They definitely knew it would impact their ad business but I think what did it was the competition authorities saying they couldn't do it to their competitors either, even if they were willing to take the hit on their own services.

Impact on their business (bold added): https://support.google.com/admanager/answer/15189422

• Programmatic revenue impact without Privacy Sandbox: By comparing the control 2 arm to the control 1 arm, we observed that removing third-party cookies without enabling Privacy Sandbox led to -34% programmatic revenue for publishers on Google Ad Manager and -21% programmatic revenue for publishers on Google AdSense.
• Programmatic revenue impact with Privacy Sandbox: By comparing the treatment arm to control 1 arm, we observed that removing third-party cookies while enabling the Privacy Sandbox APIs led to -20% and -18% programmatic revenue for Google Ad Manager and Google AdSense publishers, respectively.