Facebook's fly by the seat of your pants "move fast and break things" model is cute and all, but moves like this are going to be their death by 1000 cuts. Unlike Zuckerburg's claim, privacy anxiety is not fleeting, they just had such a monopoly on a desirable service that people were willing to swallow another hit. Unfortunately it drove their customer satisfaction down to the level of cable companies and airlines. I wonder how much longer they're going to be able to keep up such shoddy service now that they have competition.
I agree with everything you said, except the last sentence. Circles is a competent product and FB is taking it seriously, but FB will only really have competition when Circles has comparable adoption (since nothing else really matters for social networks).
I don't know for sure, I think that people creating plus accounts just to check it out is a serious hit in itself. From my experience and what little I can remember of the conversations I had at the time, facebook was "also check" because "everyone's on myspace, why would I use facebook?" until the moment you realizes "oh wait, everyone I care about is over here too".
For that reason, I don't think plus needs comparable penetration to compete. The critical mass needed to get a single user to switch the network they are a more active on isn't the same as the mass needed to get everyone to do so.
If I go look at my feed on facebook, I can already see the makeup of my 'top news' changing because most of the people I actually give a shit about are already on plus. Its less that 20% of my "friends", but 5 or 10 more people and everyone I care about interacting with will be there.