Microsoft muses on free desktop apps

...than a traditional paid search platform," he said. "They are taking the idea of contextual advertising and applying it fairly broadly."

Rosoff said it makes sense for Microsoft to explore which types of products might be supported by ads.

"It doesn't surprise me at all that they are looking at all possibilities, especially given that a lot of people feel Google is going to go this direction," Rosoff said. He notes that Money, for example, is already a hybrid product that has both a desktop software and an online component.

However, he is not convinced that consumers will accept a vast quantity of ads rather than pay for software.

"Are people willing to pay $100 every three or four years not to get bombarded with ads?" Rosoff said. "I think a lot of people will."

Finite market
He also notes that however promising the ad market, it is a finite one that can only support so many products. Today, online advertising is growing as businesses shift from things like yellow pages, print and TV ads, but, Rosoff said: "Eventually that tops out."

Microsoft faces other challenges as well. One problem with inserting ads served over an Internet connection into desktop software is that while broadband access has grown, many computers spend a significant amount of time offline. Also, to pay off, such advertising must be targeted and relevant enough to both generate higher revenue and avoid annoying users.

"It's definitely an idea to pursue, but it's fraught with perils," said Forrester Research analyst Charlene Li.

Li said the move could open up new markets for Microsoft, but notes that it is also a move into largely uncharted waters. "The challenge becomes users aren't necessarily used to having ads on desktop applications."

These concerns could explain why Microsoft held discussions to buy adware maker Claria this summer, though ultimately no deal was announced.

Privacy is another major issue Microsoft expects to face. The paper suggests some options such as offering paid, ad-free upgrades; allowing users to turn off some of the personalisation options in favour of more generic ads; and choosing applications to be ad-based in which users are already sharing private data. Even those moves may not be enough, the paper suggests. "Unfortunately, even where consumers are willing to make this trade, privacy advocates and perhaps European regulators are not," the authors wrote.

Li notes that some users might feel comfortable, say, writing a letter about their trip to Costa Rica in a free, ad-sponsored word-processing program and seeing ads for Costa Rica travel, while others may find that crosses a line.

"Everyone has different thresholds for how much their privacy is worth," Li said.

Despite the concerns, though, the researchers argue that Microsoft needs to act.

"As online advertising increases our competitors will enter many markets with free, ad-supported products," they wrote. "We must have free, ad-supported entries in these same areas."