So, having stuck my neck out and confidently predicted that Google's test of "streaming search" (now apparently called "Google Instant") would be a short lived one, I'm now going to concede I was wrong as Google do in fact seem to be taking the service out of limited Beta testing and taking it live for all logged in users who choose to try it.
This development uses AJAX to dynamically serve search results as you type, based on what Google thinks you are most likely to be searching for (arguably a logical development of autocomplete). Each time a new recognisable word or phrase is typed that changes the results set in a meaningful way, Google will fetch the search results for that word - without you having to hit "search". So, if you're intending on searching for "scary books suitable for children", Google might first fetch results when you've finished typing most of the word "scary", then most of "scary book", then finally "scary books suitable for children". This can sometimes give you the eerie feeling of being guided down a particular path that you didn't necessarily intend on.
This is a mightily impressive display of processing power on Google's part. Now, for every search you do Google may have to process anywhere from a couple to half a dozen different searches. And they've got to do this fast enough to keep up with your average typing speed. This, on top of the fact that retrieving and sorting thousands of documents in a split second is already a modern marvel (admittedly one that few people spend much time thinking about). But what of the impact for SEO?
SEO campaigns including long, multi word keyword variants may see a drop in traffic for those keywords as a result of Google Instant, because users may now find something to click on before completely typing their originally intended search term (depending, of course, on Google being able to provide accurate enough results at an earlier stage in the search). Consequently it may become more important to optimise for the shorter, constituent parts of longer keywords.
For example, if you have optimised for and hold good rankings for "cheap car insurance UK", that term may lose search traffic as UK users find that the shorter "cheap car insurance" returns several relevant looking results, negating the need to finish their sentence.
Naturally the constituent parts of longer keywords are often the types of generic keywords that are typically dominated by big brands and powerful sites with the cash to maintain rankings in an extremely competitive keyword space. So for smaller websites, this could well be a case of first Google giveth (the May Day update) then it taketh away (streaming search results).
We'll have to hold tight for the exact repurcussions, which obviously depend on the extent to which this gets rolled out to non-logged in users, and which could also extend to complications for rank checking software (if AJAX is involved in retrieving search results) and impacts on the search demand figures given by Google's keyword tools (if each stage in the streaming search counts as an impression). There are equally important ramifications for paid search as well (the cynics brief summary: Google makes more money).
Now, I'm off to eat my words...