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Some people on HN might be interested in the points that Rich Skrenta makes at 31 minutes in, and then the follow-up (which finishes at 32:25).
Matt, you are way too close to this dispute. You need to take a step back from the debacle and try to see it from the user perspective.

The real company motto of Google is simply, "Be Creepy." Even your CEO Eric Schmidt has said as much. Google will track people and invade privacy in every way it believes it can get away with. That is just the Faustian bargain every person makes when using Google.

Microsoft simply implemented another way to be creepy, invade privacy and track users that Google didn't think they could get away with or Google would have implemented the same. Sadly, Microsoft is actually getting away with it.

Both Google and Microsoft are creepy. Both companies spy on people for numerous reasons including for the sake of improving search results.

Now here is the tough question; Why do you believe Google has some sort of moral high-ground in this dispute when Google would do the same if they could get away with it?

The difficult part about posting this pointed question is I'm actually a big fan of all the hard and important work you do removing scam and spam sites from the Google search results. Though I may be critical of some of the practices of your company, you personally have my respect for the good stuff you do.