By John Letzing

The Los Angeles City Council voted Tuesday to start using email service from Google Inc. (GOOG), a widely anticipated move that may augur well for the Internet search giant's efforts in competition with Microsoft Corp. (MSFT) to sell technology to businesses and government agencies.

A spokeswoman for Councilman Tony Cardenas said that Google beat out Microsoft in bidding for the $7.25 million email contract, which covers the city's roughly 30,000 employees. She added that the council voted 12-0 to approve the deal.

Google, which still makes the majority of its revenue from search advertising, began to offer Google Apps--which includes email, word processing and spreadsheet tools--roughly two years ago. The technology is positioned as a rival to Microsoft's dominant Office suite of software.

Google's software is hosted online and accessed on a subscription basis. This so-called cloud computing model, where data and applications are stored online rather than locally on computers, is becoming increasingly popular among businesses and agencies.

Microsoft's Office suite remains a powerful source of profits for the Redmond, Wash.-based company, however. In the quarter ended in September, the business division that includes Office contributed roughly $2.9 billion to Microsoft's bottom line.

Microsoft is also making its own foray into cloud computing. The company has begun previewing versions of some of its Office applications--including Word and PowerPoint--that are hosted and accessible online. Those Internet-hosted Office applications should become available next year.

A Google spokesman said in a statement that, "We're thrilled the L.A. City Council unanimously voted to go Google, and we look forward to working with the city to bring the many benefits of Google Apps to their employees."

Microsoft released a statement emphasizing that Google is replacing technology from Novell Inc. (NOVL) for the Los Angeles contract, and noting that a number of companies and public sector customers have begun using Microsoft's cloud computing services.

The contract between Los Angeles and Google was approved pending an amendment that would require the company to compensate the city if its email service is breached and data is stolen.

Recent glitches in Google's popular, free email service for the public have raised awareness that cloud-computing models come with inherent risks.

In a statement, Cardenas said that, "By utilizing cloud computing technology provided by an outside vendor like Google, that vendor will be fully responsible to protect that data and will have to pay for data recovery costs."

-John Letzing; 415-439-6400; AskNewswires@dowjones.com