I first tried Google Docs quite some time ago, back when it was still in beta. Since then, it's become more and more well-realized. As of now, it's pretty slick. For me, it's not a replacement of the installed program paradigm, but rather a flexible option and alternative.
Google Docs, and other web-based programs like Zoho (which I read about--it sounds snazzy, but is redundant if you already have access to the Google programs) offer you the option to work on your documents at any web-capable station you find. This is great. If I have an idea, or want to share the authorship with someone else with a Google login, I can do that seamlessly.
For instance, if I'm using a computer somewhere in town, and have a few minutes to chip away at a project that I have on Google Docs, I can just pop it open and write. No "if I only had the document" or "I wish I had my laptop" or "I wonder if this is the current version". You can skip all that.
Now, if your project requires advanced tools or formatting, you'll have to export it to a "real" word processor or spreadsheet program (I use Openoffice.org most of the time, these days). The feature set that can be delivered over a browser is going to be far less than with an installed program. That being said, I don't think anyone's doing final layout for their novel manuscript from Google Docs.
Great tool, great addition to the "software as a service" segment of the internet, but not a straight across replacement for productivity software as we know it. More and more, these web-based services tell you that your productivity is not localized. To steal the tagline for one of the recent movies, "Anywhere is possible." Except, of course, if you don't have an internet connection. Then, you'll need to work "the old fashioned way", with saved files you carry around.
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