The problem with "innovation" is it's actually kinda hard to define and somewhat subjective. Steve goes into this.
I'm not sure I entirely agree about his point about Google making competitors though. I actually think that's worse than it used to be. The height of it was Google Offers (anyone remember that?) that was a response to Groupon, allegedly when buyout talks failed (I have no inside knowledge of this; just what I read here and elsewhere).
To echo Steve's point, I do kinda wonder if there are too many engineers at Google now. Or, more accurately, more than is required for what they do to do. The problem with that is they'll find work for themselves to do, good idea or not, part of a coherent strategy or not.
Generally speaking (rather than Google specifically), the danger with this kind of situation with large companies is decisions tend to then become political rather than merit-based and also you tend to end up in situations of endless internal reorgs, which seems to be a defense mechanism by middle management (in that a given org structure can't succeed or, more importantly, fail if it's never given long enough before the next reorg).
Disclaimer: Xoogler.