By combining the Writely online word processor and the Spreadsheets service into a single sign-on product, Google has moved ever closer to fulfilling the expectation they will someday place an online competitor to Microsoft Office online.

Google Docs & Spreadsheets.
Not quite as exciting as Google Office, is it? In fairness it is too soon to call a two-function service an office suite, but perhaps for a lot of people having word processing and an effective spreadsheet creator on hand from wherever they may be (with an Internet connection), that would be enough.
Users of Writely who sign in to the new service with a Google Account will have the option to move documents saved under an old Writely login to that account. Once moved, they can't be moved back. Considering that a Google Docs & Spreadsheets user may have other services in place with Google already, like Gmail, that probably does not present a problem.
I was able to move three old documents over without difficulty, and they remained intact. One irritating little issue is still present - a single space between paragraphs in Writely/Google Docs still becomes a double space when copying and pasting parts of a document into other applications, including Notepad.
Both the Docs and Spreadsheets retain the features that already existed. Those include collaboration features for multiple users to share and edit files created with either product. Users can upload several file formats to the word processor: Word documents, OpenOffice, RTF, HTML or text. They can be downloaded in several formats from the service, including PDF.
If Google truly has aspirations to challenge Microsoft, ZDNet's Google blogger Garett Rogers




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