Great analysis of the pros and cons behind the spec and implementation of Google's new open-source video codec. Summary:
VP8, as a spec, should be a bit better than H.264 Baseline Profile and VC-1. It's not even close to competitive with H.264 Main or High Profile. If Google is willing to revise the spec, this can probably be improved.
VP8, as an encoder, is somewhere between Xvid and Microsoft's VC-1 in terms of visual quality. This can definitely be improved a lot, but not via conventional means.
VP8, as a decoder, decodes even slower than ffmpeg's H.264. This probably can't be improved that much.
With regard to patents, VP8 copies way too much from H.264 for anyone sane to be comfortable with it, no matter whose word is behind the claim of being patent-free.
VP8 is definitely better compression-wise than Theora and Dirac, so if its claim to being patent-free does stand up, it's an upgrade with regard to patent-free video formats.
VP8 is not ready for prime-time; the spec is a pile of copy-pasted C code and the encoder's interface is lacking in features and buggy. They aren't even ready to finalize the bitstream format, let alone switch the world over to VP8.
Google made the right decision to pick Matroska and Vorbis for its HTML5 video proposal.