Many of the most successful Web 2.0 companies, including MySpace, YouTube, eBay, Flickr and rising stars like Twitter are prime examples of a “viral loop”—to use it, you have to spread it. The result: Never before has there been the potential to create wealth this fast, on this scale, and starting with so little.

In Viral Loop, Penenberg tells the fascinating story of the entrepreneurs who first harnessed the unprecedented potential of viral loops to create the successful online businesses—some worth billions of dollars—that we have all grown to rely on. The trick is that they created something people really want, so much so that their customers happily spread the word about their product for them.
One such business was Hotmail. After their 20th venture capitalist meeting, Sabeer Bhatia and Jack Smith, former hardware engineers at Apple who first came up with the idea for webmail, finally raised seed money from famed VC firm, Draper Fisher Jurvetson.

PS: I Love You. Get Your Free Email at Hotmail

After the two sides worked out terms governing the initial $300,000 seed investment, Sabeer Bhatia and Jack Smith walked out of the Draper Fisher Jurvetson offices with a $50,000 bridge check and quit their day jobs. Working from home, Smith, after bringing onboard another engineer, got down to building a prototype. They also needed to come up with a name, which fell to Smith, who stayed up late with his wife to brainstorm. Sitting with a blank sheet of paper they listed possibilities that contained “mail” in some form. Out of two-dozen there was Cool Mail, Run Mail, this mail, that mail, but no “A-ha!” moment. Finally his wife suggested, “Hotmail.”

Smith wrote it down. He wasn’t sure about the “hot” part, but given everything else this seemed the best candidate. Then he noticed it contained the letters “HTML,” the acronym for “HyperText Markup Language,” the lingua franca of web pages. Smith canvassed Bhatia the next day while riding in an elevator to their attorney’s office. As usual, his friend initially gave it a cool reception but they were running out of time so he went along with it. On March 27, 1996 Smith registered the Hotmail domain.

At the same time he finished a prototype within two weeks, sharing it with a small circle of friends who provided valuable feedback, mostly relating to layout, how e-mail should be viewed and the index page arranged, the look and feel of the interface, how the columns should appear on the screen. Smith demonstrated it at the next meeting with Draper and Jurvetson, who were duly impressed.

Draper asked, “How are you going to get the word out there?”

“We’ll put it up on billboards,” Bhatia said. He also mentioned radio advertising.

“God,” Draper replied, ” that’s expensive marketing and we’re giving this away?” He thought for a moment. “Can’t you just give it out to all those guys on the web?”

That would be spamming, Smith replied.

I guess spamming is bad, Draper thought. He hadn’t heard the term before. Then he flashed back to Harvard Business School, where he had received his MBA—a case study his professor had covered in class: women holding parties for their friends then selling to each other. A certain percentage of the women at each party became salespeople by referring more business. Tupperware, that was it. He also recalled MCI’s “Friends & Family Plan,” which harnessed the power of social interactions to spread the product. He wondered if they could do something like that with webmail.

“Jack,” Draper asked, “could you put a message at the bottom of everybody’s screen.”

“Oh come on, we don’t want to do that!” Bhatia blurted out.

“But can you technically do it?” Draper asked.

“Of course we can technically do it,” Smith said.

“Oh, great,” Draper said. “And it can persist, right? You can put it on one message and if he sends an email to somebody else you can put it on that one, too, right?”

“Yeah, yeah,” Smith said, not convinced.

“So put ‘PS: I love you. Get your free e-mail at Hotmail’ at the bottom.”

Bhatia and Smith communicated through pained expressions. “Oh, no,” they seemed to be saying. Draper had seen that look before. Of all the investors in the world, why did we end up with this idiot? Frankly, he didn’t care what they thought. This just felt right.

“Wait a second guys, don’t you get it?” Draper asked. A tag line at the bottom of each message would act as free advertising. “I can send you an e-mail and you can send it to all your friends and they get it and they can sign up and send it to their friends and pretty soon it takes off.”

Smith said, “I don’t think…”

Bhatia interrupted. “Let’s move on to other business.”

Draper agreed to table the discussion for now, but had no intention of letting it go. He vowed he would keep pounding until they listened.

