Previously (since 1999) Google treated subdomains as separate domains. From a site architecture viewpoint, it never made sense to me. Subdomains really are just a folder on a site. Whether the site is on a Windows or Linux server they are setup roughly the same way and any subdomain is just a part of the root domain.
I remember back to 98′ when Yahoo! bought Viaweb to create Yahoo! store. They promptly stuck it on a subdomain store.yahoo.com. I thought at the time just make it yahoo.com/store that way visitors will type in the root then go to the folder or area they want e.g. games, financial, news, etc. Which areas of a site are big enough for a subdomain and which are just folders? That’s the problem they are one in the same.
Hopefully, with Google switching and now treating all subdomains as nothing more than folders on a site there will be some common trend on naming subdomains vs folders.
From and SEO perspective, I always discouraged subdomain use because it scared the bejesus out of me. I didn’t want Google, Yahoo, MSN, or Ask (we should probably start talking about ASK again) slapping the site with a penalty. Thus, even if it made sense for that particular site to have a subdomain I always discouraged it. I feel more comfortable having a site use subdomains when it makes sense.
Good work Google. I think this is the right move simply from an SEO perspective.
Update on Google subdomain treatment.