Both. Microsoft has always stated they were interested in getting into the search business, so there is no surprise there. The fact that they've released something that is actually good may have spurred Google to make their announcement before having something to actually demonstrate.
I would imagine (as most have) that they are releasing some sort of Google-centric Linux distribution. This would make sense as it doesn't take long to roll your own if you know what you are doing (and I'm pretty sure Google knows how to do this).
From google's blog post I'm under the impression that while based on a linux kernel it will have very little actual code from linux. It sounds like they are writing their own version of X with a minimalistic window manager.
I very much like the look of the chrome browser so I'm looking forward to checking this out. Specially since I'm one of those that doesn't do much on his home machine besides web based stuff.
I would imagine (as most have) that they are releasing some sort of Google-centric Linux distribution. This would make sense as it doesn't take long to roll your own if you know what you are doing (and I'm pretty sure Google knows how to do this).