Hotmail Strikes Back

In a competitive response to Google’s forthcoming Gmail service and changes at Yahoo Mail, MSN is making significant improvements to Hotmail, including adding virus-scanning to the free version and drastically increasing storage space for both nonpaying users and subscribers. Although the changes will probably decrease subscription revenues and increase costs in the short-term, they are necessary to keep the 170 million monthly visitors to the free Hotmail site from defecting, which could impact MSN’s advertising revenue.

Gmail Setting the Pace

A new era of competition among Web-based e-mail providers began in Apr. 2004, when Google announced Gmail, a free e-mail service that will offer users 1GB of storage. At the time, the two market leaders, Hotmail and Yahoo Mail, offered far less storage-only 2MB and 4MB, respectively, for their free services, and a maximum of 100MB for paying subscribers, who paid up to US$59.95 per year. Gmail will also have several other features that distinguish it from Hotmail and Yahoo Mail, such as the display of e-mail exchanges as threaded conversations, keyboard shortcuts to perform common functions, and the ability to search all messages in the mailbox by keyword (a feature that Yahoo Mail also offers but Hotmail lacks). The advertising model for Gmail is also different: incoming e-mails are scanned for keywords (a method that has alarmed some privacy advocates) and then relevant advertisements are displayed on the right side of the page. In contrast, the free versions of Hotmail and Yahoo Mail display graphical advertisements that have no direct bearing to the content of the e-mail messages being displayed.