Actually, it is. Search ads and contextual ads (a.k.a. direct-response ads) are an important sideshow, but they're still a sideshow, which is why Google acquired DoubleClick and has tried (so far without much success) to integrate display ads into AdSense.
But let's not get sidetracked by a discussion of the advertising business. The question here isn't whether online editions of newspapers lend themselves to advertising; it's whether Google is stealing Rupert Murdoch's content by indexing it and displaying headlines on Google News. The answer to that question is straightforward:
1) Indexing isn't theft.
2) The Internet and search engines existed long before Mr. Murdoch's Web sites existed. When his company chose to published on the open Web, they made a conscious decision to expose their stories to the unwashed masses AND to search-engine crawlers.
3) If Mr. Murdoch has changed his mind about having his content indexed, he can place that content behind a firewall or block Google's crawler with a couple of lines in robots.txt. There's no need for public posturing, blustering, and bluffing.