They do great work in many areas, but the best ones (IMHO, as a systems guy) are the systems papers. In non-systems areas, folks from universities could conceivably do the same research, but for OS/Distributed systems, Google research is the state-of-the-art. There's no point even trying to find fault with their evaluations, because papers are usually submitted well after the system is deployed and operational within Google.
Three recent papers at this year's Operating Systems Design and Implementation:
http://googleresearch.blogspot.com/2010/10/google-at-usenix-...
