Well, O'Reilly does bring up good points, but then again that is his opinion. Some people are willing to sacrifice privacy in exchange for functionality. O'Reilly seems to be one of those people.
I do not mind getting banners or ads for a service that is free. I do however mind if the advertisement I receive is based on the content of my personal email. The excuse of it being software doing the scanning and not a human being, makes no difference to me. Actually, the fact that google uses that as an excuse shows what their thinking is with regards to the privacy of their users.
O'Reilly also points out that this type of targeting advertesiment happens everywhere. This however does not justify google doing so.
Noone is forcing you to sign up for the service, O'Reilly points out. Well, we could apply that statement to many of the things we consider illegal and all of the sudden they become legal: Why put drug dealers in jail? no one is forcing people to buy from them.
Just my two cents.