To me the only real problem with Google attempting to "do everything" is they seem to be bad at doing real business in any space other than their core ad business. It's as if the billions they make from ads dwarf other activities to the point where they cant be bothered to earn the millions they could make with other activities.
For example Google Analytics. From Wikipedia;
> Another market share analysis claims that Google Analytics is used at around 49.95% of the top 1,000,000 websites (as currently ranked by Alexa)
Having used Google Analytics on a relatively high traffic site ( http://www.local.ch ), it has some serious shortcomings, such as limits on API usage and accuracy of the data or even basic technical support. We'd be more than willing to pay an "enterprise license" fee in the order of a few hundreds of thousands to address this but Google isn't interested, which is maddening. As such they squat on the analytics market, their free offering acting as a barrier to entry for innovative competition, while failing to innovate themselves. The strategy with Analytics seems to be that it should support the ad business and nothing more.
The Android Market is another example. The market dynamics are different, but again Androids primary purpose seems to be to supporting the ad business again. That seems to be reflected by Googles fumbling of the Android Market to the point where Amazon feels it's worth attempting.
Similar stories apply to many other of Googles products; Groups, Blogger, Picassa, Google Desktop and to an extent even Google Docs - the appearance of "we're already rich - why bother?".
As such, outside of it's core business Google is basically a "Market squatter", blocking entry to others while driving customers mad with incomplete offerings. Can't help feeling if they could solve this by getting serious about monetizing those side products.