Warming Up to HoTMaiL

by Don Hamilton

Have you ever been on a trip, stopped at a cyber café and wished you could also check your email? Have you ever wanted to set up a separate email account within your family unit? Have you ever wanted to have an email account that your boss could not read?

HoTMaiL has it all! This Web-based email service offers users permanent email accounts and the ability to store their messages on the HoTMaiL file directory. It even offers complete privacy...and a spell checker.

This month we spoke with Sabeer Bhaktia, president of HoTMaiL, to find out more about this fast-growing email provider.

S.B.: You give away a very valuable magazine and we give away valuable email for free—both for the same reason. We establish a very loyal relationship with our end user and we, just like yourself, believe this is a very powerful advertising mechanism, globally. The number of users that have access to the Web is close to 50 million today.

S.B.: My partner, Jack Smith, and myself started the company in September of 1995. We launched our service on the fourth of July last year. It’s symbolic of freedom. Freedom from ISPs and work email accounts.

S.B.: Yes! Completely everything is our own servers. We are co-located at an Internet service provider for obvious reasons; we get a very high bandwidth from their backbone coming into our site. All the software has been developed in-house and it’s all proprietary stuff.

S.B.: Both my partner and myself were working at a company called Firepower Systems. We were designing Power PC workstation-class computers. Prior to that both of us were at Apple Computer working on the same project designing portable computers.

S.B.: The two of us had a lot of ideas about doing products and making products based on the Web. I had an idea to do a databased product on the Web and I had written a business plan for it, and Jack and I were going to work on it. We had some software developed and it became very hard for us to communicate with each other; email was our primary source of communication. We could not use our corporate email accounts because they were our corporations’ email accounts and subject to scrutiny by our companies. We had personal ISP accounts, too. The problem was that we had no single email account that we could access from home as well as at work, and that’s when my partner Jack said what if we made email available on the Web and solved our problem. He had this idea on his way home from work and called me up on his car phone; at that point we knew we had something that was very valuable to us. We believed that if it was valuable to us then it would be very valuable to people on the Web, also.

The next question that came to our minds was how would we give this away to people? Would this be free or would we have people pay for it? At that time it seemed that everything on the Web was being given away for free for market share. We felt that what we had was a very, very powerful vehicle for advertising because we have a repeat customer; we have a lock on them. So we decided to take that path and be advertising-supported and give it away for free.

S.B.: Ah [laughs], good question! We knocked on a lot of doors. One of the real positive things about being in Silicon Valley is that there are so many venture capitalists here. We had our fair share of hard times. Basically I went through at least 25 venture capitalists. They had different reasons for not funding us. It was just an idea; we didn’t have any product. We had hardware backgrounds, not software, although they are so related today. Finally we found a venture capitalist who was a true venture capitalist who would venture out and risk the money on two young people with a dream. The twenty-sixth of them actually gave us a small sum of money to go out and prove that this idea would work.

S.B.: Exactly. We took a very tiny sum of money in the beginning and we stretched that for almost six or seven months. In seven months we had a hundred thousand customers. After we proved there was a need for our product we went in for more money.

S.B.: Initially we took in just $300,000. We got 100,000 customers using just that amount of money. That’s quite a lot of customers. At that time we compared ourselves with some of the other providers, one being Netcom. Netcom at that point had about 450,000 customers. To have 100,000 in that short a period of time and compete against a company like Netcom that had spent hundreds of millions of dollars...is a pretty remarkable feat.

S.B.: Actually it’s no different from what any of the ISPs run for their email systems at the back end. The only difference is we don’t provide the access portion. If you take a look at any ISP, it has two parts. One is providing the access and the other is providing the email. We have clearly separated the connection from the email box. We said you can get your own connection from anywhere, choose any ISP from any region of the world and we will provide the email posting capability. In terms of the hardware and software and complexity required of handling email, it’s no different from what an ISP has to do.

It’s a difficult task. As you are aware, in the last couple of months AOL has had its share of problems, and so has Microsoft Network, and so has IBM. Well, the complexity is the same for us, too. Very high-end and very scalable servers are required on the back end.

