I was working at Google when lively was still just a one man 20% project. It didn't start in anticipation of anything, it was just a guy having fun and he eventually got enough momentum internally to garner official interest in it. The one thing I remember though is that there seemed to be a big internal debate about the whole concept being cheesy and out of scope for Google. Generally though google will embrace just about anything internally.
As for the ad deal, I'd have loved to seen it go through but don't have anything really insightful to add.
maybe i'm thinking too much about this, but i would've loved to see the yahoo-google partnership happen. it would've meant that google gets to distribute and leverage it's huge ad selling platform over yahoo, in return for higher yield and revenues for yahoo - good for both parties. i think if microsoft buys yahoo, the whole web will continue towards a downwards path where users get less and less. i'm not against microsoft, but it's just that their business is vast and has a huge eco-system. microsoft will partner with many traditional media companies and service providers, who will want to run the web their own way.
thoughts?