Sorry, going against the crowd on this one. (And if you aren't familiar with this issue, this will likely sound like a lot of gobbeldygook.)
Everyone is always looking for ways to rank better in Google, trying to figure out the innumerable facets of their ever-changing algorithm. Now Google gives a clear cut method, and everyone is up in arms. Why? Because they phrase it in terms of penalty, rather than benefit.
Just call rel="nofollow" "GoogleTagToHelpMeRankBetter"-and it would be much more popular---a white hat way to rank better! And regardless, it's basically just a way to prevent the organic SERPs from being sorted by money---which I think everyone agrees is a good thing. As Matt Cutts has pointed out:
Google has been moving very rapidly to a much greater partnership with webmasters. They started out opaque and non-responsive, and are now much more transparent and responsive. This is a simple tool for webmasters to use to prevent the index from becoming all about money. Google has put the most impressive collection of brainpower ever gathered in a public company to keep the index clean and of high value. Search is not a trivial problem to solve, and Google does it better than it's ever been done.
People are also mad that Google added to the purpose of rel="nofollow" over time, from it's original purpose of blocking comment spam. Fine. Use a robots.txt blocked intermediate page instead. No one is forcing use of rel="nofollow"---it's a convenience.
And it's always been the case that some of what you do to optimize for one search engine will not help/may hinder optimization for another search engine.
(And, frankly, if you're aware of the problem, and you can't think of a way to make your paid links look "natural," optimization isn't really something you should be messing around with. While I advocate against this, still, those who complain should be able to find ways of doing things the way they want to.)
rel="nofollow" is a way, like robots.txt, to adjust your link equity to benefit your rank in search engines. All search engines do, and should, penalize excessive spam and black hat methods.
Google reduces the value of your content for a variety of reasons, whether you use robots.txt or rel="nofollow" (and other methods) or not. Using them gives you a greater variety of methods of adjusting your link equity and monetizing via advertising. The SEO/SEM community has requested a variety of things from Google to minimize content theft and organic rankings penalties. Google has responded to requests from this community, and continues to respond (addressing subdomain spam currently).
There are a lot of things Google isn't doing, but no one is doing what they do---the algorithm---better than Google. Helping users use advanced operators, tabbed results, and much more are proven to help users get better results over time. Google seems more interested in providing the best results from the simplest interface, leaving a great opportunity---the interface/GUI---to it's competitors.
My problem is that sometimes it's nice to make something look like a paid advertisement and have it pass page rank, when it isn't paid. Remember all the "ads" to help people donate after Katrina, or the tsunami? I had no problem "recommending" (passing PageRank) to the Red Cross at the time. (Now instead of an ad, you have to do a sidebar column article, or text link, or some such.)
Google has shown that giving great search results is rocket science, and I'm grateful for what they've done. The quality of their search results is what has made the internet such a life-changing part of modern culture. Giving savvy webmasters who buy and sell ads the opportunity to improve their placement in search results by adding rel="nofollow" to paid ads really seems pretty straightforward to me. Google's been publicly discounting obvious selling of PageRank for a very long time, now they are just making it easier for webmasters.
Since this is a blog with very little readership, I wouldn't expect much in the way of comments, but to forestall one kind, yes, I know Google is very powerful, and no, I don't think this is an example of them abusing their power.
I think their larger problem is trying to segregate business results from informational results. There can no such artificial segregation. It is not possible to separate commercial from non-commercial. You can take any example of one, and change it into the other. Google does this to try to make the job of keeping the index clean easier by encouraging commercial results to buy ads. Unfortunately, this is evil: suggesting that businesses should work with ads, and not their placement in the organic SERPs. I realize that commercial sites will try to spend money to improve their position in the organic SERPs, and that this effort often controverts the quality of the SERPs, but trying to strong-arm them with "Yes, spend the money, but give it to us (Google) instead" is not ethical. It's like paying protection because Google says "this is our turf."
Google should change their position on this. It's fine to emphasize the benefit of buying ads, but not to state that you should buy ads to the exclusion of doing all you can to rank in the organic SERPs.
Read more!