Yes, that's correct. One thing we all need to realize is that by collecting data, software can do things that it would normally take physical hardware to do. Location data makes Google Now's travel time alerts and public transit cards possible. Search history makes Google Now's personalized sports data and frequent location searches also possible. Even more alarming, accelerometer, gyroscope, and front camera (!) data are what make iOS 7's parallax effect possible. Targeted ads, of course, are no different.
Imagine you are, say, on a Chromebook. In Chrome OS's seamlessly secure ecosystem, you are just peacefully browsing the Web, checking Google+, Facebook, Twitter, Instagram, etc., when all of a sudden, you get a nagging pop-up window, telling you to install Windows. Or IE, in all it's ugliness. And every time you try to close it out, you end up getting repeatedly nagged, by Microsoft, by Apple, by Nokia, and by every possible software vendor other than the one(s) you actually want to see ads from. What you have just imagined is a world without targeted ads.
So think about what privacy means. Unfortunately, there's a trade-off here, because functionality and privacy inversely go hand-in-hand, and unless users want to get nagged by irrelevant ads and have stifling user experiences on their devices, they will have to give up some, but not all, of their private lives.