The software giant decides to exclude the technology that could alter the Web surfing habits of millions of consumers from the version of its next-generation operating system.
As first reported by CNET News.com, the Redmond, Wash.-based company included Smart Tags in the most recent test versions of Windows XP, an upgrade to the Windows operating system. But a company spokesman said Wednesday that the technology will not be included in the final version that will be released Oct. 25.
With Smart Tags, Microsoft can link any word on a Web page to another site chosen by the company. For example, if a person were reading a story about traveling, the word "airline" could include a link that would divert the reader to an airline or travel service chosen by Microsoft.
Although the Smart Tags feature was included in Internet Explorer 6, the Web browser that is bundled with current beta versions of Windows XP, it will be dropped from the final product.
"At this time we just don't believe it's going to be ready when (Windows XP) ships in October," Microsoft spokesman Jim Cullinan said late Wednesday. "External feedback" was one of the factors that led the company to remove the feature, although he indicated it could be resurrected in later versions.
Cullinan also emphasized that Smart Tags remains a feature of Office XP, the upgrade to Microsoft's suite of applications that launched May 31.
Smart Tags, which are created using XML (Extensible Markup Language), could have strengthened Microsoft's ability to tie its newest applications and operating systems to its own Web sites or others that it favors, including those that charge fees.
The feature makes disparate bits of data available within Office programs or from Web pages. A Smart Tag pull-down menu attached to a stock ticker, say, in Excel 2002 or Internet Explorer 6, might lead to the MSN MoneyCentral Web site for the latest share price.
Critics accused the company of reverting to old tactics by loading Windows XP with features such as Smart Tags, which gives Microsoft some greater control over consumers' Internet use. Windows is the operating system on roughly 92 percent of all personal computers around the world.
What was most worrisome for analysts and others is that Smart Tags tie Web content exclusively to Microsoft software, in this case Office XP and Windows XP, according to Chris LeTocq, an analyst with Guernsey Research.
The feature gave Microsoft "some powerful leverage," LeTocq said, particularly since the company can use its products to redirect users to MSN Web properties and eventually sites "with premium paid services." The test version included Smart Tags for sports, stock and university information.
"The impression I had was there was a major disagreement at Microsoft about whether to pull Smart Tags or not," said LeTocq, who emphasized the company has merely backed off using the technology but has not abandoned it. Smart Tags could reappear in Windows XP and Internet Explorer 6 in a different form "people could live with" within six months, he added.
Microsoft is finishing up the first Windows XP release candidate--or the near-final test version before the software's release to manufacturing and PC makers. That version, which could be completed as early as this week, will include Smart Tags, but they will be removed from Windows XP Release Candidate 2, due out in July or early August, and from the final shipping version of Windows XP.
Removing Smart Tags from Windows XP and Internet Explorer 6 could give Microsoft some collateral benefit. The technology will remain in Office XP, where, in some ways, its competitive impact could be greater than its inclusion in Internet Explorer 6. Microsoft long ago closely tied its operating system to the Web by including Internet Explorer in Windows.
But Smart Tags inclusion in Office XP is the first overt Web tie within Office. Microsoft's market dominance in desktop business software roughly equals its command in the operating system market. The focus on removing Smart Tags from Internet Explorer 6 could deflect competitive concerns about the technology's use in Office.
In a research note, Merrill Lynch analyst Henry Blodget praised Microsoft's decision to at least temporarily pull Smart Tags.
"Given the regulatory and legal scrutiny surrounding the company, this is a smart move, in our opinion," he wrote. "We do not believe the removal (or delay) of the feature will have a financial impact on the company. It could quiet some of the regulatory and competitive complaints, however--which we regard as a positive for the stock."
News.com's Joe Wilcox contributed to this report.