Back from the dead, Hotmail plots its reincarnation

If you’ve been dabbling in the daily deals market, your email is probably inundated with emails touting the latest discount around the corner. Microsoft (s msft) sees this torrent of email as an opportunity to give its Hotmail service a much-needed edge over its competitors.

Microsoft is releasing some new tools before the end of the year that allow Hotmail users to better filter newsletters and daily deal emails, part of the 50 percent of email considered “gray mail,” or messages that can be viewed as vital or as spam depending on the recipient. Built off its existing Sweep feature and the category filters for social, groups and contacts, users can now filter by newsletters and delete all emails from a source or unsubscribe a user from ongoing emails. But for many people who like to receive these emails but need better ways to manage it, Hotmail lets users take actions on emails based on time.

So users can keep only the most recent email from a source, or they can choose to delete all emails older than 3, 10, 30 or 60 days. Emails can be automatically moved over into a file after these set times so they don’t clutter up the inbox. Microsoft said it will allow users to mark emails as important so they won’t get deleted, and emails that are mis-categorized can be fixed and Hotmail will learn over time how to handle those emails.

Hotmail has also added an “Everything else” filter for receipts and other emails. And now, when a user hovers over an email, they can choose to mark as read or unread and delete it with one click. Users can customize what actions they want to add to this pop-up tool, set up their own categories for emails from a specific person or entity, and apply the Sweep technology to those emails.

And the flags function has also been reconfigured so that emails that are flagged can be pinned to the top of the inbox so they don’t get buried.

The improvements are part of a big make-over for Hotmail, which got relaunched last year after hitting a low point in 2006 when 35 percent of its emails were spam. Hotmail is the largest email provider in the world, said Microsoft, though it trails Yahoo (s yhoo) in the U.S. and is trying to catch up to the perception that Gmail (s goog) is superior in features. The improvements over the last year haven’t resulted in a big jump in users, but it has allowed Hotmail to hold its own as Gmail grows wildly.

I like the improvements with Hotmail, and it will make sense for people willing to do a little bit of work. My inbox gets overloaded with emails, so any simple tools to better filter out the daily discounts and newsletters are welcome. I think giving time-based tools to deal with these emails makes sense, because most don’t have much value after a couple of weeks or a month. But I’m curious what effect this will have on daily deal sites like Groupon that are dependent on email inboxes to get the word out on new deals.

Brian Hall, GM of Windows Live, said some email marketers may not receive these improvements well but the changes are part of giving users a better experience overall. And he said the tools let people hold on to emails rather than junk them all and kill off that channel for outreach.

Hotmail still has a ways to go, Hall said, to convince users in the U.S. that its tools are competitive. The application is now handling 140 petabytes of storage actively after upping attachment sizes to 100 megabytes and has reduced spam to less than 3 percent. Hall said the improvements help Hotmail narrow the field into a two-horse race with Gmail.