When he heard of the ideas, Mr. McAndrews, the executive involved with Microsoft's Internet advertising business, was angry, according to several people familiar with the matter. Mr. McAndrews feared the Explorer group's privacy plans would dramatically reduce the effectiveness of online advertising by curbing the data that could be collected about consumers.
Given the conflicts both within Microsoft and from outside forces, I doubt that the company could have ever shipped any version of Internet Explorer that made judgements about what should be blocked. However, Microsoft could have shipped a feature that allowed third-party sources to provide blocklists, similar to the way AdBlock has different sources for the lists of ads to block. In other words, provide the browser infrastructure for blocking ads, but don't get into the minefield of choosing exactly what should be blocked.
Plus, tracking can be useful when used appropriately. The problem is that an incredible level of tracking is going on without us knowing about it. For example, any Flash application (including ads) used inside any browser can store several kilobytes of data on a PC; you can see which sites are using this feature using Flash Settings Manager. It seems that Adobe has intentionally designed that page to make it hard to use, other than simply deleting all data for all sites. It's practically impossible to browse and control the massive list of sites that most PCs contain.
And why would anyone expect Microsoft alone to lead on the tracking issue? Google doesn't offer aggressive privacy protection by default; of course tracking benefits Google as the Web's largest advertiser. Most of Mozilla's revenue comes from Google as well, so they too are conflicted on the privacy issue. Apple has its own captive ad network for iPhone, so don't count on them to beef up Safari either.
So the best reason for being disappointed at Microsoft's privacy about-face is that their meager advertising efforts made them the player with the least to lose. If they couldn't push it through, nobody will. Perhaps Microsoft could lead the industry by starting an out-in-the-open discussion about tracking and privacy.