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It does not necessarily improve rankings. It could, but there is no guarantee.
Did it happen because there is big money in it for search engines? How does MSN and all the others benefit from using Goto results?
Or did this happen because big corporations were frustrated at not ranking well in search rankings so they pressured search engines by saying "Look, we'll pay you if you rank us well in the SERPs.."?
I can't figure it out.
<added>Hey look...my 1200th post.. :)</added>
Plus with most of the directories having become little more than shopping portals (I wrote to AskJeeves asking them to consider my content packed non-commercial site and got an autoresponder message back saying they are no longer considering free submissions), there is potential for less greedy directories and portals to gain market share.
As net users become more savvy they'll realise which search engines are dominated by 'Sponsored Listings' and will avoid them like the plague.