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Can free email pay the bills?

While burgeoning subscriber rolls and reported buyout offers propel Hotmail's status, questions abound about the viability of free email providers.

Paul Festa Staff Writer, CNET News.com
Paul Festa
covers browser development and Web standards.
Paul Festa
3 min read
While burgeoning subscriber rolls and reported buyout offers from Microsoft propel privately held Hotmail to the status of Internet darling, questions abound about the value, future, and actual size of free email providers.

Hotmail yesterday said the number of registered users of its free, Internet-based electronic mail is approaching 10 million and growing at more than 60,000 per day. The company's rapid growth has put it at the center of attention among companies seeking to expand the total number of potential users by employing its service.

But the advertiser-supported free email firms face a formidable challenge in turning a free service into a moneymaking proposition.

The solution touted by Hotmail leverages its millions of subscribers into lucrative e-commerce opportunities. Company chief executive Sabeer Bhatia said Hotmail will be rolling out electronic commerce deals soon with partners in categories such as books, CDs, software, and content, as well as an instant-messaging system to link users online.

"The revenue opportunity is 10 million people coming to their site," said Dataquest analyst Dan Lavin. "In some ways, it's more of a real estate deal. Hotmail is building itself some really good real estate, and some really good foot traffic."

That's the good news. The bad, at least according to Lavin, is that "being the best at being able to give things away is not a prize."

Supported by personalized advertising, Hotmail is one of a number of free email services, including Juno, Yahoo Mail, and MailExcite. The sector is also growing: Sources told CNET's NEWS.COM today that Eudora developer Qualcomm is set to announce plans tomorrow to launch free, Web-based email powered by WhoWhere technology. (See related story)

Those companies--like online search engines and news services--face the same problem of figuring out how to profit from what is basically a free service. In addition to advertising, free email firms have generated revenue by licensing their technology to other sites. In the view of analysts, venture capitalists, and executives alike, the promise of e-commerce is a bright one.

Analysts predict that of the many avenues open to free email providers, each will likely try a number of routes before settling on their primary sources of revenue. While Hotmail appears to be on top of the free email heap with its subscriber numbers, the success of those revenue strategies will determine the real winner in the space.

However, industry watchers are skeptical of the subscription numbers for Hotmail and other free emailers. Because the service is free, the companies tend to report the total number of people who have signed up for the service, including those who signed up and rarely or never return to use it.

Still, Hotmail's numbers have elicited interest from a number of partners and reported investment offers from Microsoft and other companies, as reported last week by CNET's NEWS.COM. Sources familiar with Hotmail said at the time that Microsoft had made repeated advances to buy Hotmail, with the most recent offer valuing the deal at $300 million to $500 million.

The sources, who declined to be identified, said the software giant might still be willing to invest in Hotmail or form a partnership with the company if it fails to buy it outright. Microsoft and Hotmail have declined to comment.

Hotmail is currently closing a round of financing that could include corporate backers, Bhatia said.

The free emailer, which has been backed by venture capital firms Draper Fisher Jurvetson and Menlo Ventures, had set out to raise $15 million to $20 million in the current round by selling roughly 10 percent of the company.

Hotmail's management has set a target of profitability in the second quarter of 1998 and said it wants to have a few quarters of stable profits before going public, as market conditions allow.

"The No. 1 benefit of Hotmail is that it is universally accessible" across the Internet, Bhatia said yesterday in a presentation to a Technologic Partners investment conference in Burlingame, California. "We believe we are very well positioned to being a cyberhome" to which users return regularly.

Internet news editor Jeff Pelline and Reuters contributed to this report.