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Hotmail was sold to Microsoft in December 1997 for a reported $400 million, and it joined the MSN group of services. Hotmail quickly gained in popularity as it was localized for different markets around the globe and became the world's largest webmail service, and reported more than 30 million active members by February 1999.
Hotmail originally ran on a mixture of FreeBSD and Solaris operating systems. A project was started to move Hotmail 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.
Later development saw the service tied with Microsoft's web authentication scheme, Microsoft Passport (now Windows Live ID), 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). A security issue appeared in Hotmail during this period that permitted anybody to log into any Hotmail account using the password 'eh'; it was at the time called "the most widespread security incident in the history of the Web."
The old MSN Hotmail inbox
In 2001, the Hotmail service was compromised again by computer hackers who discovered that anyone could log into their Hotmail account and then cull messages from any other Hotmail account by crafting a URL with the second account's username and a valid message number. 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. The exploitable vulnerability exposed millions of accounts to tampering between August 7, 2001 and August 31, 2001.
After a period of technological stagnation, the webmail industry received a significant boost in 2004 when Google announced its own mail service, Gmail. Featuring increased storage space, speed and interface flexibility, this new competitor spurred a wave of innovation in webmail. The main industry heavyweights Hotmail and Yahoo! Mail introduced upgraded versions of their e-mail services with greater speed, security, and advanced features.