Google opened a new front in its widening battle with Microsoft today when it quietly announced that it has begun operating, through its Gmail service, San Jose City College’s email system – using SJCC’s own domains. Gmail’s product manager, Stephanie Hannon, wrote on Google’s blog, “We’re testing a new service with the school by hosting Gmail accounts with SJCC domain addresses (like student@jaguars.sjcc.edu), plus admin tools for efficient account management. Massive storage and features that tame the most unruly inboxes, like powerful mail search, conversation view for messages, and a fast interface, make Gmail very handy for students.”

She might also have said “very handy for employees.” Google is offering the private-domain service, as a beta, not only to schools but to businesses and other organizations. (You can ask to be included in the beta here.) By allowing organizations to keep their own domain names for their email accounts – and giving them a control panel to administer their system – Gmail suddenly becomes a viable software-as-a-service alternative for a lot of small- and mid-sized organizations that have traditionally had to maintain their own mail server or rent a hosted one. Microsoft, of course, owns a big chunk of this business.

Google is playing up the SaaS benefit: “Gmail for your domain is hosted by Google, so there’s no hardware or software for you to install or maintain.” It knows that maintaining an email system is a big hassle for many smaller organizations. It’s not clear whether it’s giving away this service or not, but if it is free, it could be a very attractive alternative to a lot of schools, nonprofits, and small companies.

UPDATE: As comments to this post point out, Microsoft started a beta test of a similar service, tied to Hotmail, last November. It’s called Windows Live Custom Domains. It’s free – and anyone, it seems, can immediately sign up to be part of the beta. Microsoft’s service is squarely aimed at small organizations, as it limits the number of email accounts under any domain to 60, and it limits the size of each account to 250 MB. (By contrast, San Jose City College has 10,000 accounts through the Google service, each with a couple of gigabytes of storage.) This shows the tricky balancing act facing Microsoft as it adapts to the SaaS model. It will have to cannibalize its existing, and very lucrative, traditional software products in order to defend its business from pure-play SaaS providers like Google. It may be able to start by imposing a 60-seat limit on its SaaS offering, but it’s not likely to be able to hold the line there. It’s a classic disruptive innovation: your highly profitable old business gets eaten away from the bottom up.

UPDATE 2: There’s a good discussion of this over at Slashdot, which provides an IT Dept. perspective on some of the pluses and minuses.