So why would Google put out a product that makes its arch-rival's product more valuable? Because Google doesn't want to compete with Office. It sees Office as part of the existing landscape, and it wants to build a new layer of functionality on top of that landscape. No one is going to stop buying Office because Google Spreadsheets exists. But what they may well do is use Spreadsheets for sharing Excel and other data online - rather than just emailing Excel files around, as they used to.
This is pretty much what I was thinking ... see the Google spreadsheet as an intermediary. You aren't going to build a ten-page pivot-table-laden spreadsheet on-line. But you can use it as a great dashboard.
But, I still see Microsoft running ahead of Google here and not getting credit for it. After Microsoft ate Ray Ozzie, they had Groove. Groove 2007, while showing all the MSbloat it can (it's huge now), is a great Peer to Peer system that allows a very deep level of collaboration. I'm not seeing this coming from any of the thin client Google applications.
I understand the reason for having things like Google Spreadsheet and Writely and what not, but they are so thin as to be nearly TRS-80 in usefulness in a modern environment. I loved my TRS-80s (all three of them), but I certainly don't come into the office and boot them up any more.
Google's goal here is to build web services. These are the ground level web services. I'm very interested to watch them evolve and I'll play with them. But use them for a serious endeavor? Probably not.
Update: The world's most boring screencast of the Google Spreadsheets can be seen here. I beg someone to remix these and put them to some hyped up music.