S.B.: Yes. In return for providing this valuable service to our customers and end users we get a few pieces of demographic information from them. We use that demographic information to target advertising to them. We are one of the few sites that can target advertising based on these criteria, such as if you are in a different region of the world like Los Angeles, and a certain age and a male, we can target advertising to you. What you will see will be different from what someone in the East sees. To give you a couple of examples, Bank of America and Pacific Bell are both located in California only, and Pac Bell found that we were the only site they could find that could target the demographic and geographic region of California. So all this information that we have we use to target advertising.

S.B.: No! That’s one thing that we just do not do. We believe that when Web sites set up cookie files that people are not aware of then it is an invasion of privacy, so we use only the demographic information that the user provides to us. We do not put cookies on the user’s hard disk. We believe it is a win-win situation because you will get to see advertising that is really relevant to you and we will be able to pipe advertising that is good for our advertisers. We have told everyone that we are going to use this information up front. We don’t quietly, behind your back, set a cookie and then monitor what you do. We don’t believe in that.

S.B.: We continue to show very positive signs but we are not yet making money. By year end we are expecting to be profitable.

S.B.: We have about 30 people in the company now.

S.B.: The majority of them are in engineering, and we’ve got a substantial customer service department and a few people in marketing. We have a couple in accounting and management.

S.B.: Yes, yes I would. We are an email service provider. Right now at this point we have about 3.6 million users, which makes us the largest free email service provider in the world today. In email providers we are behind only AOL and CompuServe at this point.

S.B.: [laughs] I get asked that question all the time. It’s one of those things with the Internet. You cannot attract millions of users instantly. There is an exponential rate of growth. It is an unwritten Internet law that everything must start out small and then grow in an exponential fashion, and we are at the upper end of the curve right now so we have tremendous growth momentum at this point. For anyone else to do this they would have to start from scratch.

I think the second point is that when we started this company we believed that technology was not a barrier to entry and the problems would be branding and market share, and we were very wrong. We have learned in the last nine or ten months that it does not matter how much money a competitor has because the technology is a real barrier to entry. One of the problems is scale. You can provide email to 100,000 or 200,000 but even the big players like ATT, AOL and Netcom have had problems scaling up. We believe we’ve solved the scalability issue. We’ve had our problems trying to solve this and we’ve had to work very had to reengineer our back-end system.

S.B.: It is substantially less. The most expensive portion of the provider’s service is the connectivity. The email part of the service is actually the most valuable because it is the name you must use when communicating and it is the lock they have on you.

S.B.: Yes. We believe we need to have a sell-through of 15% to cover our cost. The cost of a subscriber on our site is about fifty cents; it’s under a dollar. We think we’re delivering more than a dollar’s worth of advertising per month to our advertisers.

S.B.: Yes. We currently get roughly two impressions per user per day. We get about 60 impressions per user per month. So at a CPM of 20 dollars, 60 impressions translates to about two dollars so we recover our cost. We believe this is a profitable business to be in.

WWWiz: Have you found any difference in your demographics than the standard provider?

S.B.: We’ve found that we have an average age of our users that is lower than the Internet demographics. If you take a look at the Internet demographics today the average age of an Internet user in the U.S. today is around 35. The average age of a HoTMaiL user is around 26 so we are definitely skewed toward the younger age bracket. The three largest groups of users on our site are young professionals between the ages of 21 and 34, college students and high-school students. These three categories or demographic types constitute around 30% of all our users.

S.B.: We do. Twenty-five percent of our users are international and today we have users from literally every country of the world because this is truly global. Access charges in different countries are different than in the U.S. Many countries charge per the number of emails sent and received. We’re like a super application in those countries because we are totally free. We also cater to the shared Web access model like the university. You might have just ten shared access terminals and now the entire university can have an email account. Everything is server side, there is nothing on the client side so when the person is done the next person points the browser to our hotmail.com site and gets an email ID and they have his or her email and everything is stored on our side centrally on our servers.

