It also "preserves the value of desktop apps and the value of the fat desktop PC, which is very important to Microsoft," said Paul DeGroot, an analyst at independent firm Directions On Microsoft Inc.

Application streaming is similar to desktop virtualization, also known as virtual desktop infrastructure, except that in the latter, an entire application stack -- including the operating system and desktop interface -- is streamed down to the user. That requires more network bandwidth, and more storage and processing power on the server side.

Application streaming also differs from Terminal Services, a hosted delivery method that Microsoft has long supported. In Terminal Services, the application is entirely stored on the server. All data and application code is accessed through the Internet, in a manner roughly similar to a software-as-a-service app, except not through a Web browser.

Some types of application streaming delivery technology, such as Endeavors' Application Jukebox, can also be set to automatically download the necessary code so that users can run Office completely offline, such as when they are on an airplane, Gardner said.

Face to face with Redmond reps
Vendors have been preparing for application streaming for the past several years. Microsoft has been pushing its its Softgrid application streaming at its enterprise customers for the past year. VMware bought an application streaming firm, Thinstall, in January, while Symantec already owned AppStream via its Altiris acquisition.

That, along with the Google threat, may have helped convince Microsoft's information worker unit (which oversees Office) and its worldwide licensing and pricing group to approve the 12-month pilot of the change to its service provider licensing agreement, or SPLA.

Starting in June, hosting providers that pass a face-to-face interview with Microsoft representatives will be able to offer Office Standard and Office Professional Plus.

Microsoft's partners say they have been itching to offer streaming Office for years, only to be thwarted by a combination of Microsoft's onerous licensing terms and its rough treatment of violators, essentially treating them as software pirates.

But Microsoft's attitude was already softening when a British Web hosting firm Fasthosts began streaming Office to its customers in February for £4.99 (about $10) a month per user.

Microsoft talked tough -- an antipiracy executive told ZDNet U.K. that streaming "infringes our license regulations" -- but then failed to crack down on Fasthosts, which continues to advertise the service on its Web site.

Is $10 a month -- roughly equivalent to a $300 copy of Office depreciated over three years -- cheap enough to pull customers away from Google Apps, which costs a little more than $4 a month?

Not according to Schwab, who believes Microsoft needs to price streamed Office so that hosting providers can resell it for no more than $5 a month.

DeGroot agrees.

"Microsoft can't be complacent. They've got to be willing to be aggressive on price," he said. If it is, "I see the market shifting towards app streaming, though we're in the very early stages of that."