If they had end-to-end encryption, then Google wouldn't be able to read the emails; meaning to gain value, Google would have to charge for the service.
Hm.
Maybe some day email will fade away giving its place to an IM, though I'm not sure it will always be spam-filter free.
Based on a quick search, you are right that the phrase "permission based email" has been SEO'ed into uselessness by email marketing services. What should it be called? Screening? But the spam filtering services have almost SEO'ed that into uselessness.
Having just read a former google abuse team member's take on end to end encryption and anti-spam[1], this topic now looks a lot more complex. Regarding IM's, he mentions how spam-free WhatsApp is and argues that spam is a lot easier to fight when you have central control because you can change anything at any time at any point (client or server).
[1] Mike Hearn, https://moderncrypto.org/mail-archive/messaging/2014/000780....
Leave it up to the users to decide whether they want to use end-to-end encryption despite a potential spam problem. It's also not like people couldn't use multiple email addresses.
How many times have we heard companies "China has a 1 billion people - imagine if we only got 1% of that market with our product!". But we're talking about a feature of a product here, not an entire product that only gets 1% of a market's userbase.
0.1% here, 1% there, another 10% over there - all of these features add-up to create a great product that everyone loves because of the aggregate of features but also because of that "one" feature they love individually.
Another thing to remember is that the enthusiasts are the market-builders. You can't just win with a product that surveys well with 80% of the market. I don't think most of the phone or smartphone customers in 2007 wanted a touchscreen phone. Probably (well, literally, actually) only 1% of the market wanted it then.
Also, we don't know how important this feature could be to gain Google more trust. Telegram for instance has gotten promoted as a private messenger that uses end-to-end encryption - and yet its end-to-end encryption isn't even enabled by default (so same scenario that I was talking about), while its "normal" encryption is probably worse and less secure than what Google uses for Hangouts.
It might be a harder sell to implement E2E crypto, although perhaps the same argument might apply some day. The notifications are probably just low-hanging fruit.
Not to mention, from what I heard out of the mouths of ordinary folks, that protection is literally one of the leading reasons GMail took over. It was nearly spam-proof, and people loved it. (That and lots of free storage)
But honestly, as you have highlighted, these announcements should be insulting to users' intelligence.
"Dear Users: Please allow us to store copies of all your sensitive data, including every email ever sent or received, in perpetuity. In return, to the extent the law permits us to do so, we'll let you know (_ex post facto_) when some other third party is having a look at it."
The solution to the problem if indeed there is a problem here is not going to come from Google.
The problem _is_ Google.
The only parties who need a copy of an email are the sender and the recipient. If you really care about privacy, security, whatever, then "store and forward" and "POP" via some third party (Google, etc.) is not the proper way to implement email.
Hypothesis: Google does not charge for Gmail because, quite simply, no one would pay.
Emphasis on "need". Most recipients also like to have a third-party anti-spam service also have a copy of their email.
Assuming the encryption costs are low enough, spammers and virus senders would like nothing better than to cripple anti-spam learning tools by having each recipient recieve a cryptographically unique opaque blob. This would force users to develop their own training corpus and react to new spam and virus outbreaks individually.
You may argue that you could still use anti-spam locally, but it wouldn't be as good. While I wouldn't mind sending decrypted spam out to a server and getting updates to my local anti-spam program, no one would want to send legitimate mail, so the service would have no "ham" to train against.
I suppose encryption could help in the fight against spam by requiring CPU time to encrypt the email. 10 seconds per email would be hard to notice for a real human responding to messages, but might make spam unprofitable.