We have also found that corporate users use us for privacy reasons. Now this is an interesting statistic. There are about 125 million email accounts in the world today and 100 million of those are corporate email accounts. Which means there are 25 million personal email accounts in the world. Let’s assume all the personal users also have a corporate email account and you subtract 25 from 100 and you find there are 75 million corporate users who don’t have a personal email account. We appeal to that category of individuals because of privacy reasons. I’m sure you have a voice mail at home that’s different from your corporate voice mail. The idea is the same. Your voice mail at work should not be used for private purpose and the same with your email account. We appeal to these people.

S.B.: We are as secure as any Internet service provider. For example if you have the name and password of an AOL user you can get to his or her email, right? The same thing with us; we are protected by name and password. Everything is located at our servers; we’ve got extreme security around our servers. We’re paranoid about it and have many layers of security. So it would be impossible for hackers to get to your email. The only way is if a person knows your name and password, and we give users the ability to constantly change their passwords while they are online.

S.B.: We have a very strong policy against spamming. One of the things we’ve done right from the beginning is convey to people that we are not a site that is used for spamming. Yes, you can get an email account but we are not an anonymous email. So every email that is sent out of HoTMaiL—we have the IP address of where it originated. We can track it down to the computer where it originated from. When we find a person is abusing his email account for spamming purposes we take away his account immediately.

S.B.: There is nothing we can do to prevent a person from signing back up. If they repeatedly abuse our system we can track him down to the ISP he used to sign on, and we work with the ISPs to make sure that individual is cut off.

S.B.: One advantage we have of being server side is that every two weeks we can and do make changes to our software. For example, last week we introduced new features like spell checking, message finders and sorting. The benefit is felt by millions of users instantly and that’s the beauty of our system. No upgrade is ever required on the client side.

We believe community is king. People thought content was king but we believe it is community. What we are doing is building a HoTMaiL community the world over. We are looking at customized personal content and local content. Local weather and local TV listings, local entertainment guides, news and other community building aspects. We want people to make HoTMaiL their cyber home.

S.B.: We currently allow for folders. You can make folders and store your files in folders. At this point we have an upper limit of two megabytes. We will be introducing additional subscription service. If a user, say, wants to exceed the limit we will allow that for a nominal monthly charge.

S.B.: At this point we warn our users at least two weeks in advance that some of the older messages they have will be deleted. Unless they want to go in and delete their files to under the limit.

S.B.: On the back end we’ve got a hundred megabit per second with multiple T3 lines to our site.

S.B.: Yes. When I travel and I’m working on a file all I do is attach to email and send the file with it. Now all my files are accessible to me anywhere. When I am in New York I don’t have to carry my laptop; I just download the file onto a floppy and if I have to make a presentation I can do it anywhere. It gives a tremendous amount of flexibility. For the traveler it eliminates the need to carry a laptop and to remember dialup numbers and other cumbersome peripherals.

S.B.: We found a firm that was very excited in our product and had very good media relationships. They know the process of press releases and how to get it in front of the editorial community. Even now we believe our growth is being fueled by good PR. It’s not just standard PR; it’s people telling each other about our product.

S.B.: We didn’t have that much money so we literally exchanged stock.

S.B.: No, we are a private company.

S.B.: We have venture capitalists—actually two very nice firms. One of them invested in Infoseek. They’re Menlo Ventures and Draper Fisher Jurvetson Associates (http://www.drapervc.com).

S.B.: They own a sizable chunk. They don’t own a majority of our company. One of the reasons we have been able to maintain such a large portion of our company is because we took very tiny sums of money. We didn’t take all the money up front. Had we taken three or five million up front we would have had less risk but we would have given up a large portion of the company. What we did is we took just $300,000, then $600,000, then $1.5 million and $3 million and so on. At every stage the value of our company kept going up.

S.B.: I would say about 22% of all the people in the U.S. and of the world; it’s about 15%. More than 15% of all the Internet comes from California. We are in the hot spot worldwide for Internet activity.

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