Google's 100 minute Gmail outage this week is going to cost Google and every other vendor that is selling Software as a Service (SaaS) applications millions of dollars in sales.

The Gmail outage is the equivalent of a security software vendor suffering a major breach.

It's a big fat, black eye and credibility-killer for anyone and everyone selling SaaS or cloud-based services.

Google, in a post on its Gmail blog, admitted that the outage was a "Big Deal." So what caused the 100 minute meltdown? Believe it or not, regular maintenance. That's right. Google says it took "a small fraction of Gmail's servers offline to perform routine upgrades" and "slightly underestimated the load which some recent changes (ironically, some designed to improve service availability) placed on the request routers." Underestimated. That's the understatement of the century.

So this is all about not having request router capacity. Is Google serious? Try buying a few more request routers.

Anyway, the damage has been done. And it can't be undone.

David Koretz, founder and CEO of BlueTie, a Rochester, New York SaaS pioneer with a $4.99 per user per month fees for e-mail and calendaring, said that anytime someone in the SaaS industry has "reliability challenges it harms the whole industry."

"It creates a perception in the customers' minds that there is a reliability issue," says Koretz.

That said, Koretz said the service level performance of Google, BlueTie and other hosted e-mail services far surpasses the reliability of the average business hosting Microsoft Exchange on their own servers.

Koretz claims that the average service level performance for a business running Exchange is seven hours of downtime a month or a 99.1 percent service level compared with 99.99 percent for BlueTie.

"Is it a big deal?" asked Koretz rhetorically. "Yes! Is it frustrating? Yes!  It is frustrating because it causes reliability concerns for the industry. But absolutely at the end of the day Google and BlueTie can do a better job of delivering reliability than the average Microsoft Exchange customer can do for themselves."

That may be true. But Perception is reality. And Google just changed the perception of millions of customers.

What impact do you think the Google Gmail malfunction will have on your SaaS business?

Give it up for Zoho CEO Sridhar Vembu, who is the only one who has called out Microsoft CEO Steve Ballmer his muddled plan to try to stop the commoditization of the $16 billion Microsoft Office franchise with a software plus services strategy.

“What we see here is more evidence of Microsoft's strategic muddle,” said Vembu in a prepared statement blasted out to the press after Microsoft announced its “no cost” Web Office offering which is set to be delivered 12 to 18 months from now.. “How far do they want to go with their online offerings? They clearly recognize the risk — almost $16 billion in revenue (and almost the same in gross profit) is involved here, one of the largest franchises of software. We do not believe the $16 billion in revenue/profit is defensible, but our guess is that Steve Ballmer does not want to be the CEO who gives that news to shareholders. Not when the other multibillion franchise is also looking a bit wobbly.”

Vembu has gotten right to the heart of the matter. Microsoft is clearly not willing to take on the Zohos and Google Docs of the world head on. The software giant is, in fact,  facing the same dilemma that made one-time minicomputer pioneer Digital Equipment Corp. a footnote in computing history. Remember it was Digital Equipment Corp. Founder Ken Olsen who once said that he saw no reason for someone to have a computer on their desk.  What Olsen refused to do was respond to the new market conditions, namely the PC explosion. He was more interested in protecting his minicomputer fiefdom than attacking booming new markets. Microsoft is taking the exact same stand with its Office 2010 and its software plus services strategy. Software plus services = we refuse to play in the same sandbox as Google Docs and Zoho.

“Therein lies the fundamental dilemma for Microsoft and the fundamental opportunity for players like Zoho,” said Vembu in email missive.  “What are considered crown jewels on the desktop today will become features to be integrated into a variety of business applications, and not on fat clients, but on the Web.”

What’s interesting about Microsoft, Zoho and Google Docs is none of them have come to the table with terms and conditions for managed services partners to offer online apps under their own brand. There are tens of thousands of partners that are already making the majority of their sales and earnings from recurring revenue.

What does it say about just how far removed from the channel day to day are these companies when they don’t GET the BIGGEST AND MOST POWERFUL CHANNEL BUSINESS MODEL?

Google’s new Chrome operating system for netbooks is still a year away. But there is little doubt that it is already keeping Microsoft Chairman Bill Gates and CEO Steve Ballmer up at night.

Gates and Ballmer built a $60 billion business that was ignited by a deal to provide IBM with an operating system for the IBM PC based on a per-unit license rather than a onetime fee. The deal for an OS that Gates bought from a company called Seattle Computer Products also included an agreement that let Gates and Microsoft license the OS to PC makers other than IBM.

This, of couse, goes down as Gates’ greatest moment. It represented a financial windfall that was the seed of all of Microsoft’s PC power and profits.

What’s ironic about this new chapter in the soap opera that is the highly lucrative technology business is that Google CEO Eric Schmidt, formerly of Novell, is taking a page out of the Gates playbook to hammer his old nemesis.

Gates and Ballmer, by the way, left Schmidt’s old company bloodied and beaten in the network wars. Remember, Novell was the leader in the network operating system market. And Gates and Ballmer used their business and technology savvy to leave Novell as an afterthought in the network OS world.

Now, Schmidt and Google are using the same tactic that allowed Microsoft to make a comeback in the browser wars in the early days of the Internet—offering Internet Explorer for FREE. That’s right, free is a great strategy when you have cash to burn and the product is not your primary cash cow. Free killed Netscape.

A free operating system is just what Google is planning to bring to netbook makers with its Chrome OS.  Google has, in fact, said it will offer the system free under an open-source license.

For Microsoft, whose operating systems business is already smarting from a PC market meltdown, this represents a financial migraine the likes of which  it has never before experienced.

The Wall Street Journal reported earlier this year that Microsoft makes just $15 per netbook with Windows XP Home, compared to between $50 and $60 for PCs running Windows Vista. Take the netbook phenomenon, which is transforming the market and putting a huge dent in the desktop PC market, and then add up the operating system financial hit Microsoft is likely to take.

Believe me, Gates and Ballmer are swapping e-mails right now on how they are going to take the shine off Chrome with a public-relations blitz. And watch, Microsoft will spend more money battling Chrome before it ever gets off the starting line than it will getting the channel locked and loaded with Windows Azure, its forthcoming cloud computing platform.

The sad thing about the operating system firefight between Google and Microsoft is that both these companies will spend mountains of money wining and dining the top netbook makers but will do little to influence solution providers and system builders. Those partners who are able to private-label netbooks and then support customers using them for business and play are the wild card in the operating system wars. Sadly, they are often looked at as a pawn rather than a strategic piece on the chessboard, even though they represent the majority of the PC market.

Google and Microsoft will likely fight the war without giving much thought to the channel. That may be the biggest and most foolhardy mistake they will make as they battle for netbook OS supremacy.