Eric Schmidt became the CEO of Google in 2001. A few years later he mentioned to journalist John Batelle that one of the fringe benefits of the job was that he was no longer competing with Microsoft. In the 1990’s when Schmidt worked at Sun Microsystems and Novell, he had taken it on the chin from Microsoft in the server space.

At Google, Schmidt could focus on the building the organization to support the corporate goals of developing the perfect search engine, organizing the world’s information, and making money without being evil. That had nothing to do with Microsoft, right?

“I was wrong,” Schmidt admitted in his keynote last month at the Web 2.0 Expo. However, at that event Schmidt also revealed that Google was preparing to launch an online presentation application. That, in combination with Google’s mail, word processing, and spreadsheet apps, meant that Google was going to offer the four foundation applications that make up the world’s incumbent software suite, Microsoft Office. Nevertheless, Schmidt denied that the product was aimed at stealing market share from Microsoft’s cash cow.

“We don’t think it’s a competitor,” Schmidt said. “It doesn’t have all the functionality, nor will it ever have all the functionality, of products like Microsoft Office.”

Search, Ads, and Apps

At Google’s annual shareholder meeting on May 10 — less than a month after his comments at the Web 2.0 Expo — Schmidt stated, “Our next strategy evolution is to really think about three components: search, ads and apps.”

Google’s focus on search and search ads is obvious, so the fact that the company is adding applications as the third piece of its top-line promise to users and shareholders means that it sees it sees online apps as its next big thing.

“That is a business that looks like it is going to grow very nicely for us,” Schmidt said.

And that puts Google in direct competition with Microsoft, which is developing its Windows Live franchise of online applications to go with its MSN portal and the Microsoft Office application suite.

This is a major collision of giants that is going to play out over the next several years. Microsoft is trying to move more deliberately into the online space and grab a chunk of advertising revenue. Google is trying to move into the application space and grab more product revenue from users and businesses.

What about the OS?

So that brings us to the obvious question: What about the operating system? There have been rumors for years about a Google PC and/or Google OS that was based on Linux and aimed at providing a simple, intuitive desktop for the masses. Naturally, that Google PC would primarily be an Internet terminal that features Google’s online applications.

The two images below are reportedly leaked screenshots from the Google OS. I can’t verify whether they are legitimate or if they are simply cooked up by users.

Despite a lot of enthusiasm and expectations, the Linux desktop has been treading water for years. I have personally tried desktop Linux so many times and used so many different distros that I’ve lost count of both numbers. It works fine and it’s stable, but the lack of the applications has always limited its appeal.

However, nothing could change the fortunes of Linux on the desktop more quickly than if Google jumped into the fray with a Google OS based on a Linux kernel.

Will Apple takes sides?

Since this is all conjecture anyway, let’s go even further out on the limb. What if Google did release a simple OS that runs on standard Intel and AMD hardware and Apple decided to get involve by using its newly-gained experience in running an OS on Intel hardware to provide the Google OS on a Mac Mini? That’s two really powerful brands in one upstart PC.

Such a move would seem unlikely because Apple would likely fear a negative impact on its OS X, but Steve Jobs likes making unlikely moves. It’s no secret that he believes Apple should have won the OS wars of the 80’s and 90’s and then turned into the kind of software juggernaut that Microsoft has become, primarily because of Windows. So, if Jobs saw a big opportunity to help make a significant dent in the market share of Windows, it’s hard believe that he wouldn’t seize the moment. And don’t forget that Schmidt also sits on the Board of Directors at Apple.

Final prognosis

Since the vast majority of Google users are accessing Google from a Windows PC and Microsoft has now emerged as Google’s primary rival, it seems likely that Google is at least seriously considering the development of its own OS, if for nothing else than an altruistic play to give the masses a much more simple and inexpensive computing environment. The fact that such a play could disrupt the PC market — not to mention the revenue stream and strategic advantage of its primary rival — is only a bonus. At least that’s the way Google loves to spin these kinds of moves.

That being said, I still doubt that a Google OS is coming any time soon. At the moment Google appears to be heavily focused on building a great set of apps and building out data centers to handle the traffic of the future and the growing expectation of 99.999% uptime. But once those pieces are in place, the next step appears pretty logical.

Your take

Do you think the new apps strategy is a prelude to the long-rumored Google OS and a showdown with Windows? What do you think is the likelihood that Apple could get involved by doing the hardware for a low-end device running a Google OS? Join the discussion.