To understand why Google is such a threat to Microsoft--and why Microsoft's pooh-poohing of this threat is, at best, a smokescreen--you need to understand how technology disruption works.

Disruptive technologies do not destroy existing market leaders overnight. They do not get adopted by the entire market at the same time. They do not initially seem to be "better" products (in fact, in the early going, they are often distinctly "worse.") They are not initially a viable option for mainstream users. They do not win head-to-head feature tests. Initially, they do not even seem to be a threat.

Disruptive technologies take advantage of a new manufacturing/business process or technology to provide a cheaper, more convenient, simpler solution that meets the needs of the low end of the market. Low-end users don't need all the features in the Incumbent's product, so they rapidly adopt the simpler solution. Meanwhile, the Incumbent canvasses its mainstream customers, reassures itself that they want the feature-rich products, and dismisses the Disruptor as a niche player in an undesirable market segment. The Incumbent may dabble with the new technology or process, but only in service of its existing business model.

Then the Disruptor improves its products, adding more features while keeping the convenience and low cost. Now the product appeals to more mainstream users, who adopt it not because it's "better" but because it's simpler and cheaper. Seeing this, the Incumbent continues adding ever more features and functionality to its core product to try to maintain its value proposition for higher end customers. And so on. Eventually, the Incumbent's product overshoots the needs of the mass market, the Disruptor grabs the mainstream customers, and, lo and behold, the technology has been "disrupted."