As I understand it, it's off by default (so the user has to switch it on for it be effective), and then it is supposed to prevent stuff like advertising network sites that use a cookie (or two, or three, or fifty because some of them really REALLY suck) to keep track of a user so they can target the advertisements to them.
Advertising networks, in particular, are suspected for doing this to maximize their advertising revenues by making an effort to show the user ads that the user is probably interested in (e.g., if a user frequents many web sites about cat breeding, for example, that use the same advertising network that happens to track the user's web site visiting habits, then that advertising network can displays ads to this user that relate to the subject of cat breeding in the hopes of getting more genuine clicks that their advertisers really want).
Now there are some tools out there already that will just block the less trustworthy advertising networks and web sites that are known to distribute SpyWare or do other malicious things to computers that have vulnerabilities (or the user is using a web browser that's not secure), which I suspect is probably what most people really want anyway. One tool that comes to mind is SpyBot's "Immunization" feature (SpyBot is free) which updates your local computer's "HOSTS" file so that the bad sites aren't even reachable in the first place:
SpyBot - Search & Destroy
As for advertising networks, personally I'm not concerned about the big ones like Google AdSense because I know that the site operators who spend their time and put their hard work into building a web site to provide free information to everyone have their own expenses, and to me it's a small price to pay. If you don't like the idea of the advertising network tracking your movements, you can clear your cookies, although this can be time-consuming -- there must be some tools out there for though, I imagine, because on many sites the cookies are still useful (e.g., for those "Remember my login name" options on web sites that you can login to).
In summary, it's a challenge to handle this stuff properly, which I'm assuming is the reason Microsoft has this new feature disabled by default.