It's rather simple, really; I didn't expect to read so many versions of the possible google motives behind their moves.
As with every corporation, there are only two major questions asked in the "boardrooms":
1. How can we improve our product?
2. How can we improve profits?
Everything a corporation does is a direct result from the answers given to those two questions. And while the first question is not so important to most as the second, there are still large businesses, which do emphasize the quality of their product. For example, there are famous French winemakers who will forgo an entire harvest just so they don't lower the quality their name is associated with, which results in millions of $$$ being lost.
However, clearly google is not focusing on improving their product, since we can universally agree that overtime the results are getting worse and worse (the actual product people are using google for).
So the reasoning behind what google does is simply the answer to the second question - how can we improve profits. I would liken their actions to a washing detergent manufacturer, who adds extra water in their bottles in order for people to have to use more of the product, i.e. google is watering down their results so people would click more on the ads. And yes, they can do this and will do this as long as they are the monopoly.
Whether you are calm about it or not, fact is that with the current business model, what's good for google is bad for you, the working webmaster. Why would people click on ads, if they could get a good generic result?!? Anyone who has been googling for a while is well aware that the ads could actually be 100 times more dangerous than the results.
For example, a website selling Nike gear in the generic results used to mean that there is a good chance the website got there through a lot of recommendations (links), thus it's a good chance it was legit. On the other side, nothing prevents a Turkish company making fake Nike gear to buy an AdWords spot and sell junk though a warehouse in New Jersey :)
But, on the other side, if you have bad set of generic results, your options are to either try to search in a different way, hoping that you wont get another set of bad results, or click on the ads, which are (somehow) always well-targeted to what you searched for.
You could, in a perfect world, go to a competitor, but Yahoo now = Bing and Bing is really not focusing on popularizing their search engine. At least back in the days "ask Jeeves" and "yahoo" ran TV ads. Nowadays Bing can't even decide on a domain name for more than a couple of years...
Bottom line is that we desperately need some competition around here!