San Francisco ( CNN ) -- Remember when Hotmail was hot ? Dick Craddock , who manages the group responsible for Microsoft 's Web-based e-mail service , can still recall the day of celebration in 2004 when the Hotmail division had just posted a stunning financial quarter . Craddock , along with other Microsoft execs and developers , convened to relish in the victory . The triumph was short-lived because soon after , Google launched a competing Webmail service called Gmail , and like in the short time it takes Google to call up a search query , Hotmail instantly looked dated . Gmail gave users a gigabyte of file storage for free , while Hotmail presented a few megabytes and required users to pay for more . Gmail was fast , spam-free and let people attach files several times larger than that of Hotmail . And Gmail only showed small text advertisements , while Hotmail 's pages were covered in ads , which is why the site was able to exceed financial goals during that quarter in 2004 . After evaluating the options , `` it was n't hard to pick Gmail ; it just was n't hard , '' Craddock said in an interview on Monday . `` It was a great learning experience about what really matters . '' After a few years of lightning-fast growth for Gmail following its launch and at the expense of Hotmail , Microsoft reversed course . `` We set out to really invest in Hotmail and really , to rebuild it from the ground up , '' said Chris Jones , a vice president who oversees several of Microsoft 's Internet applications . The Hotmail team eventually got the green light to dial down the ads while increasing development on features made available to nonpaying users . Making money directly from Hotmail `` is not the most important thing for us to optimize for , '' Jones said in an interview . `` The lesson from some of the most successful Internet companies is they build something valuable and durable . '' That is a notion , Jones said , that Microsoft learned from a rival , Google , and from a partner , Facebook . It is not conventional wisdom for Microsoft , which makes most of its revenue from software sold for hundreds of dollars a package in brick-and-mortar stores . The people who write the history of technology tend to take shortcuts . Accounts of Friendster 's , Myspace 's and AOL 's fall from grace are often summed up as : they just stopped being cool . In fact , they were less reliable and less capable than their scrappier competition . The same was true of Hotmail , but Microsoft is fighting back . The Redmond , Washington , company gathered reporters together here at an art gallery in San Francisco on Monday to show PowerPoint slides that demonstrate how Hotmail is just as feature-rich , if not more so , than Gmail . Microsoft is putting muscle behind features such as granular controls over daily-deal messages and newsletters , automatic filtering and various new functions that launch in the next few weeks . These changes are already being touted to current users of Microsoft 's e-mail service in a banner that urges them to look out for `` the new Hotmail . '' It 's a part of a campaign to improve the brand 's image , so that people are n't embarrassed to say their e-mail address ends in @ hotmail.com . `` For a lot of folks , Hotmail was their first Webmail address , '' Jones said . `` Now the challenge that we 're fighting , frankly , is mostly one of perception . '' Hotmail still holds the highest market share worldwide , followed by Yahoo Mail and then Gmail , according to research firm ComScore . In the U.S. , Yahoo is the leader , and this year , Gmail surpassed Hotmail and maintains faster growth , ComScore says . The options for free e-mail are poised to increase , with other tech giants making bids for the space that follows your name and the `` at '' symbol . Apple will discuss its iCloud service at a news conference on Tuesday , which is the first time the company will give out free e-mail access , in this case , an @ me.com address , to customers . Facebook recently gave each of its 800 million users an @ facebook.com alias , but few people seem eager to use them . Microsoft is hoping to regain some cool in the hopes of hanging onto the friends it still has -- and to make new ones , before the new kids take over the block .
Apple is hoping to improve the reputation of Web . The Hotmail -based e-mail service , once a dominant player , is losing steam . Hotmail faces a growing list of competitors , including Microsoft , Facebook , Apple .