This move is foolish and self-defeating. If it has to, Google can simply block A.P. stories, and I’m sure it will choose to do that rather than agree to pay A.P.’s new fees. More simply, Google’s lawyers can point to the fact that any publisher can already opt out of Google’s system any time he/she wants to.
The A.P. isn’t going to build the hundreds-of-millions-of-dollar business it speaks about based on this effort; the most it can hope for is to sequester its version of the news off in a corner from the rest of the Web, where fewer and fewer will read it.
The danger is that this conflict will make it into the courts and some judge will narrow the fair use principle in ways that hurt both the Web and the free flow of information in our society.
UPDATE: Zach Seward at Nieman Lab has a post covering some of the legal aspects of this story.