Here's the essence, in my view:
- They extract value from massive amounts of freely available stuff. Doing anything massively requires a big computation infrstructure, so there's a barrier to entry.
- They provide some added value for free to the community (search, tools for making more stuff). This brings them attention, the important currency of this economy.
- They figure out a way to extract some money on the side (literally in their case, that's where the ads are).
Of course, that's the user's view. In reality the tail wags the dog, and the advertising part of Google is actually much bigger and more important than the first two points. Google puts much more effort into the advertising side than in the search side, which makes sense -- all those free meals and fancy buildings and jet planes have to be paid for somehow.
In the meantime here I am creating content for free using Google-owned tools.
Recently bhyde and others have commented that long-tail economics brings benefit only to the hubs, the filtering and aggregating services. I don't think that's quite right. Assuming Google as a paradigm, it actually does bring some benefit to small content creators who can run advertising and take a share of the money stream. The people who are going to get killed are the middle-sized middlemen. Economies of scale will produce a few massive hubs like Google or EBay, consumers and small producers on the edges will get some benefits, and the smaller aggreators (like the huge publishing house that I work for, or the small publishing house that my friend runs) will suffer.
Note: I do not actually have an Internet pundit license and may have no idea what I'm talking about.