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In terms of search relevancy, I still think google is better, especially when I look for coding related reference materials. Google is faster in the time it takes to index a newly created web page and more frequent and sensitive in adjusting the rankings. Live search however is better in the overall search experience. For example, the color theme looks more comfortable. The "related searches" on the right side of the result page is very helpful. The image search is very nice with infinite scrolling bar and scratch pad. In the academic search, users can adjust the level of detail in snippets. The 3D map is also impressive. (try adding 3D maps to your Movable Type blog using my plug-in) At this moment, for average users, a little bit less performance in relevancy might not be that obvious but the overall search experience and the richness of the features might be more attractive.
It will be a very tough job to compete with google in search engine market. They quietly accumulated 5+ years of experience before they became the hot company and search is their major business. Brand recognition is also on google's side. Keep up improving, Live Search! Competition makes the industry advance more rapidly. If you are interested, you can check my Internet Dashboard page where I've aggregated some search engine comparison real time diagrams and I'll keep adding more related charts and diagrams there.
Windows Vista is finally out and along with that Microsoft seems to have kick-started its Vista-Live joint initiative. This initiative aims to push Microsoft's new web properties in tandem with their dominant Windows operating system - and so become a leader in the web industry as well. Basically this means that Microsoft makes its Windows Live web properties the default in Windows Vista PCs, where possible - for example Live Search is the default search engine in IE7 on new Vista machines.