Google will make Microsoft’s entire strategic plan and mission, which revolves around the continued proliferation and dominance of the desktop PC operating system, obsolete by making Google itself the operating system. The model they are pursuing is very similar to Sun Microsystems’ (Jonathan Schwartz’s) vision of turning computing into a utility, like electricity. The only difference is that Google is already almost there.
To some extent, Google is bringing back the architecture of the mainframe to render Microsoft obsolete. In the future, all computing devices, whether it be the PC, mobile phone, TV, etc., will simply be terminals that “plug-in” to Google’s massive server grid and application services. With the increasing price/performance of CPUs, memory, bandwidth, and storage, Google’s strategic edge will be based on their advantageous cost of processing bits. And as long as users are comfortable sharing their private data and behavior with Google, all services will remain free (and supported by advertising).
Microsoft has lots of cash and smart people, and has survived many classic battles over the last two decades, including the Department of Justice. The biggest battle going forward won't just be with Google. There will be a battle for resources and favor between the Longhorn/Vista and MSN/WebOS worlds, and with the forces trying to merge the two together even more tightly. Among the masses of global users, Microsoft will find it increasing difficult to compete with "free."