Microsoft's dominance of the computer desktop will not be challenged by Google's partnership with Sun Microsystems, according to analysts. But the deal may provide a clue to the internet search engine's next move.

Sun and Google announced yesterday that they would promote and distribute jointly each other’s products. Under the deal, Google's toolbar will offer as an option downloaders of Sun's popular code-compiling engine, Java Desktop. In return, Google will look at ways of distributing OpenOffice, a suite of business applications that is distributed for free and competes with Microsoft's core Office package.

Microsoft shares fell 2 per cent amid rumours that Google was planning to release an Office-like package or a branded operating system to challenge Windows. That talk proved wide of the mark, with the company saying only that its collaboration with Sun was more about community and giving consumers choice rather than driving user numbers or challenging rivals.

Tom Berquist, a software analyst at Citigroup, called the union "a non-event from a Microsoft perspective".

He continued: "We see this as a marketing event around products that are already freely available on the web. While the two companies stated they would explore opportunities to promote OpenOffice, we do not see any logical reasons why consumers or corporate users would transition off Office ... to an open-source substitute that has been available for many years."

Sun has given away the source code to OpenOffice since 2000, with the the aim of breaking Microsoft's market dominance. The company also sells a slightly more powerful version of the software using the brand StarOffice, with a price tag less than one-third of Microsoft's package.

Yet Office still retains about 90 per cent of the market for productivity software, a sector that is estimated to be worth more than $10 billion worldwide. Office also accounts for about 30 per cent of the software giant's sales and 70 per cent of its profit.

Analysts at Goldman Sachs called Google's union with Sun a "baby step", but they added that the statement was "more about what may be coming than what was announced."

Rick Sherlund, Goldman's software analyst, told clients: "We had expected that Google might host a version of StarOffice online as it does for Gmail (Google's e-mail product), putting Google in competition with Microsoft Office, at least for the consumer portion of the market. ... The actual announcement seemed far less substantive."

Jason Maynard, of Credit Suisse First Boston, also admitted that the announcement was a damp squib. But he was encouraged by hints at "the potential for interesting technology mash-ups that draw on the power of software as a service."

According to industry reports, both Google and Yahoo have been hiring OpenOffice developers. This has lead to speculation that the internet companies are aiming to make their e-mail products look more like Microsoft Outlook through the addition of calendars and contact management.

Eventually, the aim may be to add buttons for free word processing packages and spreadsheets to their search toolbars. That would allow the software to available on demand rather than pre-bought and pre-downloaded -- delivered "just in time not just in case", to use the industry's preferred phrase.

Through this route, Google and Yahoo will create "beach heads" on users' desktops, Mr Sherlund argued.

"Software can be free if it can be monetized by search and related advertising revenues," the Goldman analyst told clients. "By increasing the distribution of the Google toolbar, this is like seeding the user's desktop with buttons to be populated later with a richer set of hooks that can pull users toward Google."

Scott McNealy, chief executive of Sun Microsystems, has long been an an advocate for the internet replacing the PC. But the thin client, where processing and storage is done on central servers rather than the beige box on your desktop, has proved an elusive next-big-thing for the last two decades, stymied by falling hardware prices and slow network connections.

Now, with broadband penetration over 50 per cent in most developed economies, the idea of distributed computing is making a comeback. However, the threat to shrink-wrapped software distribution has not been lost on Microsoft. It has already responded by reorganising its divisions so its internet employees are in with its developers of client and server tools.

The latest build of Office and a new Windows operating system, both slated for release in the second half of 2006, are seen as the company's main defence against web-based competition. The company can also rely on its support network to keep enterprise customers.

"Microsoft’s dominance is far from shaky," analysts at Canaccord Capital wrote. "The long term competitive threat from Google and other web-based providers is real, however Microsoft’s dominance in the space gives the company some room to maneuver."

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