They launched HoTMaiL on Independence Day 1996. Not only did they like the symbolism—they viewed webmail as a populist tool because any user could log in from anywhere in the world—Smith had long promised the service would be ready by then. After turning on the registration function and hitting the switch in the early afternoon, Smith accompanied his tiny technical staff to Chili’s Grill & Bar in San Jose to celebrate. To keep track of signups he brought along a laptop with an attached radio modem receiver on the back, the antennae sticking up like a divining rod. Over quesadillas Smith counted 100 registrations in the first hour. After lunch they went to the movies, and by the time the summer blockbuster “Independence Day” began to roll he tallied 200 signups. Upon exiting the cinema, Smith logged in again to find that fifty more joined HoTMaiL. They were finding the site via word of mouth and word of mouse. People were talking about it, and letting their friends and family in on the deal via email, using the Hotmail message as a proof of concept: Eighty-percent of those who signed up said that they learned about it from a friend.

Growth was robust but not staggering for the week. At the next meeting at DFJ Tim Draper once again pushed the two young entrepreneurs to insert a tagline into each message. Bhatia and Smith were adamant about not adulterating email. It just wasn’t done. They would feel like they were polluting emails with advertising, and what about privacy issues? If someone is adding a tagline what else were they doing? A user would wonder what else they had access to and they were also fairly certain it was unethical. But Draper wouldn’t let it go. The benefits, he contended, far outweighed the risks. If they were predicating their entire business on the size of their user base, they should be doing everything in their power to increase it as fast as possible. “P.S. I love you. Get your free email at HoTMaiL.” The more he said it, the more he liked it.

The next day Bhatia phoned Draper with the news that they agreed to do it, but without the “P.S. I Love You” part. The impact was almost instantaneous. Within hours Hotmail’s growth took on the shape of a classic hockey stick curve. They started averaging 3,000 users a day, compounded daily. By Labor Day they registered 750,000 users and within six months they were up to 1 million. Five weeks after that they hit the 2 million user mark, adding more than 20,000 signups a day, with Smith desperately trying to keep the servers up and running. At times, the site became sluggish and suffered major outages. But through it all Smith, using little more than virtual spit and glue, kept Hotmail—they had dropped the awkward capitalization by this point—afloat.

The tagline with the clickable URL that Draper insisted that Bhatia and Smith insert into every outbound message served as a promotional pitch for the company. Simply by using the product every customer became an involuntary salesperson. This implied endorsement from a friend or peer made it more powerful—and more far-reaching—than traditional advertising. The receiver of a Hotmail messages could see a.) his friend is a user, b.) it works, and c.) it’s free. Successful consumer branding is often based on user affiliation. (The cool kids wear low cut jeans, so I will, too.) This plays to our tribal instinct. It also resulted in clusters of users. Bhatia sent a message to a friend in India and within 3 weeks Hotmail registered 100,000 users there. It also became the largest email provider in Sweden without spending a nickel on advertising there. In contrast, Juno blew through $20 million in marketing and advertising yet Hotmail gained three times as many users in half the time.

As Jurvetson related in what would become a famous white paper, the Hotmail adoption pattern was similar to that of a virus “with spatial and network locality.” A person’s email address book is a type of virtual social network that is not encumbered by geography. A certain percentage of contacts will be friends, family and colleagues who reside relatively near by; others may be scattered throughout the world. A Hotmail message sent across the country might result in a new cluster of users. Jurvetson noted a “mathematical elegance” to Hotmail’s “smooth exponential growth curves” in the company’s early days: cumulative users = (1+fan out) cycles. “We would notice the first user from a university town or from India, and then the number of subscribers from that region would rapidly proliferate,” he wrote. “From an epidemiological perspective, it was if Zeus sneezed over the planet.”

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We’re not talking about a small number of users who will be affected. Hotmail is still by far the largest web mail provider on the Internet, with 343 million monthly users according to Comscore. Second and third are Yahoo (285 million) and Gmail (146 million). A year ago Hotmail had just 273 million users, so it is still growing rapidly.

The new features let users search for and insert maps, movie listings and times, in addition to the restaurants, videos, images and business listings that were there before. And all of these have been upgraded with Bing functionality via the API.

Some of these quick adds are quite useful, particularly the maps and movie listings. For the masses that use Hotmail, it’s also a great way to introduce them to Bing.

