Does this Prove Microsoft is Losing Old School Enterprise Battles?

Google (NASDAQ:GOOG) and Onix Networking have been granted a $35 million contract to run the U.S. Department of the Interior’s new cloud-based email and collaboration system. The offering is a major victory for Google as the Department of the Interior chose the search giant over Microsoft (NASDAQ:MSFT).

In 2010, the government agency awarded Microsoft a $59.3 million contract to run its email and collaboration system. In response to the contract, Google and Onix Networking filed a lawsuit to block the transaction. Google asserted that the Interior Department’s procurement process unfairly favored Microsoft and did not give Google a fair chance.

As the Department withdrew its contract with Microsoft, Google also withdrew its lawsuit. The Interior Department announced that its decision to withdraw its contract with Microsoft was because the company’s solutions were now stale in light of new developments in technology and entrants into the market.

Arguments between Google and Microsoft grew rather heated last summer. Microsoft alleged that Google (NASDAQ:GOOG) falsely advertised that its solutions were certified by the General Services Administration for use in government agencies. But the contract is still going to Google, regardless.

The transaction will make the Department of the Interior the largest major U.S. government agency to switch to Google’s cloud. Currently, government agencies like the NOAA, the GSA, the Lawrence Berkeley Laboratory, and the Idaho National Laboratory are using Google Apps for Government. A handful of state governments have also made the switch to Google’s solution recently.

In accordance with the contract, Google and its partners have the right to demonstrate that they can meet the Department’s objectives for an integrated suite of tools and services, information assurance, and regulatory compliance. The migration is expected to take place by December 2012. The process will involve the migration of over 90,000 mailboxes away from the Department’s outdated system to Google Apps for Government.

Microsoft (NASDAQ:MSFT) wasn’t too pleased with being dumped. The company issued a statement expressing its disappointment  in the Department’s new contract with Google.