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They are easy to add to your web site if you have an icon editor. Just Google "favicons" and you'll find instructions.
You've only got 256 total pixels in the favicon anyway, so use them for good effect and make a favicon that is reminiscent of some prominent graphic element on the site. Using a one-color capital letter these days is not going to be a strong signal (unless you're Google.) But allowing subtle differences in shade and tone from pixel to pixel can help make a visually memorable icon.
When I look at stats, people who will see the favicon frequently (that is, non-IE users) also use 16-bit color or higher. So I let my image creation software have a lot of color information to work with rather than limitng the palette. The end result looks a lot better on modern machines - and no uglier than most when it degrades to a low color-depth system palette.
a good fav can really catch a visitors eye too. the tough part is creating an original one that looks good. you don't have much real estate to work with for that graphic.
no drawbacks that i have encountered.