Mr Hotmail listens to the future

By PETER GRIFFIN

In this part of the world software entrepreneur Sabeer Bhatia could arrive and leave without attracting a glance from his fellow first class passengers.

In India it's a different story. Bhatia, or Mr Hotmail as he has come to be known in tech circles, is treated like a rock star back home, drawing attention usually reserved for Bolliwood stars.

The story of the boy from Bangalore who became a multi-millionaire after arriving in the United States with only US$250 in his pocket is a modern legend in India.

It's also the classic Silicon Valley story of a penniless software geek (he was 19 and on a scholarship when he entered the US) made good. In 1997, he and partner Jack Smith sold Hotmail, an email programme the pair had developed to get around using their corporate email system, to Microsoft for US$400 million ($809 million).

The sum was a drop in the ocean for a company at present sitting on a cash pile of US$40 billion. Back then, however, before the dotcom hysteria, it was an unprecedented figure to pay for a start-up.

The sale sent shockwaves through Silicon Valley, fuelling the belief that the future for IT companies lay in the internet.

Bhatia popped into Auckland briefly to speak at a Project Management Institute conference and to take in a round of golf. Questions about the feverish negotiations that accompanied the Hotmail sale brought a broad grin to his face.

Microsoft had expected the software engineer to jump at the first offer. Instead Bhatia dug in through round after round of negotiations that saw Microsoft lift its bid from US$200 million to US$400 million

He walked away from the table more than once.

"I was doing all of this without having anything ... My net worth was US$5000.

"Who was I to refuse US$350 million and ask for US$400 million," he chuckled.

"I knew Microsoft's major weakness: they had tried in the past to provide email to their subscribers and had failed. I knew they wanted us badly."

Before Bhatia knew it, he was judging Indian beauty pageants and sitting on venture capital advisory panels.

He became a role model for a generation of young graduates filling India's rapidly growing IT sector.

"I was touched by the response," he said. "I still can't go to a restaurant or nightclub without it being written about in the press the next day."

In 1999 he dabbled in the dotcom arena, forming arzoo.com, an online marketplace which matched corporates with software developers and IT experts. Nine months later, it was wound up as corporate IT spending slowed to a trickle.

For its dollars, Microsoft picked up a brand that in the years since has become synonymous with the internet. But for all its popularity, Hotmail has never turned a profit for Microsoft - people just like the free model too much.

In a rare move, Microsoft broke out its earnings for MSN in its accounts for the three months to September 30, revealing that the unit generated revenue of US$427 million, dipping US$3 million on the same period a year ago. Microsoft admits MSN is making a loss but will not reveal to what extent.

Bhatia said Microsoft's business case demanded that it start making its millions of Hotmail subscribers shell out to a greater extent for added services.

"Microsoft is looking at ways of monetising this large subscriber base, selling them additional storage, spam and parental control, those types of things."

The Hotmail founder had no concerns about the commercialisation of the service.

"I'm pleased with where they've taken it, growing subscribers from 10 million to 150 million," Bhatia said.

"Where Microsoft has the edge [over Yahoo and AOL] is that it is a software company. When you are the maker of the engine and the maker of the body, you have a distinct advantage over competitors who rely on someone else to build the engine."

Still a dedicated Hotmail user, Bhatia said he was horrified by the spam that had swamped users of web-based email services with unwanted and offensive messages.

"My own Hotmail account is bouncing off emails because I haven't checked it in a couple of days. It's full of spam. We had an inkling this would happen, but we thought legislation would prevent it," he said.

Ties with Redmond severed, Bhatia said he watched with interest where Microsoft was going with his invention.

These days he keeps busy tending a handful of tech businesses including San Francisco-based startups Cradle and Mediabolic.

Cradle is developing "soft silicon" computer chips that allow the chips to be programmed entirely with software, slashing research and development costs. Mediabolic is making software that will be embedded into household appliances. It's not a new concept. Bhatia's old haggling partner, Microsoft chairman Bill Gates, is planning exactly the same thing with its Microsoft Home project.

"The difference is that these guys don't consider the PC to be the centre of the universe like Microsoft does," Bhatia said.

"This is a peer-to-peer system. Any device can become a master, any device can become a slave and they'll communicate with each other. You don't need a PC at all."

Bhatia, now 34, has put more than US$20 million into the two companies, but the business venture most likely to deliver success on the scale of Hotmail centres around a service no more complicated than voicemail.

He is looking at the Indian mobile phone market which, with only 8 million subscribers, has one of the lowest penetration rates in the world.

Of those subscribers, fewer than 5 per cent had voicemail on their phones. Bhatia said that was the legacy of an Indian distrust in technology that sees people hang up rather than talk to a message machine.

"People never had voicemail on their land lines because there's always someone in the extended family to answer the phone. The same is not true of the cellular phone."

His plan involves equipping every new mobile subscriber with free voicemail. So how will the venture make money?

"I'm saying, give me half of the airtime generated by subscribers accessing the voicemail account," Bhatia said.

"Even if I only make 50c per subscriber per month, that's $500,000 a month. Project that out over the next six years when mobile numbers are expected to reach 100 million ... That's a damn good business to be in."

Bhatia hopes to go live with the first voicemail platform next month, with a target of 1 million subscribers by the end of the year.

It's a simple plan with the potential to add considerably to his fortune.

"Money is just a yardstick," he said. "My lifestyle's not going to change if these companies make it or break it.

"Changing the lives of people in India, to me, means a lot more."