Philipp Lenssen, owner of Google Blogoscoped site wrote a nice and comprehensive article about paid links economy. This is one of the followups after some recent moves Google made regarding the SEO technique. See the Webmaster Central post and Matt Cutts' blog entry.
Most of the SEO crowd is getting nervous about the idea of demoting paid links by Google, which just shows how much power they currently have. I think that this method of search engine optimisation is simply cheating and in my opinion those who use it are wearing black, or at least gray hats.
One of the fundamental ways to tell the difference between the whitehat and blackhat techniques is to think about creating websites for users. If a particular feature is not useful to your visitors, then you are most likely walking into the dangerous zone. It doesn't mean that the whole page must be dedicated to your main content. Ads, for instance, are obviously a very popular feature and nobody would question your right to run advertising. 98% of Google's income depends on ads, after all. What is questionable with regard to SEO paid links is the fact that they are not meant to be clicked by the user. Clicking won't hurt the advertiser of course, but it's not the point of text links. The point is that they are used to artificially inflate the position of said website in search engines by two means:
- The linked text (a.k.a. anchor text) is indexed by search engines and associated with the linked website.
- The link itself, regardless of anchor text, transfers some of the Page Rank (or its equivalent) juice to the destination.
Thanks to those two factors many commercial sites are willing to pay quite a lot for such links, especially from pages which already have high PR. Prices range from a couple of dollars to thousands per month, per link. Many text ads brokers popped up, who often host link spot auctions, like LinkAdage for instance.
The publishers (people selling link spots) say that this form of earning money is the most profitable. In Philipp's article several authors confirm this is the best source of income for them. David Lee says he tried AdSense, AdBrite, Amazon and other forms of advertising, but paid links turned out to be “the strongest and most dependable source of web income”.
Another webmaster, Emil Stenström, says that those “ads” are preferred by users, because they are unobtrusive. This point is true, except for the fact, that the links are not ads, because users don't need to click or see them. He himself confirms that later saying “People buy links from me because it gets them a [search engine]-boost, not because of the traffic it gives them (which seems to be the only linkbuying Google is OK with).”
An interesting question is: do the SEO text links hurt users? At first
glance they seem nice and unobtrusive, like the people involved in this
business try to convince us. However, in economy, money doesn't come out of
nowhere. If advertisers are ready to pay the publishers quite high sums for
links, then who pays the advertisers? Customers, who found them via search
engines, of course! In the end, text links do hurt users by
artificially changing search engine rankings and promoting sites, which spend
more money on unethical advertising, not the ones, which people truly think
are good quality. If you need an example, try searching for a highly
commercial query, like [London hotel]. Then
search for links pointing to each of organic results via
operator in Google or Yahoo! You'll easily discover, that most, if not all
top results use paid links as a way of boosting their position. In other
words, as a person interested in hotels honestly recommended by other
people I'm getting results totally skewed by link spammers. That's not good
for a user. That's where the real cost of paid links is shifted.
Don't get me wrong, I don't absolutely oppose all text links. Hypertext is
all about linking and that's the fundamental thing WWW was built upon. I
don't oppose ads either, be it text or image based. Links are treated as a
way to vote for the destination page, to establish some relation between you
and the linked site. That's why I think that ads should be linked with
because when money is involved your vote is most likely affected. Your real
users and advertisers won't be hurt at all, because they are free to click
ads as before. Link abusers of course won't accept rel-nofollowed links,
because they are clearly not advertisers, but spammers. Patrick Gavin, owner
of text-link-ads.com, puts it this way: “Our clients want static html
links void of the ’nofollow’ tag and so that is how we display our ads on
our publisher websites.” The so called “advertisers” don't even want
website publishers to clearly label the paid links section as
“Advertisement”. This is because they are afraid, that Google will soon
analyse page content and decrease the value of links, which are not
rel-nonfollowed, but they were paid for. I think it says all about their
honesty and real intents.
Go ahead and read the whole article by Philipp. It's a good read and he offers more information on the controversial subject.
 When checking links, I recommend using the cached version of the pages available in search engines, because they could have changed in the meantime.