Google Apps: Where is it going?

I recently read this article about why it made sense for Microsoft to give up on Yahoo and pursue other options, and something in the article piqued my interest

Google may be lapping Microsoft in search share and online ad dollars, but the real threat is Google Apps—its free Web-based desktop applications

I was discussing this a few days ago with someone: What is Google's game with Google Apps?

There are several possibilities, but two stand out:

1. A new venue for targeted, personalized and relevant content (ads, news articles, advice, etc), in line with their core business model. This puts google-vended content in front of the corporate users at the one place where they spend most of their working-time: in their workspace, laboring away at word processors, spreadsheets, presentations, meetings and, of course, emails. These users are key commerce generators: they have needs, are aware of them, and have the means to satisfy them, if the right opportunity comes along - say in the form of a well-timed well-placed ad or link to an article subtly endorsing a product or product category. All perfectly legitimate, and very reasonable.
   
2. An Office-killer for small-to-mid businesses, in line with widening the scope of Google as a company. This will help businesses cut costs (from $500/yr/user to $50), and provide all the advantages - and disadvantages - of a fully online application. Few other pros: online collaboration (in various forms), Google's reputation for innovation, light-weight (no legacy-support requirements). This expands Google's market to the very lucrative office productivity apps space, and it will be easy for them to get a foothold at the lower end of the scale.

The question still is: What is Google's plan? It could well be both, but what is the primary thrust? A few days ago, I would have said (1), but I'm going to wait a bit more before putting my money where my mouth is.