Cloaking, is it good? bad? or ugly?
It just depends, if your competitor is using cloaking technique on their site and is caught and banned for good from major search engines, then it could be a real good thing for you, however the reverse of it could even mean worst then bad and ugly.
Cloaking is delivering one version of page to user x and other version of the same page to user y.
Ok, lets make things easier to understand. Suppose if page http://www.domain.com/cloakedpage.html is cloaked for user x (using IP address). So when user x will access www.domain.com/cloakedpage.html, a different page is shown, while if user y visit www.domain.com/cloakedpage.html a different page will be shown.
Generally in the world of search engine positioning, cloaking is use for showing different page to regular visitor and different page to search engine spiders. The main reason behind use to be "protection of optimized code", however, many uneducated SEO Consultants has used cloaking in unethical manners and this has brought cloaking a bad name and ugly looks from search engines.
There are many ways of cloaking a site, but here we will talk only about IP cloaking and user agent cloaking.
There are many free and commercial scripts available out there, that will allow anyone to employ cloaking technique on their site. However, there is no room for guesswork in cloaking as ban from the search engine is the least one can expect if caught red handed, and such ban would mean more expense and more time before you can see your web site ranked at major search engines.
What Google has to say about Cloaking. (January 18, 2003)
What is cloaking?
The term "cloaking" is used to describe a website that returns altered webpages to search engines crawling the site. In other words, the web server is programmed to return different content to Google than it returns to regular users, usually in an attempt to distort search engine rankings. This can mislead users about what they'll find when they click on a search result. To preserve the accuracy and quality of our search results, Google may permanently ban from our index any sites or site authors that engage in cloaking to distort their search rankings.
There are many good and bad things that can be said about cloaking but if it all were to sum in one sentence then it will be entirely true to say:
Cloaking, when used appropriately it can do wonders for your business, but if misused, then it can prove disastrous.