In a post today on Marketing Land, Greg Sterling is reporting that Microsoft is replacing conventional display ads in Hotmail with ads for Deals, including Bing Deals and MSN Offers.  The switch, which is being tested in selected cities, won’t be appearing everywhere, at least not yet.  However, Sterling says that Dharmesh Mehta, Director for the Windows and Windows Live Business Group, believes users will prefer the new ads, as they will be “less distracting” and less “creepy” for users.  The post offers a glimpse of the difference between the current display ads and “Deals”:

Below are images of an actual display unit in Hotmail (left) vs. a screen capture of the new deals unit (right):

In our post last week asking “What’s stopping you?” from switching to Hotmail, and in comments on Inside Windows Live, the ads were mentioned frequently as a big distraction.  Even though Mehta said that Microsoft will probably see a decline in the revenue generated from the ads (he estimates that combined, Microsoft, Yahoo, and Google make something like $1 Billion annually on ads in email), Hotmail is focused on improving the user experience, and that Microsoft can afford not to maximize ad revenue in email (of course, they could probably afford to eliminate ads altogether, if they wanted to, but that’s another thing entirely).

Sterling goes on to describe a bit more about the new deals ads:

The new deals ads will be initially targeted by country, language, age and gender. However Microsoft might allow users to select categories of interest later on.

I asked Mehta about the deal sources Microsoft is using. He said that some were sourced by Microsoft directly and some are aggregated from partners. The business models and the way Microsoft gets paid also probably vary accordingly. The company said it will be testing out different models and approaches.

Microsoft now has several distribution points for deals, including Bing Deals and MSN Offers in addition to the new email deals ads.

Is this an improvement for you?  With SkyDrive, Microsoft eliminated the right sidebar ad altogether, explaining at the time:

We also looked at the current advertising placement on SkyDrive and decided that this didn’t make sense in this experience. We removed ads to create room for a pane of info about your files, so you can do things like open a doc in Word or Excel on the desktop, directly from SkyDrive.

…but even with the switch to Deals, that same real estate will be taken up by advertising, even though it may well be less “creepy”.  Is that enough?