As a service provider, at first you looked at Google and said to yourself, “Wow, there’s a mechanism for marketing my services online to potential customers.  Their printing cash, but I’ve got to get on board.”

Then you became slightly uncomfortable with the bills that you were paying them on a weekly basis….

Then you became somewhat more uncomfortable when they rolled out Google Talk, offering voice and click-to-call services via their paid ads and other channels…

Then they offered free broadband Internet access in Silicon Valley…just giving back to the community surrounding HQ or a stepping stone to something on a wider scale?  Writely???  Google Calendar???

And now this…

This week Google announced that they are in the process of launching a new suite of services aimed at small businesses, including email, personal and shared calendaring, instant messaging, voice communications and web page creation.  Dubbed “Google Apps For Your Domain”, all of these services are hosted on Google infrastructure, but can be private labeled by the customer and attached to any domain.  Go here to check out the beta https://www.google.com/a/

Google plans to offer a fee-based version of the service by year end, and one can only assume that a free version will be available if users are willing to accept advertising within the services portal.  All of the services are web-based and bring together gMail, Google Calendar, Google Talk, and Page Creator.  One can only assume that Writely (word processor) and Google Spreadsheet are forthcoming.

Soooo….

What are the implications of Google’s move for service providers and software vendors who make their living delivering services to small and medium sized businesses?

It’s a complicated issue, but my initial impression is that there is real cause for alarm.

Telecom providers who are in the business of providing voice, broadband, email and other basic infrastructure services to small and medium sized business customers face commoditization on almost every axis.  Hosting providers who offer simple domain registration and web hosting packages to small businesses face similar (if not more severe) dynamics.  If a provider lags behind Google in reaching their customers with at least a similar offering, they can expect to be relegated to providing raw commodities, if that.

I’m not saying that every small business in the world is going to immediately move to these services bundles offered by Google (or Microsoft via Office Live) and drop all services from other service providers.  The adoption is going to take time, but it will happen.  Small businesses are IT constrained, and this is simply a better model for them than trying to deploy these applications and services on their own.  This requires attention.

If you’re a service provider, how can you respond?

One response that I’ve often heard is to move into more complex and “deep” SaaS service offerings (e.g. hosted accounting), ceding these basic services to Google, Microsoft and the other titans that are playing in the game.  I don’t think that this strategy will be successful in the majority of cases.  More complex service offerings are also more difficult to sell, deliver and support.  Customers are also still often reticent to accept the hosted model for delivery of deeper back office applications.  There are business models with more complex offerings that will work, but not for everyone.

In my view, the top near-term response for service providers targeting the SMB market with hosted services should be to become more aggressive in driving a similar, compelling suite of small business services into the market before Google and others have had a chance to establish a large foothold.  At best, the upcoming offerings from Google and Microsoft validate the hosted model for small business services of this type and will make more customers ready to adopt these or similar offerings.  Get yourself there now and be the one to put a turnkey, elegant, easy to deploy and easy to use suite of communications, collaboration and web services into the hands of your customers. 

Once a small business is using these services with a particular provider, history tells us that they will not readily move.  Be the provider of these services that small businesses would have to move away from rather than trying to convince them to migrate to you later.