My last take on this, for now
Overall, I haven't really been hit too hard by this update. I have been hit on ultra-competitive phrases very hard, but as I have consistently built sites around themes, the theme being the core key phrase, and then expanded with information about the core theme - my sites tend to come up for hundreds if not thousands of relevant phrases that are searched for. This hasn't changed - in fact, Google included a new site today for a site that sells software and it is getting a new referal every minute.
A lot of my philosophy has been that with the advent of gross PageRank and Link manipulation with everyone aggresively trying to get links I had a gut feeling that there would eventually be a backlash from Google. So, for the past 2 years I have done exactly the same thing I did before Google's link thing caught on. Therefore I just got links from the major directories, a few industry specific directories, didn't cross link and never accepted reciprocal links. This prevented me from coming up for a lot of very competitive terms, but loads of on-focus secondary terms which convert to sales better usually. The sites which have been hammered (for words like "perfume" or "lingerie") have been around for years, and had their rankings primarily through their length of time on the 'net (plus reasonable optimisation) rather than any seeking out of links etc. The only bad news with these sites was that I obviously advised them to get the wrong domain names - as they dropped like a stone yesterday, but were unaffected on the intial update.
So, my advice is do more keyword research and carry on as usual. Reduce the link hunting frenzy and go back to what was the natural linking methods which were there before Google and accept the fact that you are probably not going to come up for competitive phrases. The problem is, that as more people realise that the only way they are probably going to get on Google is by using AdWords, then more phrases will be bid on, more information goes into the Google database and the more phrases will be put into the "competitive - is it SEOd" bin.
Frankly, I still think Google will turn back the knob. Doing this just prior to the Holiday Season when more people are looking to buy something online may backfire when people realise they have to click on adverts rather than use their own choice from the "natural" results. A proportion may search elsewhere. It only takes a user to go to ATW or even AV once to see that the results appear much more editorially relevant than Google's for product searches if they are looking to buy something. However, that may well be a risk Google is willing to take.
>It's not a filter.
Yes, it is!
So, we should agree to completely disagree