Google doesn't compete with them for the desktop really. But desktop Linux distros do. Especially when it comes to gaming. Note that Valve pushes Linux a lot lately with their whole SteamOS effort especially. I think that's a major threat for MS who for a long time enjoyed an unchallenged position as a platform in PC gaming.

Latest Linux gaming renaissance eats at their confidence. For many gamers Windows is not seen as a requirement anymore, and they simply ditch it and start using better systems (especially because Wine became so good lately). While gamers are a minority amongst Windows users, MS still fears that dynamic because it breaks their network effect and creates the same effect in the Linux world.