Microsoft is planning to change a key section of its Office 2007 licence in a bid to compete with Google Apps and the growing number of cheap and free online alternatives.

The software giant is concerned by the number of small businesses and consumers that are switching from Microsoft Office to other web-based applications. However, by reworking its licence agreement, multiple sources claim it will allow web-hosting service providers such as Fasthosts to offer Office applications using an emerging technology called application streaming.

The sources said Microsoft will make the announcement early next week during its weeklong Microsoft Management Summit show in Las Vegas.

If successful, the company will likely overcome its long-held fears about hurting its hugely profitable Office business and make the change permanent.

Microsoft "has been sensitive to whether it would cannibalise its own application business", said Neil Gardner, a vice president of marketing at application-streaming software vendor Endeavors Technologies. "They were also sensitive to the piracy side of it, of losing control over distribution."

Such a change could mean that Microsoft, with the huge data centers it is building, will start to stream Office directly to its customers, too.

It will be the second announcement by Microsoft this month that showcases its determination to fight growing competition from Google Docs, Yahoo's Zimbra, ThinkFree and similar services.

Last week, Microsoft confirmed that it is beta-testing a low-end Office bundle, code-named Albany, that it will offer on a subscription basis.

Microsoft did not respond to a request for comment.

Talk is cheap; is the service?

News of the licence change had already leaked out among members of Microsoft's hosting partner community, which had been campaigning for it for the past several years.

"What was frustrating for us was that Microsoft allowed Terminal Services for Office but explicitly disallowed application streaming," said Gardner, whose company is trumpeting the news on its website.

But others warned that Microsoft will have to price streaming Office low enough to make it competitive with the paid Enterprise version of Google Apps, which offers technical support for $50 (£25) per user per year, and competitive too with the free offerings.

"Why would a [small business] go out and pay an arm and a leg when they can get Google Docs or OpenOffice for free?" said Ty Schwab, CEO of Blackhawk Technology Consulting LLC, a reseller of application streaming software. The price "has got to be close if Microsoft wants to make itself a force to be reckoned with".

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