One basic issue is the simple fact that someone owns that billboard, and someone else paid to place their ad on that billboard, yet in the virtual world, it is Google and its advertising customers that are benefiting from the existence and placement of that billboard. This issue, however, is not new, as in 2002 several Times Square advertising companies unsuccessfully sued Sony over its alteration of billboards in the movie Spider-Man. (more). Unfortunately for Google, the scenario could be vastly different if it pursues what this new technology outlines.
What if every time a consumer enters the search term Starbuck’s to search for a nearby location using Google maps, the Street View showing that location also shows an image the billboard next door with a Dunkin Donuts ad, the latest special, and a note that they are right up the road. Indeed, there arguably doesn’t even need to be an actual billboard in the image, as any open space could get a virtual billboard. A Honda billboard next to a Ford dealership, an Ace Dentistry Sign next to Alpha Dentisty's building ... the posibilities are endless and all up for the highest bidder.
Because the arguments that Sony successfully used in its Spider-Man case were largely First Amendment arguments related to the artistic aspects of the movie, and Google’s potential virtual ads would seem to be entirely commercial in nature, Google may not be able to rely on that prior decision. More likely this would be viewed as AdWords II – Attack of the Billboard Snatchers (more)