It's difficult to understand why Google didn't develop an online photo editor: it would've integrated with Picasa Web Albums, Google Docs and other Google services. Right now, Picasa Web Albums is just an online extension of Picasa, a popular software that lets you manage your photos. Unlike Picasa Web Albums, most Google services work online and don't require additional applications.
Instead of migrating Picasa online, Google acquired Picnik, an online photo editor that already integrates with Picasa Web Albums and many other photo services.
"Today, we're excited to announce that Google has acquired Picnik, one of the first sites to bring photo editing to the cloud. Using Picnik, you can crop, do touch-ups and add cool effects to your photos, all without leaving your web browser," mentions Google's blog.
Picnik will not be discontinued and Google promises that the service will continue to support all the existing partners, but I suspect that Flickr will no longer use it as the default photo editor.
"When Bitnik, Inc was created, our founders envisioned making great software for real people and giving users the power to edit digital photos in their browser, without having to purchase or download complicated software. While our first office in 2005 only had two desks, today we've grown to 20 employees and have become the world's most fun online photo editor, with millions of visitors every month," says Virginia from Picnik.
Google will have to rethink its strategy and no longer build online extensions for software, even if they own a popular application like Picasa. Google Photos should be a standalone service that doesn't require Picasa to upload more than 5 photos, to download photo albums or to quickly retouch a photo.