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Last year, Microsoft started subscription-based online services to run its Exchange corporate e-mail program and SharePoint collaboration software on the company's own servers, as an alternative to customers buying their own hardware to run licensed software.

Microsoft initially limited those services to companies with more than 5,000 workers, but the company says it will now offer the service to businesses of all sizes in the second half of 2008, after a testing period. The company hasn't disclosed how much it will charge customers for the services.

It will also begin to offer a free download of software called Search Server 2008 Express that allows companies to search files and documents inside their network. The product will rival Google's Search Appliance.

Hosted Web services are gaining popularity among business customers, because companies don't need to spend a lot of money upfront to buy and maintain powerful servers. Instead, companies can rent space on a server from a service provider for a monthly fee and avoid being locked into multiyear corporate agreements that are used by Microsoft for many of its core software offerings.

It also lets smaller companies get applications normally reserved for large organisations. "This is a market that is really starting to pick up. I believe it is going to going to get very large," says Karen Hobert,

Tough competition

Google, Salesforce.com and a host of start-ups are aggressively targeting Microsoft's traditional business customers with web applications.

Last week, Google announced that it is offering a simple website publishing tool for office workers to set up and run their team collaboration sites.

Companies such as Salesforce see web services eventually replacing traditional packaged software, but Microsoft is pushing a "software plus services" strategy with the promise that this option combines the best of both worlds. "Microsoft is starting to feel the pressures of the Googles of this world," Hobert says.

Microsoft's rivals have begun making inroads into the corporate market. Google says it has signed up more than 500,000 businesses over the past year to use Google Apps, with employees able to make use of the hosted services without even having to consult their IT manager.

But Microsoft claims technology administrators in large organisations are concerned about losing control over access and usage of the software. So with Microsoft's hosted applications, administrators will maintain nearly the same level of control as if the software was on their own computers, but have fewer headaches managing related hardware, storage and software, the company claims.

Microsoft has invested billions of dollars to build enormous data centers packed with thousands of powerful computer servers and storage systems to offer services to both regular consumers and customers in large organisations.

In order not to jeopardise corporate agreements that underpin many of its businesses, Microsoft says any company who wants to switch over to its services will be credited for the remaining portion of an existing contract, which can be applied toward monthly subscriptions.