Competition is a good thing. If anything, it validates that your idea is a good one, or at least one shared by others.
Google is a giant, but its success with search hasn't proven to translate into de facto dominance of other areas of the web. In most cases they've had to end up buying their competition -- YouTube won the video battle, Google Docs & Spreadsheets was acquired from Writely, Google Earth was acquired from Keyhole...
So don't let Google's interest in a problem scare you away from an idea -- use it to motivate you. The web is the one niche in the economy where a 3-person team can topple a multi-billion dollar corporation.
The hosting issue still seems to be the big risk with using Rails for a startup -- hosting a Rails app seems to require a lot more sysadmin-like knowhow than some of the most established environments that have essentially become standard and one-size-fits-all features on most hosts.
Joyent seems to be one of the leaders in the game.. do any of you use them and have comments to share?
That's a good point. There is a big distinction lost on a lot of people between "importance because I like it" and "importance because others like it". The DJ who plays the Electric Slide at your wedding because he like it is the typical example of a guy who can't see outside his own opinions of the world.
I'm not sure how I feel about facebook either (from a technical standpoint, I feel the same way every developer I know feels: "[homer voice] doh! I could have done that in a weekend!"). But given the way its become the sharing medium for a whole generation of college students, it deserves a lot of respect and attention no matter how you feel.