TechWeek: For Google, the Price Is Writely

Updated from 4:26 p.m. EST

At a price of $10 million or so, Google's(GOOG Quote) acquisition of privately held Writely wouldn't normally be on the radar screen of tech investors. But it should be.

Writely is a tiny start-up that makes a rather cool Web-based word processor that runs inside a browser. While it lacks many -- and probably most -- of the features found in Microsoft Word, it does allow users to collaborate on documents and publish them to the Web quite easily.

Why should you care? Friday's purchase represents a small, but potentially significant, repositioning of Google onto Microsoft's(MSFT Quote) home turf. And more broadly, Writely is emblematic of the new wave of software entrepreneurship that is creating opportunities for investors while challenging the conventional wisdom that only the biggest players will survive.

There was a huge buzz a few months ago when Google and Sun Microsystems(SUNW Quote) said they were teaming up. Speculation quickly centered on the notion that Google would start hosting Sun's OpenOffice suite and go head-to-head with Microsoft. As it turned out, the announcement was nothing of the sort, much to the disappointment of the blogoshpere and its legions of Microsoft haters.

But Friday's announcement that Google will buy the little start-up is different. While Writely will never be a replacement for Word, let alone Office, it does offer some users an alternative to Microsoft's products. Google already has G-mail and will soon have a Web-based calendaring application. So, if it goes a bit further and -- as some have speculated -- purchases another popular start-up called NumSum, which makes a Web-based spreadsheet, the company suddenly has a nifty little office suite.

Let's be clear. Microsoft isn't seriously threatened by these moves. Even if Google were unbelievably successful in wooing consumers, the obvious targets of Web-based productivity applications, Microsoft's worst-case exposure isn't all that great, points out Goldman Sachs analyst Rick Sherlund. Sales of Office to consumers only accounts for about 6% of the company's overall revenue, he estimates, and 7% to 8% of earnings. Goldman Sachs has an investment banking relationship with Microsoft.