NEW YORK (FORTUNE) - Privacy watchdogs are scrutinizing Google's plan to deliver free WiFi to San Francisco—and they don't like everything they're seeing.

Earlier this month, the city approved a joint proposal from Google (Research) and Earthlink (Research) to turn San Francisco into a giant wireless hot spot. Users will have two choices: They can pay Earthlink $20 a month, or get free access from Google if they're willing to tolerate a slower connection and Google's ads. They'll also have to sign in each time they use the network.

That log-in page worries privacy advocates. "Because you have to sign in to use it, they can attach your identity to anything you send through that pipe," said Chris Hoofnagle, a senior counsel at the Electronic Privacy Information Center.

Google will also be able to pinpoint where users are located, since the Wi-Fi signals will be sent out via a matrix of nodes installed on the city's lampposts. According to Google, that's only to the benefit of the user. With more specific geographic information on hand, anyone on the network will be able to get better local search results, whether they're looking for nearby restaurants or doctors.

In its proposal to the city, Google spells out some of the more interesting possibilities: "Google's personalized consumer products will allow users of the network to instantly find the local weather forecast, top stories from their favorite news sites, movies in their neighborhood, and to explore countless other local services."

Google says it's far too early to know all the details of how WiFi access will work. Together with Earthlink, it's still in negotiations with the city, and says the proposal, submitted early this year, is only a starting point. "As we move forward, the privacy of our users will continue to be of utmost importance," said Google spokesperson Megan Quinn in a statement.

The question is how much information people will be willing to forfeit in exchange for a more personalized experience on the web. When advertising is that ubiquitous and customized, useful can be just another word for invasive.

"One of the problems of the advertising-supported system is it's built for advertising, not people," Hoofnagle said.

In an April 19 letter to the city of San Francisco, the ACLU of Northern California, the Electronic Frontier Foundation, and the Electronic Privacy Information Center outlined their concerns. "There's no way to choose not to be profiled by Google under the company's proposal," they wrote. "Fundamentally, the Google profiling is non-consensual, because in order to use the service, one must sign in and be tracked by the company."

Google already owns nearly half the market share for online search. The question is: what is it doing messing around in the same space as traditional ISPs like Earthlink?

There's a degree of altruism from the "don't be evil" company. But Google has also made no secret of what's in it for them.

The company already provides free Wi-Fi for the town of Mountain View, Calif, where it's headquartered. In a letter last November to the Mountain View mayor and city council, Google explained: "In our self interest, we believe that giving more people the ability to access the Internet will drive more traffic to Google and hence more revenue to Google and its partner Web sites." In other words, introduce someone to the Internet, and that person will likely use Google and click on Google's ads.

More significantly, it's also a chance for the company to experiment with local search, which down the road could become a huge source of revenues. The consulting firm Kelsey Group predicts that the ad market for local online searches will hit $6.1 billion in the next five years.

"Google has always taken the 'Hey, we're the good guys' approach. But it doesn't work anymore," said Hoofnagle. "How much [information] do they need? And where do you draw the line?"