It's unclear to me what the difference is between Microsoft's Office Web Apps and Google Docs. Are they at all similar - or is it just marketing hype from Microsoft. How would I decide which to use for sharing documents online with friends and coworkers?
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They're actually very similar. Both allow you to create, modify, and share several document types online. The biggest difference between the two is in the feature set. While Google Docs is a great way to create basic documents, spreadsheets, and presentations, Office is far more powerful when it comes to styling the presentation of these documents. So if your focus is on content, there's not much of a difference. If your goal is on producing a production-ready document collaboratively, I'd recommend Office.
One other advantage of Office Web Apps over Google Docs is the inclusion of OneNote. There's no equivalent feature in Google Docs.
One of the largest differences is that you get much better compatibility with Microsoft Office when you are using Office Web Apps instead of Google Docs. Google Docs can butcher a good bit of your formatting when importing and there isn't a good way to get it back if you need to export.
That said, I think Google Docs has much better real time collaboration and sharing features than Office Web Apps does.
One of the other main differences is that Google Docs is hosted by Google, and only Google, whereas Office Web Apps can be hosted on your own server, thereby giving you control.