When you've got thousands of the world's most brilliant engineers spending 20% of their time on whatever takes their fancy, you need a home for the results. Such a home would provide a safe environment for these fledgling experiments to test their wings - even if they fail. It would provide a playground where the geekier contingent of the general public can access ideas before those ideas are ready for public consumption. It would be associated enough with Google to get the brand benefits, and quarantined enough so that it doesn't put the core service at risk.
That playground exists at Google Labs. And while many of the experiments from the Lab have slunk away into obscurity (anyone remember Google X?), some of the big G's most popular current offerings had their genesis there. Google Alerts, Google Desktop, GOOG-411, Google Docs, Google Maps and more, all alumni of this no-holds-barred, no-fear-of-consequences toy store.