I don't think this is flexing a lot of muscle, though I could be wrong of course. The VM was written by one very talented, experienced guy and his assistant. Let's say it cost $200k. The plugin probably cost a trivial amount (there is for example an open-source IE plugin for Firefox that is pretty small sourcecode-wise: http://ietab.mozdev.org/). So all in all a small bet with a large potential upside.
I don't think the technical aspect of what they've done is flexing muscle. It's interesting for sure, but in the end, it's a plugin (a very cool one, yes).
The muscle flexing is that they're willing to subvert a competitors product instead of just promoting their own product as a superior offering.
Can you imagine the outrage if Microsoft had done this and offered a plugin to Chrome or Firefox that would make them render things just like IE does? If you're having trouble imagining such a scenario, think back to the outcry when people discovered the .Net plugin for Firefox, and that wasn't nearly as invasive.
Google is drawing a line in the sand that essentially says "You can do things your way or our way, but if you don't like our way we'll find a way to make your users do it our way."
To me that seems like a pretty serious escalation.
Nah, this is no worse than making IE skins for Firefox, which have existed for some time. The .NET Firefox plugin was significantly more invasive, since it was automatically installed without user consent. As long as this plugin is voluntary, there's nothing serious about it imo -- it's more a fun prank that people may have developed with or without Google's help.
This is just speculation, but I think it's possible somebody just did this in their free time without much strategic planning, like so many projects at Google (you know, that 20% free time at Google).
I have some idea of how easy it is to embed IE into apps, so I am going to assume it's at least the same order of easiness to embed Chrome into IE. I think it's fairly trivial, though perhaps unpleasant work.
I tried looking at the source code, but I don't use GIT so I gave up. It's part of Chromium: http://code.google.com/chromium/
EDIT: After considering your profile page I fold :)
Again, I don't think that this is a technical thing; but a corporate strategy thing. We didn't hear about this from some developer's blog; we heard about it from an "official" Google blog. At some point, this thing has been blessed for release under the Google umbrella.
