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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