You'd be surprised. I've talked to published authors, and here's the inside scoop: the writing/editing process is often, amazingly, word documents emailed back and forth with hacked up homebrew version control 'systems' and inline comments. Believe it or not. I've seen them. And it only gets worse when there are more editors involved (depending on the content, there can be many).
O'Reilly is working on a similar idea (http://atlas.labs.oreilly.com), which means there is at least some demand by commercial publishers for a system like this. If O'Reilly is working on it, it can't be solved very well.
Anyway, I'm not even targeting commercial publishing, I'm targeting independent publishing.
> you mention essays? Most students would just use google docs
For short essays google docs is fantastic. I don't plan to touch that. But have you tried writing any kind of long-form group research paper (as in, over the course of a semester), especially technical, with google docs or dropbox? I have. It's a nightmare.
> their is adequate substitute products already in the market place
Craigslist and couchsurfing.org were adequate substitutes for Airbnb, Yahoo search was an adequate substitute for Google, and flash drives were an adequate substitute for Dropbox.