While Microsoft and Google are engaged in battles on many fronts, what may win the war is the battle to move software from the ground to "the cloud." This battle pits Microsoft's core business on the ground--the sale of locally delivered and internally owned applications--against "cloud computing," where applications are not purchased but rented and run on hardware owned by someone else.

"Software-as-a-Service," or SaaS, vendors started this battle 10 years ago, recognizing that companies need to focus on their business rather than on building and maintaining complex internal datacenters enterprise applications. Popular SaaS vendors including the salesforce automation company SalesForce.com, Web analytics provider Omniture and enterprise resource planning specialist NetSuite demonstrated that doing business in the cloud was both cost effective and more productive. Microsoft has actively embraced the trend toward enterprise SaaS with its acquisitions of Web conferencing service Placeware and enterprise e-mail security service Frontbridge.

As the popularity of cloud computing increases, application vendors, service providers and hardware vendors are rapidly innovating in the shadows of the battling goliaths. Innovative companies like VMWare, Savvis and Rackspace, which have solutions to outsource the entire datacenter, are developing ways to keep ever more power and space-hungry datacenters under control. Expensive and hard to maintain desktop computers are being eliminated by companies such as Citrix, Qumranet and NComputing, which are moving desktop applications to servers inside the enterprise or in the cloud.

To cost- and productivity-conscious businesses, the simplicity and savings of cloud computing is looking better every day. To compete in the cloud with the massive data centers Google built for its search business, Microsoft needs to move swiftly to build and buy the applications and infrastructure necessary for an effective cloud computing platform.

A competitive cloud computing environment to rival Google's is the best chance Microsoft has to ensure its software business is as dominant in the cloud as it is on the ground.

Jim Jones is a managing director at Scale Venture Partners, which is an investor in many companies, including Omniture, Frontbridge, Placeware and NComputing.