Hotmail a hot commodity

Free email service Hotmail is a hot commodity. As the company's subscriber base expands at warp speed, investment banks and partners are lining up at its door.

Last Friday, Draper Fisher Jurvetson, a venture capital firm, officially offered the company an additional round of financing. Hotmail is still considering the deal, said Steve Jurvetson, partner and managing director at Draper Fisher, which has made four previous investments in Hotmail. Jurvetson would not comment on the amount of the most recent offer.

Hotmail is not soliciting itself, but it has pursued business partners and investors.

"We are in the process of working with a number of strategic partners to grow the business, and these are large companies that would also provide funding." said Steve Douty, Hotmail's vice president of marketing. "A couple of deals are underway. This is a strategic round of funding."

Hotmail is faced with a lot of choices, and pressure may be in full force in the wake of navigational company Yahoo (YHOO) snatching up free email provider Four11 recently.

The company has a lot of options, Jurvetson said. Suitors could include corporate investors or large media companies who have an interest in new forms of distribution; existing companies, such as AOL, or Microsoft; or possibly communications companies looking for business partnerships.

Hotmail could go with partnerships, investment rounds, or a merger or acquisition, Jurvetson said. But he noted: "We want Hotmail to grow as an independent entity. From our perspective, we are not eager to sell shares. The company is a very valuable asset."

Jurvetson said he has high hopes for the company to become a thriving company that eventually will go public. He said many promising start-ups get acquisition offers early in life, or go public too soon.

"If they can't withstand the temptation, they may sell themselves short," he said. "We see Hotmail becoming a large branded entity on the Internet."

And it is. Hotmail boasts that it currently has 8.5 million registered users. About 60,000 new subscribers register and over 1 million unique individuals log in every day.

That makes Hotmail's subscriber base just shy of online behemoth America Online (AOL). The ISP announced last month that it now has more than 9 million members, less than 1 million shy of its year-end goal of having 10 million members worldwide.

So that makes the two companies neck-and-neck in the race for gaining subscribers. But, Mark Levitt, an analyst at International Data Corporation, said it really doesn?t make sense to try and determine how much market share the Web-based email company holds compared to other email providers because there is so much overlap.

"To say that one company has 'x' market share and another company has 'x' market share would not be a good way to determine how much of the market they hold because [Hotmail] is often used in addition to other services," he said.

That is one of the benefits Hotmail offers, said Douty, because the service gives employees a private email account to use in addition to their corporate account, for free.

So why compare a free email provider to a giant online service?

Because Hotmail is morphing into a free online service--slowly.

Hotmail is taking it slow, largely because it will take money to expand. The company's revenue has grown consistently, Douty said, though he would not comment on specific numbers. He did say, however, that the company is looking to diversify its revenue so that it will no longer be advertising-based.

The company has had two sources of revenue: advertisers and content partners.

But, Hotmail also has been adding to its service and expanding it revenue streams. Users soon will be able to send Greet Street electronic greeting cards through their email for a small fee, or buy a subscription to McAfee's virus software to scan all email before it is brought into their computers.

"We would like to redefine what an online service is. Our ambition is not to replicate AOL," Douty continued. "What we want to do is create a tight community at Hotmail and keep people happy with the service, and in the process add features that make sense."

He said email is the core of the business and is a foundation for growth. Hotmail is going to add capabilities, not unlike those of other online services, such as forums and chat.

He pointed out that this is the opposite development direction of an online service, which is built before it starts signing up subscribers. In Hotmail's case, the subscribers already exist, and the service is built around them.