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they now want me to create an additional 20 1-page websites, each with a different domain name that basically consist of the template of their main site (same logo, navigation & sidebar) filled with different content. any links users will click, for example in the main navigation will lead to their principle site.
assuming they sell all kinds of widgets and their principle domain is widgets.com, the additional sites will have domains like red-widgets.com, large-widgets.com, etc. - aimed at more specific niches within their area of business.
i see this as a not very kosher SEO tactic that confuses the users. they are determined to go ahead with it since they "know a guy who does this with great benefits to his company". it seems they see this as a cheaper way to boost SEO, rather than optimising their existing content more, putting out press releases, etc.
how bad is this actually and what might the results be in the long term?
The downside is if you start this from scratch now allow many, many months before you see the benefits. There are simply too many long standing sites to compete against for a new comer so the process is much longer and slower than the old days.
The key point is you don't duplicate any content. My sites expanded more deeply on existing content and no wording is the same on any site. It makes the initial creation a lot slower but it's a lot safer.
Having the same navigational system may hurt the effort only because of the large number of times he wishes to duplicate it. If it was three or four times it would be safer.
The question about whether this is greyhat, blackhat or whatever is answered when you wrote "...filled with different content...". By different, it cannot be just replicated, mix mashed same old stuff. it must be indisputably unique content, maybe all saying the same stuff but in substantially innovative ways.
So, in spite of the navigational system/linking structure being identical and probably overdone (20 domains) and because you are implying that the content will be different, it should pass the search engine as not being mirrored sites but you'll know and I'll know and the client will know that in fact it is.
Judgement by the court: grey hat. Good luck with it though and try to convince the client to let you recreate each domain using a unique template and here's a great opportunity to try out various manners to throw the links around.
Go to my blog and read up on "Keyphrase Dynamicability" and "Anchor Congruency".
the content will be 100% unique. the client has staff available to produce this and they know their business well.
i dont think the navigation itself will be seen as dupe content. incoming links are a bonus to boost PR, even though it will indeed take a long time before the external sites get PR IF they will get it at all.
the main reason is to generate more business, to cast a wider net.
seems like it wasnt that bad of an idea after all.