They forgot to show the "Ukulele $350" ad that pops up when he looks at the book. Also, "Monsieur Gayno Boxed Set - $24.95", "Feet hurt? Try walking shoes from Reebok!" and "John Smith for Mayor! I'll make the trains run on time."
Google does make a lot of money on advertising, but that's because it's impossible to not make money on advertising. Google could literally fire 99% of its employees and we would still make money on ads because it's that easy. You could probably start an ad company today and have a steady income next week. (You need a web server, someone with content to "monetize", and someone with an ad. Pretty simple.)
What's hard is figuring out how to make money once the easiest source of money dries up. (It's sort of like why we don't have solar-powered cars yet: because burning decomposed dinosaurs is so easy that any attempt to do something else seems impossible.) Future products you see from Google will be less about advertising and more about something else. That's why we have web browsers and open source projects and self-driving cars and space elevators. Try everything, see what makes us more money than advertising, then do more stuff like that.
But actually your scenario sounds plausible if Google was the most ignorant, narrow minded, child-like version of an ad network. If they have any smart people at all working at Google, I think that they would have a much wider, longer-term vision in which they can generate value from more than just bombarding you with ads in the most direct, obvious way possible. If they feel at all compelled to stay relevant and profitable for the longest amount of time possible, then they are working on that right now.
I can see that it would initially be relevant, than it would gradually stray and become increasingly flooded with obvious ad bombarding and irrelevancy, much like what Google did to search.
It's the cell-phone carriers (or OEMs) that want to sell you non-rooted devices, and that's a battle even Apple hasn't won.