Is Microsoft joining Google in tracking users? [Update]

(MoneyWatch) Microsoft (MSFT) has attacked rival Google (GOOG) for years over privacy issues, including how the search giant tracks consumers online. Now, with the software maker needing to boost revenue, it seems to have decided that if you can't beat 'em, join 'em.

According to InfoWorld, the newest version of Windows 8 will monitor user searches to target advertising that becomes an "integral part" of future versions of the operating system. In short, in a world where PC sales continue to drop, this might provide Microsoft with a new revenue stream.

[Update: A Microsoft spokesperson claimed that the InfoWorld article was "inaccurate." According to emails received, "Ads are never shown in local device search results, and are only shown in the web search results portion of Smart Search experience." When asked if Microsoft will look at any information from local devices for any marketing purpose, the spokesperson offered the following statement: "Microsoft will not access, view or use any information from consumers' local devices for the purpose of delivering any ads or marketing." Presumably, cookies are considered separately as they are a locally-stored part of a Web browsing and searching experience.]

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Here's why that is important: The continued decline of the PC market has put Microsoft in mortal danger. For now, its financial results have remained strong, but the company's strategic strength was built on control of the desktop. Businesses and individuals bought computers running a Microsoft operating system. That gave the company an advantage in taking over the business productivity market with Office because competitors didn't have the inside knowledge of how to write software for the platform, nor the ability to offer deals to promote it. Microsoft developed server and infrastructure software that played well with the desktop.

Desperate times

The ongoing shift to mobile devices has begun to undermine Microsoft's control of client devices, as Google and Apple (AAPL) largely have that tied up. Microsoft's Surface tablet hasn't been widely adopted. As a result, the company can't wait to see what happens. It must take action now to bolster its revenue, and Microsoft is clearly focusing on what has worked so well for Google in search.

Apple will use Microsoft Bing to power Siri, Apple's voice-activated "personal assistant," and not Google search. That isn't an accident. Neither is all the money that Microsoft has put into deals with Yahoo (YHOO) and other activities to promote Bing.

Business Insider's Jay Yarow claims that Microsoft's online services division has lost $10.9 billion since the company's 2005 fiscal year. The charge probably isn't accurate as Microsoft always indicates in its financials that segmented breakouts by group don't show how costs or revenues in one area can affect another. In other words, what seems to be a straightforward loss may actually reflect expenses on behalf of other parts.

Coming to the dark side?

Still, Microsoft has clearly invested heavily. Historically, that would suggest the company expects to make money, and some of the strategies are starting to appear. The deal with Apple, for example, is another attempt to lessen the importance of Google. But Microsoft has learned from its rival how lucrative a targeted ad business based on search can be.

Smart Search in Windows 8.1 will deliver Bing ads directly to consumers:

Bing Ads will be an integral part of the new Windows 8.1 Smart Search experience. Now, with a single campaign setup, advertisers can connect with consumers across Bing, Yahoo! and the new Windows Search with highly relevant ads for their search queries. In addition, Bing Ads will include web previews of websites and the latest features like site links, location and call extensions, making it easier for consumers to complete tasks and for advertisers to drive qualified leads.

To that end, Microsoft will monitor user searches to get the targeting information that can yield higher ad rates. Mind you, this isn't just about Web searches, but local searches. As Woody Leonhard at InfoWorld puts it:

If you search for "flugelhorn" on your local computer -- not on the Web, mind you, but on your own computer -- the results that Windows 8.1 shows you will include advertisements for flugelhorns on eBay and Amazon (no, I'm not joking -- try it), local flugelhorn manufacturers, flugelhorn party consultants, and no doubt some day flugelhorn addiction services.

That's taking the Google model and going one step further. (So much for Microsoft's "Scroogled" campaign, an effort to draw attention to what it regards as Google's privacy lapses.)

Since Microsoft can't seem to build a mobile platform people flock to, it needs other revenue sources. And search advertising looks to be one of its prime candidates. And think of how valuable that level of personal information would be as details emerge of how the U.S. government pays tech companies to snoop on citizens.

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