My understanding is that something being 'required for product to function' refers to technical requirements, not revenue requirements. So, yes I agree that it's a problem for small sites (or really anyone who tries to make money on ads).
So this is a bad rule, because enforcing it will result in eliminating independent small sites which have no other means for financing themseves than ads.
Advertising doesn't require recording detailed profiles of individuals without their consent. Think of magazines, billboards, television, radio, etc.
In case of the advertising availabe for small sites with a handful of staff (ad networks) untargeted ads pay much less (even 50% less or more) and that revenue may not be enough to keep the sites operational.
Is this necessarily a bad thing, or just a reality of operating a business?