Indeed I was all ready to write a screed against trying to turn open source proprietary before I did the research.
First, Google has a good reason for wanting to retain control over its own services. This lets it retain legal cause against malware aimed at its servers using its software.
Second, after some hemming-and-hawing, Kondik backed down. He said he would provide a work-around so his Cyanogenmod will still work with Google applications. A group of college kids called the Open Android Alliance offered to do a purely open source Android.
There was even some action inside Google itself, with one developer considering resigning but the thinking better of it. "Let's try to move on and be constructive and talk about how we can make Android better for everyone," he concluded.
So why is this a kerfluffle? Why isn't it a scandal?
Because so far only one lawyer has made a dime off this, the Google lawyer who wrote the original letter. (And he or she is on salary -- if they hadn't written this they might have just played ping-pong on the Google dime.)
In the end this was an open source dispute, handled by open source developers in an open source way. Let's find a workaround. Let's find a way to get along. There ain't no one here but us chickens.