UPDATED Microsoft is embedding advertising in its new e-mail client software known as Windows Live Mail Desktop, the company disclosed late Friday. The feature, known as Active Search, will display text links based on a message's content, much like Google does with its Gmail service on the Web.

Windows Live Mail Desktop is expected to be released later this year and will eventually serve to replace Outlook Express, updated for Vista and renamed Windows Mail. Because it will not ship with Microsoft's new operating system, Live Mail Desktop will be available as a free download.

RSS and blogging have begun to spread, and users are spending more time utilizing Web based services now that broadband has reached ubiquity. Microsoft unveiled Windows Live last year to help usher in this new era.

Windows Live Mail Desktop will fill the role of connecting the operating system with a number of Live services. The software client links up to Windows Live Mail without configuration, and integrates Live Messenger contacts directly into the interface. It also works with any POP or IMAP e-mail account, with support for multiple inboxes.

Like its Web-based counterpart and other Windows Live services, the product will be supported through the use of advertising. At the core of this effort lies Active Search, an addition Microsoft is pitching to users as a helpful feature, but which will largely function like text link advertising on popular search engines.

Active Search appears in a pane on the right side of the application window. A Web search box sits above a number of sponsored links, which are provided by Kanoodle, a third party contextualized advertising company. Based on the content within an e-mail message or RSS article, the sponsored links will change.

"We’ve designed Active Search to make it easier for you to act on anything that piques your interest while reading your email. That’s why we show you key search terms we find in a message and provide a search box right underneath, so you can quickly search for terms of your own," Live Mail Desktop developers explained.

Microsoft is already preparing for the eventual controversy and privacy concerns this new feature will bring with it. The company has tapped the services of consulting company Jefferson Wells to conduct a full privacy audit of Active Search, the results of which have been made public.

In addition, Microsoft assures that keywords used to bring up sponsored links will never be connected the person who sent the e-mail, and says it will remove all traces of collected keywords each time the software is restarted. Keywords will never be gathered from attachments or "unsafe" messages, and social security and credit card numbers will be ignored, developers add.

Active Search can also be disabled by the user, but will be on in Live Mail Desktop by default. Disabling the feature stops the software from gathering keywords, Microsoft says.

With the addition of text link advertising in Gmail, Google faced an outcry from users and privacy advocates alike, who cited concern about the content of their e-mail being read by the company. The issue eventually subsided, but Microsoft may face stricter resistance, says Jupiter Research senior analyst Joe Wilcox.

Wilcox notes that Microsoft has added the technology to a desktop application, where users are not accustomed to seeing such ads. Furthermore, Microsoft has outsourced the advertising functionality to a third party, while Google uses its own in-house AdWords solution and can directly control any data it collects.

Kanoodle's privacy policy says it, "does not sell, trade or rent personal information to other companies. However, we will transfer personal information in connection with a sale or merger of Kanoodle or the division responsible for the services provided to you."

The company adds, "We may also share your personal information with our technical consultants, third party auditors and other third parties who make our site available, enhance its functionality or provide associated services."

One potential sticking point is likely to be Microsoft's inability to assure that keyword information is kept secure. Kanoodle says it uses "industry standard security devices," but explains, "Kanoodle cannot guarantee that your information will be completely protected from unauthorized access and you assume such risk when you use our services."

"Kanoodle’s customers are the advertisers and publishers who use Kanoodle’s services, and as such the Kanoodle privacy policy does not apply to Windows Live Mail Desktop Beta testers who receive Kanoodle ads," a Microsoft spokesperson explained to BetaNews. "Those consumers are covered by the agreement between Microsoft and Kanoodle."

"Our agreement with Kanoodle helps ensure that they follow the same strict requirements with regard to protecting the privacy our beta testers including that Kanoodle will not collect any personally identifiable information from any MSN user, and will not transfer any information collected from any MSN user to any third party without the prior consent of Microsoft and the customer," the spokesperson clarified.

"Collected keywords will be stored anonymously in our adCenter and Search systems, and during the beta by our trusted partner Kanoodle, however it is important to note that collected data cannot be traced back to either recipient or sender."

While Kanoodle is powering the Active Search feature for the beta, the company could opt to switch over to its own MSN adCenter service for the final release. adCenter is currently used when a Live Mail Desktop user performs a manual Web search from within the client.

Microsoft developers also note that Active Search will evolve based on feedback from the beta period. "Being able to compare feedback from participants with and without Active Search will help us learn whether our new features are truly of value to our users. Also, starting with a small group of testers will help us fine tune Active Search for a broader audience when we finally release."

"Microsoft takes the privacy of our customers very seriously," added a company spokesperson. "In terms of Active Search for WIndows Live Mail Beta, Microsoft has taken significant efforts to help protect consumer privacy."