1. First, as Eric points out, there is a real privacy concern raised by this "free" service. I don't think Google intends to go after the very bloggers it likes to benefit from, but the way is open with the terms of service for this tool. Here's a short sample:
You will have and abide by an appropriate privacy policy and will comply with all applicable laws relating to the collection of information from visitors to Your websites. You must post a privacy policy and that policy must provide notice of your use of a cookie that collects anonymous traffic data.
Here's the full deal.
I don't have a privacy policy. All traffic to this site is tracked, I think you knew that, but until just now I'd never mentioned it. Furthermore I, like Eric, am not sufficiently informed about privacy law to know whether agreeing to these terms would be a wise move on my part or not. Are you?
But the biggest red flag that these terms raise for me is summarized in my Coalition of Unpaid Bloggers manifesto (read: justification for putting a neat looking button on my blog), and expanded upon here. I prefer to remain unbeholden, at least as far as is possible. Google Analytics applies just the kind of restriction I'm eager to avoid.
I still like Google, and still wish I had bought shares last year, but I'm not ceding any more to them or anyone else than absolutely necessary. As the apostle Paul wrote, "all things are lawful for me but I will not be enslaved by anything."
2. It never did work! Not for me, anyway. This is actually the more important reason. When I sign up for a service, free or not, I expect it to work. 'nuff said.
So, moving on...
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