A Note on Viral Marketing – Part II: How Hotmail Grew

Hotmail is one example of a product that spread through the use of viral marketing techniques. This case study will cover the early days of hotmail, explore some of the underlying factors that led to its spread, and examine one model that has been used to model growth of its number of users.¹

Ray Tomlinson is credited with inventing email as we know it today. Before 1972, email could only be sent between users of the same computer. The problem became more complex once different computers were connected to one another to form a network, and a user on one computer wanted to send email to users on a different computer. Important contributions to the evolution of email were made by others, and commercial email packages began to appear in 1976.²

Sabeer Bhatia and Jack Smith met at Apple Computer in the early 1990s, and later joined a startup called Firepower Systems. In 1995 they started discussing the idea of building a startup themselves. Their first idea was to build a database on Sun’s Java technology. They called it JavaSoft. Venture capitalists turned them down. During the period when they were working on JavaSoft, they encountered a number of obstacles that prevented them from communicating freely with each other. Jack Smith developed a system that allowed them to have their email displayed on a web page. This became the basis for Hotmail. They soon obtaind $300,000 in funding from DFJ and rounded up an additional $100,000 in additional capital. This was in early 1996. The funding terms ascribed Hotmail an implied valuation of $2,000,000.³

At the urging of the venture capitalist’s backing Hotmail, Bhatia and Smith did two things. First they struck a strategic relationship with Four11, another DFJ portfolio startup which ran “the most comprehensive ‘people finder’ on the Internet” at that time according to PC Magazine. Second, they automatically included the text “P.S. I love you. Get your own free Hotmail at www.hotmail.com” at the end of every email that was sent by a Hotmail user.⁴

Hotmail launched in July 1996, with 100 signing up in the first hour. By September it boasted 100,000 subscribers. That number rose to 1,000,000 by January 1997, and 8,000,000 by October. Though Hotmail had ran out of cash before it launched its email service to the public, it went on to raise additional capital from venture capitalists. By August 1996 it was valued at $20,000,000, up 10x from the $2,000,000 at which it had been valued just 8 months earlier.

To model the growth of Hotmail’s subscriber base we’ll turn to a model called the Bass Model, after Professor Frank M. Bass who first published it in 1963 as a section of another paper.⁵ The Bass Model states that the probability of adoption by those who have not yet adopted is a linear function of those who have previously adopted. The mathematical expression for the model is given below.⁶

In the equation above:

• t represents time, and the first full time interval of sales is t = 1,
• p represents coefficient of innovation,
• q represents the coefficient of imitation,
• M is a constant, and represents the potential market or the number of purchasers of the product,
• f(t) represents the fraction of the potential market that adopts a product at time t, and
• F(t) represents the portion of the potential market that has adopted the product up to and including time t, and
• f(t) is the first derivative of F(t) wrt t.

Alan Montgomery uses the Bass Model to fit the model’s results to actual data from Hotmail’s first year and reports a very good fit.⁷ He uses estimates of 0.0012 for p, 0.008 for q, and 9,670,000 for M. I will tackle models like the Bass Model in later posts.

It is reported that Bhatia sent a message to a friend in India using Hotmail, and three weeks after that Hotmail had 100,000 users there.⁸ Hotmail was eventually bought by Microsoft in 1998, a year and a half after it launched to the public. The value of the deal was not made public but is rumored to be as high as $400,000,000.⁹

What ever you call it, “Growth Hacking” or “Viral Marketing”, it works. Hotmail spent a fraction of the capital that its rivals spent on marketing and advertising, but experienced significantly more growth.

In the next post on this topic I will study the tactics Dropbox used to grow its user base.

1. Any errors in appropriately citing my sources is entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them. ?
2. Ian Peter, The History of Email. Accessed at http://www.nethistory.info/History%20of%20the%20Internet/email.html on Jan 17, 2013. ?
3. Oliver A. Hugo and Elizabeth W. Garnsey, Hotmail: Delivering E-mail to the World, http://doczine.com/bigdata/1/1370291311_60c0e3de77/4e7-hotmailcase26apr02.pdf. Accessed on Jan. 26th, 2014. ?
4. There seem to be variants of the exact message that was appended to the end of each email, but it is consistently reported that a message was included with every email sent from Hotmail. ?
5. http://www.bassbasement.org/BassModel/ ?
6. Frank M. Bass, A New Product Growth for Model Consumer Durables, January 1969. Available at http://www.bassbasement.org/F/N/FMB/Pubs/Bass%201969%20New%20Prod%20Growth%20Model.pdf. Accessed on Jan. 26th, 2014 ?
7. Alan L. Montgomery, Applying Quantitative Marketing Techniques to the Internet, available at http://www.andrew.cmu.edu/user/alm3/papers/internet%20marketing.pdf, July 2000. Accessed Jan. 26th, 2014 ?
8. Willix Halim, My Top Five “Growth Hacking” Techniques, http://e27.co/my-top-five-growth-hacking-techniques/. Accessed on Jan. 27th, 2014. ?
9. Jeff Peline, Microsoft Buys Hotmail, January 3rd, 1998, http://news.cnet.com/2100-1033-206717.html. Accessed on Jan. 27th, 2014. ?