It’s no secret that Google has been making a play for SMB market share, a territory long under Microsoft’s control. It’s a logical goal to pursue as business computing continues to evolve from the local machine to cloud computing—Google’s wheelhouse. But can Google succeed at taking customers from business software incumbent Microsoft, even while fending off newer cloud-based competitors?

Cloud computing has made the SMB market a goldmine for service providers. Vendors can offer and tailor services (such as databases, programming platforms, unified communications, and more) that would have been out of reach for small businesses due to cost or technical expertise requirements. Still, Google hasn’t made significant gains in the enterprise space. I addressed the reasons why businesses have been slow to embrace cloud computing in a recent analysis of Google Apps.

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Google’s SMB Chase
Lately, Google has fervently pursued the SMB market segment with a slew of products and services designed to entice everyone from mom and pop shops on up. For example, the Google Small Business Blog, which launched earlier this month, serves as a central hub where small- and mid-size businesses can find useful tips, features, articles, and Google products written with them in mind. Google hasn’t stopped there. It has given many products significant tweaks and upgraded in August, some without much fanfare. Some of the more major new features and upgrades include:

• Google Docs now supports auto-formatted hyperlinks. It also added page sizes like “Executive” format for documents, and spell check has been added to Google Spreadsheets.

• Google Sites has been updated with horizontal navigation capability, global footers, and a new selection for deleted items.

• AdWords Help Forum now includes the Small Business Corner, a forum for SMBs.

• Tools for Online Success” is a new joint venture between Google and the U.S. Small Business Administration (SBA) to educate business owners about how to succeed online.

If all that isn’t proof enough that Google is courting SMBs, consider the fact that it has released nine new apps in the Google Apps Marketplace that are business-focused. These include ToBeeDo for task management; DeskAway for team collaboration, a B2B app Katera Networks, and Backupify, for secure backup of Gmail, Docs, Calendar, Contacts and Sites.

All of this love for the SMB serves as a direct challenge to Microsoft. Google wants small businesses and needs them. Small businesses using services like AdWords account for much of Google’s revenue. By fleshing out its SMB offerings, Google can not only retain its current SMB base, but it can also attract new small businesses and keep an edge over competitors.

That’s why Google needs to confront Microsoft head-on, and not just in the search space. Microsoft’s done well in the SMB and enterprise markets. This incumbency is the big problem for Google with the SMB space. Furthermore, Microsoft is hard at work moving its traditional applications and platforms to the cloud, making the transition easier for businesses. Many businesses bold enough to make the shift to the cloud are still risk-averse enough to want to stick with tried, tested, and familiar technologies, rather than navigate unknown waters with relatively new Google offerings. While Google’s business offerings are improving quickly, that conservatism argues against Google building market share quickly. Businesses that aren’t already committed to Microsoft are an easier sell, but that’s a much slower growth path.

Google’s Cloud-Computing Competitors
Then there’s the trendy “cloud wars.” Google not only has to lure the SMB crowd from Microsoft’s ecosystem, but it also has to fend off market share from cloud-based startup companies that are peddling some very sophisticated services to small businesses, like Box.net, Dimdim, and Dropbox.

These providers also can be just as price competitive as Google. For example, Google Apps Premier costs $50 per user per year, but you can get the same collaborative functionality from Zoho at the same price with the first three users free. Of course, with Google Apps Premier you get the ability to also host Web sites and wikis, but there are plenty of services out there that will allow a small business to do the same for free or for a nominal price, like Intuit’s Homestead, which is $4.99 per month.

Google Versus Open Source
And then, of course, there’s the open source challenge. Open-source software is making big gains in the SMB world, according to a recent study that shows that 98 percent of enterprises are using some sort of open-source software. Even though that’s enterprises, that number is significant enough that Google’s SMB team should be worried. Businesses that are bold enough to abandon Microsoft still might not want to take the cloud-computing risk—especially verticals like healthcare and finance. There’s understandable reluctance at such organizations to transfer data processing to cloud services like Google App Engine or Big Table. Open-source software is a very appealing choice for these businesses.

The open-source world has no shortage of options for databases and customizing applications: MySQL, SugarCRM, and Open ERP are just a few (very successful) examples. These applications are free, highly customizable due to their open code base, and can be deployed as completely on-premise solutions. Those factors hold a lot of weight for many companies when comparing local, open source against Google services.

Does Google Care Enough About Privacy?
Google’s other challenge stems from on-going criticism over privacy. There’s a strong perception that Google is lax with user privacy and glib statements such as those made by its CEO Eric Schmidt that people should just change their names when their privacy is compromised don’t help. It does not boost the perception that privacy is of utmost importance to Google—something about which many business owners are concerned. Something they, are in fact, required to be concerned about, by many laws, in the U.S. and abroad.

Can Google Reach The Goal?
As Google, Microsoft, and the vast array of start-ups compete for the coveted SMB market, that competition means better SMB cloud computing services in the long run. Google is without a doubt king of the cloud; yet unless it can deliver competitive products that can fend off smaller companies, can wrest a significant share of the market from Microsoft, and can sway the public to think of it as a trusted and secure gatekeeper of business data, Google might not find SMBs flocking to its services no matter how hard the cloud giant tries.