True. I hadn't even posed that doomsday scenario. Imagine if MS made Windows and Office FOSS, what would happen? Exactly as you state, Google would build it and make it a free binary download and offer free support of it (probably replacing IE with Chrome, and Google as the search default). This would effectively kill MS and Google wouldn't have to worry about MS funding Bing through Windows and Office.

EDIT: And to be clear, that's largely what Google's Chrome/Docs strategy is. The total revenue from it isn't very large, even if it is a success. The real win is chopping down the core revenue of someone who wants to chop down their core revenue (search revenue). But today Google has to build this all. If MS did FOSS, MS would be handing Google the keys.