Hotmail Makes Email the Killer App on the Internet

On July 4,1996 two Stanford graduates, Sabeer Bhatia and Jack Smith, launched Hotmail, the first free web-based email service. While they did not invent electronic mail, they popularized the service. Web mail allowed individuals to have an address and to send and receive messages even without having a contract with an internet service provider.

The idea came to the Hotmail founders as they were working for Apple. They were exchanging ideas about the creation of their own firm and they were afraid their employer could have access to their corporate email accounts and would notice that they were using working time to develop alternative ventures. They could not use their personal email, as it could only be used from their internet connections at home. The solution to their problem, but also of interest for any user, was a web-based email account that could be used from any computer connected to the internet: from home, from work, or from an internet cafe for those without any other access to the internet.

A bright idea is never enough; investment is necessary to develop a product and a corporate structure is necessary to commercialize and monetize the product. The role of venture capital (VC) is key for the success of bright ideas. The first VC firm in Silicon Valley was established in 1959 by General William H. Draper Jr. and two partners? The General’s grandson, Tim, would later found Draper, Fisher, Jurvetson, the VC firm which invest in Hotmail. They funded the venture with $300,000, a 15 percent stake in an idea valued at $2 million.4

It is of interest to identify how platforms grow a customer base large enough to get powerful network effects. In the case of Hotmail, the trick was a line of text with a clickable URL that was introduced at the end of each email message sent with Hotmail: “Get your free e-mail at Hotmail.” Each email became a powerful ad, proof in itself of the reliability of the service. The service ignited, adding 3,000 users a day. In six months, Hotmail reached 1 million users.5

In December 1997, just 17 months after it was launched, Hotmail was acquired by Microsoft for $400 million. It had nine million users, out of an estimated total of 70 million worldwide internet users at that time. Hotmail had built such a customer base faster than any other company in history. And this is indeed the result of the power of networks.

Web-based email became one of the most popular services in the internet. By 2020, the number of email users has been estimated to be 3.9 billion, 54 percent of the world population. (the successor to Hotmail) is used by 400 million users, but the market leader is Gmail, owned by Google, with more than 1.5 billion monthly active users.6

Web mail operators, such as Hotmail, are platforms in multi-sided markets. They make the interaction between different groups possible, for the benefit of all the groups participating in the platform. Web email is a multi-sided market in the sense that individuals are connected by different ISPs. They do not all contract the internet access service with the same company. The platform makes it possible to interact with the users connected to the internet by another ISP. In this sense, web mail users are not a homogenous group. Web mail platforms connect previously fragmented groups of users. Furthermore, web mail platforms introduce another group into the ecosystem, as the service is financed by advertising. The platform allows the interaction of different groups of email senders, recipients, and advertisers.

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