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The new service was built from scratch and emphasized three main concepts of being 'faster, simpler, and safer'. Other webmail enthusiasts also wanting to try the beta version could request an invitation granting access. Microsoft's new email system was announced on November 1, 2005, under the codename 'Kahuna', and a beta version was released to a few thousand testers. The main industry heavyweights – Hotmail and Yahoo! Mail – introduced upgraded versions of their email services with greater speed, security, and advanced features.

Featuring greater storage space, speed, and interface flexibility, this new competitor spurred a wave of innovation in webmail. In 2004, Google announced its own mail service, Gmail. The exploitable vulnerability exposed millions of accounts to tampering between Augand August 31, 2001

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It was such a simple attack that by the time the patch was made, dozens of newspapers and hundreds of web sites published exact descriptions allowing tens of thousands of hackers to run rampant across Hotmail. In 2001, the Hotmail service was compromised again by computer hackers who discovered that anyone could log into their Hotmail account and then pull messages from any other Hotmail account by crafting a URL with the second account's username and a valid message number. At the time it was called 'the most widespread security incident in the history of the Web'.

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In 1999, hackers revealed a security flaw in Hotmail that permitted anybody to log into any Hotmail account using the password 'eh'.

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Later development saw the service tied with Microsoft's web authentication scheme, Microsoft Passport (now Microsoft account), and integration with Microsoft's instant messaging and social networking programs, MSN Messenger and MSN Spaces (now Windows Live Messenger and Windows Live Spaces, respectively). In 2002 Hotmail still ran its infrastructure on UNIX servers, merely the front-end was converted to Windows 2000. In June 2001, Microsoft claimed this had been completed a few days later they retracted and admitted that the DNS functions of the Hotmail system were still reliant on FreeBSD. A project was started to move Hotmail to Windows 2000. Hotmail originally ran on a mixture of FreeBSD and Solaris operating systems. Hotmail quickly gained in popularity as it was localized for different markets around the globe, and became the world's largest webmail service with more than 30 million active members reported by February 1999. Hotmail was sold to Microsoft in December 1997 for a reported $400 million, and it joined the MSN group of services. Hotmail initially ran under Solaris for mail services and Apache on FreeBSD for web services, before being partly converted to Microsoft products, using Windows Services for UNIX in the migration path. By December 1997, it reported more than 8.5 million subscribers. Hotmail was initially backed by venture capital firm Draper Fisher Jurvetson. The name 'Hotmail' was chosen out of many possibilities ending in '-mail' as it included the letters HTML, the markup language used to create web pages (to emphasize this, the original type casing was 'HoTMaiL'). It was commercially launched on July 4, 1996, symbolizing 'freedom' from ISP-based email and the ability to access a user's inbox from anywhere in the world. Hotmail service was founded by Sabeer Bhatia and Jack Smith, and was one of the first webmail services on the Internet along with Four11's RocketMail (later Yahoo! Mail).

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