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Amazing fact.  How long will it take for people spending mad cash on adwords - who are not quantifying their investment figure this out?  Will we ever see the decline of adwords? Anyone remember goto.com - they were the ppc kings back in 1998!  The good old days .05 clicks brought tons of traffic and sales...

Thanks Cyrus - very helpful. I still get the feeling that getting a link from a PageRank e.g. 7 site (however relevant it is) is going to be a lot more valuable than a load of PageRank 3 sites, though maybe not as valuable as an extremely relevant PageRank 6 site...

That didn't auto-update, but we're working on getting the date updated. The data is good.

Partial duplicate content can be OK if you provide your own product description. The main problem is writing a product description containing useful, unique content that is not already in the manufacturer's description. If you have the budget to make these useful descriptions, do it and remove the manufacturer content.

I'm a huge fan of http://www.rei.com/, check them out.

Very interesting - thanks! And makes sense. However, I can't quite get my head round how this would work in practice. Have you got any real world examples? Alex

I agree with Sparkplug here.  Go with the flat site-architecture (option 1).  What I'd do is use your category page design to clearly separate the sub-category links from the individual product links. List all subcategory links then decide which individual products are most interesting to users viewing that category page.  Try to keep these to a select few to prevent user overwhelm. This way your most important product pages are easily indexed and have some category-level link juice directed to them.

Joram- Great Response.

It's early in my observation/research of Google Product optimization, but it seems to me that Google leans to branded keyword optimization. You'll appear in Google products for both branded and non branded keywords but results suggest to me (without enough hard data) that branded terms are favored (perhaps because branded terms tend to be long tail). Hopefully, we get some more comments here that have more data-backed experiences.

Revisiting this - check out this Quora thread with some additional insight. http://www.quora.com/Search-Engine-Optimization-SEO/Do-sub-domains-hurt-SEO