Is the tech job market heating up? Hell yes. In the last 4 months I've been cold called by 3 recruiters. Additionally, there is a lot of new headcount on the Microsoft Silicon Valley Campus. However, since my time in Hotmail I've personally hired 2 folks and they were both internal hires. Why? Because there are a lot of people in the company who have been doing the same product or discipline for 5+ years. After doing something that long, it's only natural to want to try something different. For me there were a lot of reasons to move from the MacBU, but the big three were 1) new career growth opportunities, 2) working in a super competitive and exciting technology segment, 3) increasing my scope of influence and impact within the company... In that time a lot of people I worked closely with in the last 6.5 years in the company have also changed jobs, and some are even working with me again. The Microsoft workforce is staying with the company longer and there are a lot of folks reaching their 5 year anniversary in the same team.
I think that's one of the coolest things about Microsoft. As a Program Manager, Developer, Tester, Product Manager etc you have the core competencies go to work on pretty much any product group in the company. Personally I can't see myself working on any given product for less than say 3 years, but once you get to 5-6 there are just so many interesting opportunities either at Microsoft or elsewhere. On our campus, Silicon Valley, there is of course a very limited number of product groups (less than 12) so you tend to see folks doing the same job in the same group for longer than you might in Redmond.
So it comes as no surprise that I read this earlier today. You know, it's a lot easier to make a hiring decision when that person has a proven track record within the company. The internal candidates for jobs are usually a the top of the fold when interviewing for job positions as they have a lot going for them (usually). I suspect that due to the difficulty in finding good external candidates in the tech industry, there is a lot more internal transfers happening.