Screen shots below:

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The new feature will be gradually rolled out, starting from today enabling subsets of users in Brazil, Canada, China, Germany, the Netherlands, Norway, and USA to send instant messages from the Windows Live Hotmail and People pages. The feature earlier rolled out to some users users in France, Italy, Japan, Mexico, Spain, and the UK.

I’ve said this before: easily dismissed by geeks and savvy web users, Hotmail has a gigantic mainstream userbase who are not likely going to switch to an alternative webmail service en masse provided Microsoft keeps up with the times and lets Hotmail evolve the way its users are increasingly demanding it to.

But make no mistake about it: Microsoft is ridicously late with adding this functionality to Hotmail.

Your thoughts?

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Google launched Gmail only four years ago, and it is now the fourth most popular e-mail service on the Web after Yahoo Mail, AOL Mail, and Windows Live Hotmail. In 2008, it saw some serious growth in the U.S. Google doesn’t break out the number of Gmail users, but comScore estimates unique monthly visitors. According to the latest stats, the number of people visiting Gmail grew 43 percent last year to 29.6 million. In contrast, the much more massive Yahoo Mail grew 11 percent to 91.9 million uniques. AOL Mail finished in second place for the year with 46.6 million uniques (plus another 7.2 million visitors to AIM Mail), while Hotmail actually declined 5 percent to 43.5 million.

How can Gmail keep growing at such a fast rate, when the other email services seem to be stagnating? Maybe it’s because Gmail is evolving at a faster rate.

If you look at any of the major Web portals by subdomain, the email service always comes out near the top in terms of driving traffic (for instance, see Yahoo’s breakdown). Google never defined itself as a portal, but as it added more and more services beyond basic search, creating deeper connection swith consumers by offering them indispensable apps for free was always part of its strategy. And as much as we like to complain about it, email remains on of the most indispensable communication tools out there.

If you look at the chart below, you can get a sense of how Gmail gained against AOl Mail and Hotmail during 2008 (I left out Yahoo Mail because it is so much larger than the others that it skews the chart). At this rate, Gmail could overtake AOL and Hotmail within the next two years. Yahoo Mail won’t be as easy to catch. Although Yahoo Mail grew only 11 percent last year, it still added more visitors (9.4 million) than Gmail (8.8 million).

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It’s 2009. Storage is so cheap that Email providers like Yahoo are literally giving you as much space as you want. Yet we still have to deal with archaic policies that allow these Email providers to delete everything in our inboxes if, for whatever reason, we forget to login for a few months.

The time limits vary: Yahoo cuts you off at 4 months, Windows Live Hotmail at 60 days, and Gmail after a more lenient 9 months of inactivity (you can see a more comprehensive listing here). Most of them have some kind of grace period where your account enters a deactivated ‘hibernation’ state, but still retains its data. Some of them have these policies in print but rarely actually delete your account. But for others, once you cross the threshold, every Email message, photo, and file attachment is gone for good.

Take Yahoo, for example. Now that the free service includes unlimited storage, the site uses the threat of deleting your account as a way to convince users to upgrade to its premium Yahoo Plus! for $20/year (you can see the wording in the screenshot below). Since when did my data become a bartering tool?

Of course, all of these services are provided for free – none of them are obligated to give us anything. But they are also loaded with ads, and help drive users to each service’s web portal so they can access their integrated inboxes. Webmail is no charity.

Years ago, when space was relatively costly the restrictions made sense. Now that each service uses excessively large or unlimited storage limits to entice users, one would think that they’d be able to support stagnant accounts. Granted, it’s more complicated than a pure storage issue. Every account is likely backed up multiple times, which multiplies both bandwidth, processing, and storage costs. But given a choice I’d much rather sacrifice my Email’s maximum size limit if it meant I could keep my data online indefinitely.

The issue extends beyond just Email. Earlier this year a spammy chainletter proclaiming that Facebook was deleting inactive accounts (it isn’t) exploited fears of data loss. Now that more services are moving to the cloud, our most vital data (like photos and documents) is increasingly at the mercy of these web companies – an unsettling thought given the precedent set by webmail services. For these cloud-based services to thrive users will have to believe they’re good for life, not just until the company involved holds their data ransom for a revenue boost (or worse – deletes it entirely).

(Image from Failblog)

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We’ve been beta testing Kahuna for a few weeks. It is a big improvement on the old Hotmail interface, using ajax to provide a much more Outlook-like email experience. Features include a three-pane view and drag and drop functionality to folders, etc.

