For example, if friendships in this new system cannot exist in the data schema without being part of a group/circle, this would have profound effects on any ecosystem built on top of it, extending right up to the broader U[I|X] level.
You could compare this to how facebook built their whole success on the concept of activity feeds, which was arguably their killer feature over myspace. Myspace did have similar functionality, but it was tacked on in the way that groups are tacked on to facebook.
Hopefully google can kill facebook by building their offering with privacy groups right at the core, and layering everything else on top of that.
EDIT: I think what I'm trying to say is that privacy has massive potential to be a core feature/selling point in and of itself. It could also potentially form the foundation of a more successful social networking platform/ecosystem full stop.