What can I add to this discussion? I think this may be the most discussed blog story in a long time. Check out this list of links to the story on Buzztracker. That's 68 links from yesterday alone and Buzztracker only includes the "authoritative" blogs/feeds in their index. I can't even bring myself to wade into these links and start reading.
And this is really not a new story. We all could see this coming. Gmail, Gtalk, Gcal, Google Spreadsheet, Writely. You'd have to have your head in the sand not to see this coming. Clearly Microsoft has seen this coming, although Bill acted like he didn't at the D conference.
So what does this mean for VCs and entrepreneuers? I think it means that Google has selected its second area of focus and that is collaborative web-based productivity apps (the first being search of course).
As much as Google is an unusual company (and it is), it will begin to have to play by the rules that large companies play by, that being organizing, planning, process, heirarchy, and focus.
So if you fear competing with Google (I am not sold on the fact that you should be), then you don't want to be competing with them in paid search/contextual advertising or collaborative web-based productivity apps. The second category is particularly worrisome because its going to be war between Google and Microsoft and the small guys might get stepped on by some elephants.
Add to this the story of Kiko, a web-based calendaring app that was recently sold on eBay for roughtly $250k. Paul Graham, who provided the seed funding for Kiko, wrote the definitive essay on this subject and he says:
The killer, unforseen by the Kikos and by us, was Google Calendar's integration with Gmail. The Kikos can't very well write their own Gmail to compete. While I don't think this case implies the party's over for web startups, it is significant in one respect. It seems to be the first example of Google benefiting from the Microsoft Office effect. In the 80s and 90s, Microsoft gradually killed off the competitors of its individual applications by making them tightly integrated. Obviously this works for web apps too.
So there is good news and bad news for VCs and entrepreneurs in this story of Google deciding to focus on the productivity market. The good news is that if you are competing with Google anywhere other than search/contextual and web-based productivity apps, you may find them focused elsewhere. The bad news is if you are in the productivity space, you might want to think about a new business plan.
Update: Nice post by Chris Anderson on how you might be able to embed productivity app data from Google's apps like you can embed videos from YouTube. I like that a lot.