Microsoft took an early step into the ad-supported software business on Wednesday, announcing it will be rolling out a limited pilot of an ad-funded version of its Microsoft Works low-end productivity application.

Microsoft Works SE 9.0 will be bundled for free as pre-installed software on computers sold in select countries. Works is already often bundled into computers sold to consumers because of its low cost, about $50 for Works 8.5. Customers using Works SE 9.0 will see ads both when they are online and offline, as the software will ship with a set of cached ads. When a user is connected to the Internet, new ads will get served from the same display advertising platform used for Live.com and MSN properties.

It's no secret that Microsoft is interested in ad-supported software, especially in an era of online competitors like Google Docs and expansion into poorer markets around the world. The company already has an ad-supported version of Office Live, a set of online tools to complement Office.

"Consumers, if they're given a choice of paying for something, or getting an ad-subsidized version of it, as long as it's not intrusive, and it helps them, there is an opportunity to consider whether that might be a model that works in certain applications and test the waters," Microsoft chief software architect Ray Ozzie said at the company's annual Financial Analyst Meeting last week. "In very small businesses that have no IT departments, they're also cost-sensitive, and it might present an opportunity in that realm. We don't know yet, we're at a transition point, and I think we will all, as an industry, try experiments and see where it works and where it doesn't work."

The company would not yet comment on which countries or computer manufacturers will be covered in the Works pilot. However, Melissa Stern, Microsoft's senior product manager for the Office client consumer and small business team, said the ad-funded version comes in the wake of customer and partner demand to make productivity apps more affordable and comes after a year and a half of research into how to best create such a version.

Unlike typical ads online, Works ads won't be completely contextual in that Microsoft won't be parsing the contents of Works documents to deliver ads, though Microsoft has applied for a patent in that space. Instead, they'll be relevant to Works users, as determined by Microsoft research into who Works users are and how they commonly use the software. For example, Microsoft knows people use Works to manage home budgets and plan vacations and schedules, so ads relating to those topics may be relevant. Ads will be served in the lower third of a taskbar that shows up on the right-hand side of Works applications.

The now 21-year-old Works application consists of word processor, calendar, dictionary, project organizer and spreadsheet applets along with a personal database module called Works Database. The paid version of Microsoft Works 9.0 also launched this week and will be available for an estimated retail price of $39.95. Along with an ad-supported version, Works 9.0 sports the ability to open and save documents in Office 2007 formats, a redesigned launch portal for the various Works apps

Microsoft won't comment where it goes from here, either with ad-supported software or even ad-supported Works. Reports over the last few years, including a BusinessWeek story last fall, have placed Microsoft on the precipice of offering an online version of Works, though Stern won't comment on that either. However, it's not a leap of faith to say that Microsoft may have further plans. "We'll be learning from this business model over the course of the next year," Stern said.