I think Google still innovate in that, as other commenters have noted, they're creating some interesting file system and database solutions. However, these (among others) are infrastructural contributions to the backend. I think the article is talking about innovation from the average consumer's perspective.

I remember speaking to a friend of mine when Google released Wave. He said Wave was the first real home-grown "product" since GMail and it was his opinion that it was developed in Australia because the office there was a kind of skunkworks plant with little bureaucratic oversight compared to the other Google offices around the world (whether this is true, I don't know). He said Google were at the stage where they are big enough for middle management to stifle real innovation because the individual managers don't need to take the kind of risk required with greenlighting a project like Wave (and look how that turned out!).

To Google, buying an early-stage startup is a cost-effective way of outsourcing the risk-taking and that kind of acquisition is the closest they can now get to serious innovation and staying competitive.