As everyone knows, Google is going after the core of the Microsoft franchise: Windows and Office/Exchange. They face incredibly long odds. Why? In the long run, Google has only one real weapon against Microsoft: lower cost. Yes, the Windows OS is bloated and not web centric. Windows 7 will close these gaps. Office and Exchange work well despite poor web integration, but expect this shortcoming to evaporate soon (this week?). Google is not offering something substantially better. They are offering something cheaper.

This is not to say Google v. Microsoft won't be a vicious war. It will. Google will be aggressive. They will get hardware makers to take Linux seriously. They will engage with big companies to use their products. They will get some victories. But, they will mostly invest money with little return.
 
By embracing the browser and web application model, Google will lower the network effect of the Windows OS, the source of their monopoly power. But, even with this strength diminished, there are still lots of benefit to using Windows: habit, ecosystem, sunk investment, etc. Everyone will dabble with leaving (partial enterprise use, threats, etc.), but in the end, they will get Windows and Office at an acceptable price and stay.
 
And, that's the best thing about this war: the consumer is going to win big time.
 
Google will raise the bar. Free, online services, unlimited storage. MS will respond. More investment, more features and lower prices. Goodbye monopoly rents.
 
In the end, the two best business models we have seen in the last 50 years are colliding. The massive profits from these business models are now going after each other. What will we end up with in 10 years? Two massively successful companies, a lot more innovation and lower prices. And how about for shareholders? Well, get ready for lower returns.