Google scored a large coup against rival Microsoft last week when the IT manager of the city of Washington DC selected Google Docs and Apps over Microsoft Office applications.

The $500,000 contract might appear small relative to the size of Google and Microsoft however the licensing agreement covers all 38,000 municipal staff employed by Washington DC. The licenses cover the use of Google email (Gmail), spreadsheets and word-processing programs and will see Google products used in accounting, budgeting, emergency response, schools and all other areas in which civic government operates in the DC area.

The switch from Microsoft products to Google products by one (smaller) major US city hardly marks a turning point in Google’s bid to dis-entrench Microsoft from its position as the world’s dominant software maker. Microsoft continues to power much of the modern world and still services most large corporations, governments and institutions around the world. What the DC switch does demonstrate is Google’s ability to capture small (but likely growing) segments of Microsoft’s traditional market with its lower-cost set of highly functional applications.

Google Docs and their other productivity apps still have a long way to go before they are as well used and ubiquitous as Microsoft products. The announcement of the DC switch however marks what could be the true beginning of Google’s focused attempt to take a big part of a market Microsoft absolutely relies on.