Hotmail seems like one of those relics of the early Internet, like AOL, that I'm always surprised to find out still exists. That's my fault in Hotmail's case, really, because despite its current lousiness (compared to Gmail, say), it's still the biggest email client in the world. But Gmail's better interface, features, and ease of use have led to a quickly growing userbase, and Microsoft  had to act. The new Hotmail  is the result, and it looks surprisingly excellent. Let's get to the big features.
The interface. The new Hotmail looks good, taking a page out of the Zune and Windows Phone 7 design book. That means pastels, big text, horizontal sub-menus, and simplicity. It also means Hotmail does a boatload of things you will be surprised to learn it couldn't do before, like threaded messages, a suggestion search box, and some decent spam protection. Basically, it's pretty, and it behaves like a modern email Web client should behave--meaning, really, that it looks a lot like a Microsoft version of Gmail.
Folders. Microsoft's version of folders goes a lot further than Gmail's, though, with features called Sweep and Hotmail Highlights. Sweep lets you check a checkbox to automatically shuffle a particular type of email (by sender, say, or subject) into a particular folder. Tired of getting Gilt Groupe 's daily deals? Sweep them into a Gilt Groupe folder and check them a couple times a week.
Hotmail Highlights is even cooler. It automatically creates and files certain types of email. All daily newsletters will go in one folder; all shipping notices (from UPS, FedEx, whatever) go in another; all updates from social networks (Facebook  friend requests) go in another. I love that feature--I'm sure Gmail has an extension or something that can do it, but it's not built-in nearly as nicely as it looks in Hotmail.
Office. We've covered Office 2010's Web client before . This is an obvious integration, pretty much like Gmail works with Google  Docs. Hopefully Office 2010 brings better file compatibility or something to make up for its comparative lack of features (like simultaneous editing).
The Social. Microsoft is adding a feed of Facebook, Twitter, MySpace, LinkedIn, and every other network you can thing of, directly into Hotmail. You can send and reply to messages from within the Web client.
Powerful inbox. Microsoft is using their muscle-bound tools, Silverlight and SkyDrive, to provide a flashier and more capable inbox experience. If somebody sends you photos, you won't have to dick around with saving files or opening them in a new tab, like in Gmail--there's a built-in, flashy-as-hell slideshow photo browser, right in your inbox. Same with videos--YouTube and Hulu will both embed naturally instead of showing up as external links.
Microsoft is also using their cloud storage service, SkyDrive, to offer up to 25GB of free storage, which means you can send files of pretty much unlimited size. Note: The complete series of Planet Earth, in high-def Blu-ray rips, is just slightly too large, at 26GB, to email to all your friends. Why does Microsoft hate nature? We'll never know.
There's a lot we don't know about yet--the new service isn't due to launch for "a few weeks," and the integration with mobile devices (not just Windows Phone 7, but iPhone and Android as well) will be vital. Windows Live Hotmail looks to continue Microsoft's recent hot streak--will it pull users away from Gmail? Maybe, and maybe not. But it won't be for lack of trying.