Why is the blogosphere abuzz lately about Google buying Upstartle, a four-person software company with no revenues? The obvious answer: industry-watchers are sensing another fight coming between Google and Microsoft.

Upstartle makes Writely, a Web-based word processor that’s free. Launched in November 2005, the product has gained around 150,000 users. That’s just a blip for Google, of course, but the deal is interpreted by some as confirmation that the search-engine leader is trying to knock Microsoft off its software throne – using so-called “Web 2.0” technologies. These technologies, such as asynchronous JavaScript and XML (together dubbed AJAX), allow Web applications, such as word processors, to perform at speeds comparable to desktop applications.

So how realistic is this idea that Google is targeting Microsoft’s productivity applications? In fact, applications like Writely are not a serious threat to Microsoft Office – which has beaten back numerous challengers, and still controls 95 percent of the market. Writely is designed to be a collaboration tool, rather than a document-creation tool, meaning it’s more like Microsoft’s free SharePoint Services than Word.

Writely’s creators themselves have said they don’t see their product competing with Word, but instead complementing it. In fact, they built it using Microsoft’s own .NET technology, which lets developers integrate software applications across platforms, rather than using AJAX. Furthermore, Google has never declared that it intends to put together a suite of Web applications to compete with Microsoft Office.

What’s more, even if such a Web-based application were targeted for the vast Word-dominated market, many people may not want to host productivity applications online, says Mary Jo Foley, editor of the independent newsletter Microsoft Watch. She notes that Microsoft itself tested Office as a hosted application – but the results were so poor that it abandoned the effort.

All of these realities deflate talk of an imminent “Google Office.” The company itself is referring all inquiries about the Upstartle acquisition to the official Google blog, where Writely team member Jen Mazzon simply wrote that Upstartle was happy to be part of Google. “Everyone told us it was crazy to try and give people a way to access their documents from anywhere – not to mention share documents instantly, or collaborate online within their browsers,” Mazzon says. “But that’s exactly what we did.” Or, more accurately, is doing, since the product is still in beta. (Right now, in fact, Writely can’t be accessed by new users, while its programmers work on moving the application to Google’s internal platforms.)

So this new acquisition by Google is unlikely to provoke Microsoft into a response, at least not right away. “My guess is that [Google] will first offer Writely as a simple word processor, and perhaps they will also use it as an HTML editor for the Blogger service,” says T.J. Kang, CEO of ThinkFree, which offers productivity applications, including a word processor, spreadsheet, and presentation manager, that run on a desktop or online.

But Kang does go further. In an e-mail, he says his own talks with Google suggest that the company is keeping its options open. After all, there’s Gmail to counter the e-mail functions of Outlook, and Google is rumored to be putting together a calendar program and an online storage space, Gdrive. Foley notes that if Google were to offer a free, advertising-supported alternative to Microsoft’s other major productivity applications, and users could control where the documents were stored, it could begin to make consumers wonder why they’re paying $150 to $500 for editions of Microsoft Office.

“Microsoft does have an exposure here,” says Rob Enderle, principal analyst with the Enderle Group in San Jose, CA. “Web 2.0 breaks the retail and direct models Microsoft currently enjoys.”

But Enderle adds that Microsoft is well aware of its potential market problems – which is why it’s touting Windows Live, Office Live, and other “Lives.” So far, though, these Web-based services extend Microsoft’s existing desktop products, rather than replacing them.

If Google continues to buy or develop complementary applications to GMail and Writely, it could force Microsoft to move away from its current sales model for Office sooner than it wants, Enderle says. “The question is: Can Google make what Office should be before Office itself can get there?”

People who use applications like Writely, ThinkFree, and the online spreadsheet Num Sum “will realize they do not need all the functionalities of Office,” agrees Kang. “In SOHO [small office/home office] and small and medium business markets, I believe Office’s days are numbered. Google’s move could only help accelerate the process.”

Kang says the Writely acquisition has already sparked more interest in his own company. “I now have two meetings in the U.S. this week and another in Asia next week with large portals and ISPs who want to explore the area,” he says.

But, as Enderle also notes, history has not been kind to companies that go after Microsoft’s core businesses. Novell and Netscape Communications both tried to take on Microsoft – Novell in desktop applications, Netscape in enterprise Web services – and only got sidetracked. Is Google – which this week made another purchase, buying @Last Software and its SketchUp 3D modeling tool – also getting distracted? “Google’s starting to look a little bit like a company without a rudder,” says analyst Enderle.