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Before Google was the de-facto search engine, Altavista, Yahoo!, Hotbot etc were #1 for many. I don't see why it couldn't happen again - at least on some niche areas of search.
For big company sites and big weblogs, the results were fairly good. For lesser blogs and sites, the relevance dropped off quite substantially. That is most likely why a lot of bloggers might complain as vanity searches for themselves turn up nothing.
However, the layout of the search results is compelling from a readability standpoint. I think there's a space for a little bit of design and Cuil might be hitting a sweet spot with their results pages. Good typography and good use of columnar layout.
I think, as you said, with a little bit of time to incubate and garner user feedback, Cuil can become a competitive search engine.
On the other hand, the reaction of the Silicon Valley echo chamber for good or bad may not matter one whit to their plans. Search engine quality can be measured quantitatively, so they should know where they stand, and whatever their business plan is, it might not be affected by whether the TechCrunch crowd thinks they're as good as Google or not.
The question is were the expectations set by media or by the company itself? How could they have better positioned themselves, such that the initial hiccups were more acceptable? And yes, the bubble of Silicon Valley might not mean one wit to their long-term goals, but it's also a lot harder to get outside of this little bubble without a push from the Valley itself.
Still, you can't blame people for coming to quick conclusions. As they say, the first impression is the most important one, and when you come out making big claims like Cuil, that impression better be a damn good one.