I agree that it's ok to give users a discount for giving up privacy. The problem, in this case, is how hard to tell: what level of privacy you're giving up, how they'll deliver the ads and that there's "private" option. Google does not have to meet the same standard as they do not have a "private" version (except google apps).

If AT&T presented this as $179 + $50 for normal, or $150 + $0 "with special offers" (think kindle model), I think people would be much less worried.