Contextual advertising is the only kind that will work online in the long run. Of course, AdSense text ads on content pages (as opposed to on Google’s search results pages) will have to have lower clickthroughs, but this misses the point. Since the ads are targeted based on Google’s crawl of the page, the ads should be relatively targeted (read useful) and therefore should give good results when people do click.
The lower average clickthrough doesn’t matter since the advertiser only pays for results.
One thing I’d like to see is a way to see (before signing up) what kind of ads they would be serving. My guess is many sites will be nervous about trying this because they don’t want to see competitors or “cheesy” sites advertising on their pages.