"Given the evolution of the Web and our strategy, we believe the next generation of search is about the development of an underlying, sustainable business model for the search engine, consumer, and content partner. For example, this past Wednesday we announced our strategy to focus on verticals with high commercial intent, such as travel, and offer users cash back on their purchases from our advertisers."
In other words, the book search engine didn't make enough money and Microsoft decided it's better to focus on areas that are more profitable. Instead of improving their search engine with valuable content from books and offering better search results, Microsoft chose to make decisions based on the short-term profits.
This is also visible in the Cashback offering: "Microsoft Live Search cashback is The Search That Pays You Back. Find great deals on millions of products from hundreds of brand name stores that you know and trust. You will be able to earn cashback savings based on a percentage of the product price. Your savings will be paid to you via your choice of a deposit to your PayPal account, direct deposit to your bank account, or a check in the mail."
Microsoft hopes to attract more search users, but this will probably work in the short term. People will only go to Live Search for the rebates and they'll return to Google to find information on the web. If you pay your users and define your service as "The Search That Pays You Back", your brand's value diminishes because the search should pay off through its own merits.
Google has a long-term strategy for its search engine and for the other services. "Our goal is to develop services that significantly improve the lives of as many people as possible. In pursuing this goal, we may do things that we believe have a positive impact on the world, even if the near term financial returns are not obvious. For example, we make our services as widely available as we can by supporting over 90 languages and by providing most services for free," wrote Google's founders in the IPO letter.
To offer a compelling alternative to Google, you need to offer services that are more valuable to the user, even if there's no profit involved. Google thinks you first need to create a great service and then start to find the business model. Microsoft still has to work on building a great search engine, so discontinuing the book search engine is not a step in the right direction.