Hotmail may be the most popular email service worldwide, but that doesn’t mean it will always be. At least in America, the service is falling out of favor (and often associated with spam). Slow to add new features, Hotmail’s early popularity as a webmail provider is in danger, and the company is planning to change the way consumers perceive Hotmail with a new update that will go live this summer.

The announcement comes a week after the release of a major Office update, and among the many new features lies a significant counter to Google Docs: free access to Microsoft Office functionality for all Hotmail users.

Microsoft’s Chris Jones tells The New York Times that Hotmail has a “perception problem”:

“There were features people expected to have in e-mail that we haven’t had.”

That doesn’t mean that Hotmail has entirely fallen out of favor with users. Microsoft’s web mail product is the most-used email service globally, with nearly 400 million worldwide users. But in America it ranks second after Yahoo. And Google is quickly gaining marketshare, with almost 200 million Gmail users. 

As of July or August, Hotmail (now known as Microsoft Live Hotmail), will add lots of features to counter what Google has on offer with Gmail. Among those are increased storage, better spam filtering, increased photo viewing, storing and sharing functionality, and social integration.

According to Microsoft:

“Mail from contacts is only a quarter of the typical inbox today; the
rest of the inbox includes mail from social networks (20%), personal
business (including newsletters, receipts, and shipping information),
and “other mail” (which is typically junk mail or graymail). People
made it clear to us that the number one thing they wanted their email
service to address — whether it was Hotmail or any other email service
— was to help them manage the clutter in their inbox; not just the
spam, but all the mail they get that’s clogging their inboxes.”

But most interesting is the access that Microsoft is providing to its Office product. Microsoft has been very slow to adapt to the notion of cloud computing. While Google’s cloud product is free for light users, Microsoft’s 2010 upgrade costs $119 for Office and Student editions, and $499 for the Professional version.

The latest update for Microsoft Office has cloud features, called “Web Apps,” but only for people who pay to download Microsoft’s proprietary software. Not so for Hotmail users. 

According to Microsoft:

“The moment you receive an Office document as an attachment in Hotmail – Word, Excel or PowerPoint – you can open and view
the attachment online in any popular browser, on PC or Mac and even if Office is not installed. This results from the seamless integration between Hotmail, SkyDrive [Microsoft’s free online storage service]
and the Office Web Apps, so you can send, receive and work on a document with others.”

The workaround will allow users to edit PowerPoint, Excel and Word documents from their email. Even if Office is not installed on the computer they use.

At this point, it’s not likely that Gmail users will leave their current email provider to use Hotmail when the features go live this summer. But this could be a powerful incentive for current Hotmail users to stay. Also, if consumers have issues with Google Docs functionality, they might consider opening up an account with Hotmail to access Office features.

This office software battle started back in 2006 when Google first launched its Google Docs functionality. The search giant only has 4% of the office software market now, but its basic free product will be a growing concern for Microsoft going forward. Most businesses are still willing to pay for Microsoft’s product, but as Google increases the reliability of its cloud offering — and adds to its premium services, many users could shift alliances.

The new Office access via Hotmail is especially important considering Google’s recent strategic acquistion of DocVerse. Google plans to use the plug-in to add web-based collaboration to Microsoft and create “true collaboration right within Microsoft Office.”

As the competition between Google and Microsoft heats up in this area, keeping up with Google’s offerings is the least that Microsoft can do if it wants to retain its marketshare and avoid more defections to Google, whether it be via Gmail or Google Docs.

Images: Microsoft