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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 with more than 30 million active members reported 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. In 2002 Hotmail still ran its infrastructure on UNIX servers, with only the front-end converted to Windows 2000. Later development saw the service tied with Microsoft's web authentication scheme, Microsoft Passport (now Microsoft account), and integration with Microsoft's instant messaging and social networking programs, MSN Messenger and MSN Spaces (later Windows Live Messenger and Windows Live Spaces, respectively).

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