MS can make a really basic windows OS for free. They can remove stuff such as themes and other apps. Maybe leave the most basic networking features.
They can limit the number of applications it can run at once to 5, if you enable adds, you can have more features, like Home Basic edition...
Possibly too little too late. For instance, Reactos is a open source Windows clone and ad free. www.reactos.org. Also, google has their own OS coming out and of course you have the many flavours of BSD/Linux. The big question is who would benifit from a ad version of windows?
I can see it working in the corporate world, and on some home PCs, but for the most part this will have zero impact on piracy rates. If people who already don't pay for Windows want to continue to get Windows for free I'm sure they're going to get it without ads.
When I was younger (and broke), I'd consider this. However, the Ad version does not currently have a place for me. Though, my parent's machine seems to think they have an illegal copy (they do not), and the Ad version might be a solution to that.
The problem is that the OS gets pirated mostly in low income locations where it does not make much sense to advertise brand-name products. Why should advertisers pay for marketing coverage of people who can't afford to buy their products?
This might, however, be good for free internet kiosks to pay for connection and computers.