The reversal, explained by general counsel Brad Smith in a blog post Friday, follows last week's revelation that it searched through emails and instant messages of a blogger who Microsoft believed had received proprietary code illegally.
The search, in September 2012, led to Alex Kibkalo, a Russian native who worked for Microsoft as a software architect in Lebanon. Microsoft turned over the case to the FBI in July 2013.
Smith now says the company "will not inspect a customer's private content ourselves" and will refer the matter to law enforcement if it believes its services are being used to facilitate theft of Microsoft property.
Microsoft Corp. owns Hotmail and the cloud storage service formerly known as SkyDrive. It alleged that the services were used so Kibkalo could transfer software files to the blogger, including a fix for the Windows 8 RT operating system that hadn't been released publicly.
The case spawned a wave of criticism, and Microsoft initially responded to it by saying that it would consult with an outside attorney who is a former judge to determine if a court order would be issued in similar searches in the future.
Many saw its initial response as inadequate.
"Last week's response was trying to create a mimic of due process with a shadow court that was run by Microsoft," said Kurt Opsahl, senior staff attorney for the Electronic Frontier Foundation, a privacy advocate. "It was good to see Microsoft reconsidered."
Smith said the company would also change its terms of service to make it clear what customers can expect, and consult with privacy advocates to come up with industry best practices going forward.
Shares of the Redmond, Wash., company rose 94 cents, or 2.4 percent, to $40.30.