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Subdomains cost nothing to create and I can see the appeal from an optimizer's pov, but a web full of keyword1.domain.com - keywordn.domain.com just seems.... wrong.
Anyone care to guess whether this strategy is going to continue to pay off? I won't take it personally if this thread dies an early death, I'll just assume everyone's too busy creating subdomains to notice :)
There are fans on each side - personally, I haven't come across any coming up for searches I've done, except some big sites. There are huge sites out there that use them for natural divisions, yet others use subdirectories.
Way back when, Inktomi didn't like those because of being used for a lot of spamming. In some circles they're considered part of the same site, in others they're not. There are cross-linking issues, and I'm personally one of the camp that doesn't believe you can crosslink between them with the same safety you can with subdirectories.
Here's a thread about a paper that talks about defining "logical vs. physical domains."
It's a long but a good read, and you'll find a lot about sudomains if you use the site search up top. Post a link to any threads you think are very good and if you find there are further points that could be clarified.