In an interview at MIX07 where Techcrunch's Mike Arrington interviewed Ray Ozzie, Microsoft's chief software architect, Ray made some interesting comments when asked about competing with Google.
The DNA of Microsoft is not going into a space unless we can change the game and win in some form. More interesting from a competitive standpoint related to Google and large incumbent competitors in general is how Microsoft approaches it and secondary and tertiary effects.
If you go back to Sony years ago, the Playstation 2 look unassailable. A side effect, secondary effect was the creation of an entire entertainment and devices division in Microsoft.
From a Google perspective, the secondary impacts have already begun to happen.
(referring to ad models)
Ozzie also discussed Office on the web, competing against Adobe Flash with Silverlight, and how he would rate himself since he took over Gate's position as Chief Software Architect. But let's face it. What's really interesting is how they feel about competing with Google.