of Office which is one of Microsoft’s two core revenue products.

The announcement was phrased in a press release from Paris based Capgemini reading in part,

Capgemini, one of the world’s foremost providers of consulting, technology and outsourcing services, today announced services supporting the adoption of Google Apps Premier Edition by large-scale enterprises. By partnering with Google, Capgemini extends its portfolio of desktop solutions, enabling it to support more client employees, regardless of their locations, platforms and roles.

Delivered as a Software as a Service (SaaS) solution over the Internet via a Web browser, Google Apps Premier Edition – which includes Docs & Spreadsheats, Gmail, Google Calendar, Google Talk and Start Page – provides powerful collaboration and communications applications for a low annual fee.

The agreement between Google and Capgemini marks the first serious competition Microsoft Office has faced since Corel bought (and subsequently broke) the WordPerfect suite in 1996. This for Microsoft is an enormous cause for concern as licensing of their core product can run into hundreds of dollars per unit where a Google Apps Premier Edition costs $50 per license.

Under the agreement, Capgemini will customize integration of the far lower priced per license Google Apps into corporate work stations as quickly as they can sign up new customers. That’s a pretty powerful offer considering the cost per user licensing system can cost businesses tens of thousands of dollars to comply with.

Microsoft fired back with a top ten list of questions designed to question the strength and credibility of Google’s services. Joe Wilcox at eWeek’s Microsoft Watch today reprinted the Top Ten list adding his own answers to questions he called FUDs (short for Fear, Uncertainty and Doubt). They discovered the awkward acronym GAPE and use it to full advantage. Here are his top two FUD’s:

“1. “Google touts having enterprise level customers but how many users of their applications truly exist within the enterprise?”

Why it’s FUD: There is no right answer. Whatever the response, Microsoft can claim 600 million Office users, even though about half of them use pirated software. For the record, Google says 100,000 businesses use the suite.

2. “Google has a history of releasing incomplete products, calling them beta software, and issuing updates on a ‘known only to Google’ schedule—this flies in the face of what enterprises want and need in their technology partners—what is Google doing that indicates they are in lock step with customer needs?”

Why it’s FUD: There’s a saying that people accuse of what they are guilty; the same applies to companies. Microsoft is an egregious abuser of betas, as bad or worse than what Microsoft claims about Google. How long as Windows Server 2008 been testing, with Microsoft touting the number of businesses using it in production? It’s wonderful misdirection.”

Wilcox goes on skewing at Microsoft’s expectations of discontent effectively dismissing each of the arguments. It’s a fun read that acts as an instructive guide to the word play wizardry of FUD marketing. Microsoft appears to be frustrated.

Microsoft has good reason to be frustrated. Google docs and spreadsheets work very much like Microsoft Office products. Experienced users are not likely to experience many difficulties. While they might not interface well with actual Office products Google’s server-side software strategy has a few unique advantages that go beyond low cost.

Not only has Google managed to create a useful set of office productivity software, it is close to perfecting the provision of server-side software suites. That’s a trick Microsoft has struggled with but dreamed of for years. They simply didn’t have the ad-model to support and subsidize it.

The most interesting difference I’ve found using Google docs is the easy allowance for collaborative work. As documents are saved to a central server, access and active team work are made easier. Several people can work on the same set of documents with all alterations marked and recorded in a wiki-like environment. The collaborative creation feature worked amazingly well for two project groups I’ve worked with.

The most interesting aspect of server-side software is the easy allowance for computing devices to get much smaller. Imagine your cell phone or “handheld” being as multi-functional as your laptop. If the software and storage space doesn’t have to be on the computing device, a lot of computing can be done much smaller devices.

The biggest stall in the server-side software dream is last-mile connectivity. To shrink the size of computing devices, connectivity has to be everywhere. Ubiquitous WiFi, (another topic both Google and Microsoft are keenly interested in) is the key to providing truly revolutionary server-side applications. Watch for free WiFi in virtually every city near you in the very near future.

The shrinking of computing devices and easier access for greater numbers of people is one of those web-shattering changes prognosticators and pundits have been predicting for years. Server-side software applications make that possible.

Server-side applications also put the fear of declining expectations into Microsoft. Google’s agreement with Capgemini can be seen as a significant step towards an uncertain sales environment. There will be, no doubt, significant barring of teeth and gnashing of chairs in Redmond for the next little while.