They are screwing both parties, they want to monopolize buying and selling links via adwords, and force people to use adsense and adword, I hope in few countries google gets slapped with dozens of monopoly cases
the way that they are penalising paid links is this: Reduce the PR of sites selling links. Any site that has bought links from that site is also reduced from a flow on effect of the selling site having its PR reduced. Simple really.
Start with the big names and it will have a flow on effect to everyone else below. Google has based wiped off half the value of links from these big sites. PR 5 links aren't worth as much as PR 7 or 8. So this should stop link selling for PR in its track.
PR penalty = YAWN! Have any of these "big name sites" suffered any kind of drop in the ranks? That's what really counts. If they haven't then have they really been penalized?
Sites that i sell links from have had no reduction in PR and sites that i have sitewide links to have had a reduction in PR. Matt Cutts even said: sites that sell links won’t have their search engine rankings or PageRank penalized.
Honestly Folks, the PageRank and SERPs algorithymn "belongs" to Google. They should be able to change it however and whenever they want if it is their company. Right???? The goal is not monopolizing but rather improving relevancy in SERPS. If your site is really an authority for a topic you shouldn't have to pay other sites a bounty to link back to you. Note the key word is "bounty". There are all kinds of bartering and exchange agreements going on for backlinks but most people will only consider doing those with credible sites. ..stepping off soap box