We previously wrote about Kahuna on August 16, 2005 and August 24, 2005.

Kahuna – Extreme Marketing

I am a little bit annoyed right now. Sometimes people get a little too cute. Microsoft’s Kahuna may be falling into that category.

I’m pretty excited about Kahuna because I love ajax and this is going to be one cool ajax application. It looks like (and should be) the new version of Hotmail will act very much like a desktop application. I like that. I want to try it out, and blog about it. And although I don’t always get an invitation to participate in a beta, I usually don’t have to waste a lot of time getting to an answer.

Kahuna is offering beta invites, but require you to read through team member blogs to find out the answers to questions. If you find the answer, you get another hint. Here’s a recent post by Imran Qureshi, the Kahuna Program Manager:

The mail team wants to invite a few more beta testers into the mail beta, but simply adding people is just too easy… so we put together a small treasure hunt:

One of our team members made a post about the origin of the product’s code name, locate his space for your next hint.

WTF? This is stupid. This is not time well spent. This does nothing to build a brand or make me a loyal user. It suceeds only in pissing me off. I’d much rather use this time either testing Kahuna (and most likely writing amazing things about it), or testing something else (there are lots of other profiles on my to-do list).

So, do you guys agree and consider it kind of lame to waste our time like this? Or am I wrong and this treasure hunt is an example of hip, cool, edgey and/or extreme marketing (marketing 2.0)?

I am now done with this particular gripe.

Kahuna Update

Back to Kahuna, Imran has posted additional screen shots and information on the service. He had a previous post where he stated 2 of his top 5 reasons for liking Kahuna.

Today he posted reasons 3 and 4 (leaving us in suspense for #5), along with a new screen shot of Kahuna (see to left):

3. Keyboard shortcuts to read mail
I’m sure the power users will love this. Use “[“ and “]” to navigate the message list and read your messages without using the mouse at all. Combine these with the preview pane and the delete key shortcut to delete messages and you can cruise through your inbox in no time flat. To read a message, click Enter to open a message in a larger view and click Esc to return to your message list. Also, “control [" and "control ]” will allow you to move between mail folders.

4. Change message encoding as you read
Do you get a lot of mails in a variety languages? If the mail itself does not specify the encoding Hotmail calculates the encoding by analyzing the message. You can choose the correct encoding if mail beta’s automatic choice was wrong so your messages look right regardless of the sending language or encoding.

It really does look like Kahuna will be user friendly and fast. Looking forward to future posts on this.

Kahuna (the new hotmail with Ajax) hasn’t launched yet, but the Start.com team (profile) has been working on it seriously since May 2005 and it is now in private beta testing (updated).

From posts by the Kahuna team (see below) and various beta testers (and others watching the space), it looks like it as as signifcant an enhancement to Hotmail as Start is to the old MSN portal. It appears that they will be launching the service under the URL mail.start.com.

Key features include liberal use of ajax to eliminate screen refreshes, an “outlook�? approach to allow reading of emails without leaving the inbox, and a generally faster and cleaner user interface.

Details of the recent history of Kahuna can be found here.

From Imran Qureshi, Kahuna team member:

Top 5 reasons I love the mail beta… reasons 1 and 2

Mail beta is a brand new web mail experience focused on being faster, simpler and safer than existing web mail services (read more). The team focused on the basics of reading and sending mail. Mail beta is a work-in-progress and a large number of beta users are driving what it becomes (we can barely keep up with all their ideas…)

Here’s the first of some of my favorite things about reading mails in mail beta:

1. Fast, faster and faster still Mail beta is significantly faster, I mean by an order of magnitude:
a) The UI responds instantly to many actions and quickly to others
b) Very few context switches (where the whole page changes and your eyes have to rescan)
c) You need fewer clicks to do the everyday tasks
d) Cleaner look (including more “white space�?) so your eyes can relax and find stuff faster

2. Read mail without leaving your inbox using the Reading pane
The Reading pane allows you to read your mail without leaving your inbox. If you like the reading pane in Outlook now you have it in web mail. Other web mail services forces you to open each message and close it before reading the next message. If you have 10 messages to read, they will require 20 clicks, Kahuna: 10. (How’s that for your carpal tunnel?)

Want to see a wide email? Just double click the message and voila!

We’re looking forward to testing this out ourselves.