This analysis isn't quite right.
First of all, users are more than welcome to use S/MIME with gmail, I know that I have for years. The problem is that the messages then aren't accessible to anyone using the web front end, you need to read them using IMAP and a reader that supports S/MIME, as pretty much all current readers (Mail.app, Outlook, Thunderbird, iOS mail reader, etc...) do.
For those who don't want to bother with any of this, Gmail is essentially saying that they will make their web front-end an S/MIME supporting reader, BUT this requires that they host your keys so that they can do this. So if you are communicating with someone who does S/MIME using something like Mail.app, then your side of the conversation is visible to Google, but their side is not visible to their mail provider.
So this just allows the web front-end users to not automatically force everyone else's communications to be downgraded on their end, which is definitely a huge improvement over the status quo.