Microsoft is considering giving away its basic Microsoft Works word processing and spreadsheet software, aimed at preventing a possible challenge from Google, who bought web-word processor Writely in March, and began testing Google Spreadsheet in June.

However, the Redmond company runs the risk of hurting its Office business, which contributes a significant amount of revenue to the company's bottom line. The challenge will be how Microsoft handles the Web-based service while still making money off its Office suite.

It's not clear if Microsoft would offer the services under the guise of Windows Live, although plans call for the service to be advertising-supported. There is a service named Office Live, but that suite of products has more to do with putting a business online rather than the suite of software applications using the same name.

JupiterResearch senior analyst Joe Wilcox said that a free or hosted version of Works may not be a good idea for Microsoft. "That's not to say it would be a bad more. Microsoft could easily do the right thing, just for the wrong reasons," he explains.

"If Microsoft does bring Works to the Web, the reason should be to bulk up the commoditized functions of its Windows Live products and services," Wilcox continued. He said that a web-based Works should be for consumers, and not included as part of Office Live.

"Works as part of Office Live risks cannibalizing Office sales to small businesses. I simply don't see a strong upsell opportunity to Office," he added. "More likely, many very small businesses would find the hosted or free Works as good enough. I've got to strongly encourage Microsoft folks to resist making product decisions in response to competitors; there simply is too much of this kind of behavior going on."