Currently, Microsoft and Yahoo’s webmail services are earning revenue by selling premium email accounts, and ads. Gmail on the other hand is using an automated email scanning system to push highly targeted ads.

Gmail’s system is a form of paid search, and under this system users see ads relevant to the contents of the email they are viewing. Obviously, Google’s calculations show ads selected via email scanning to be a much better revenue generator, or the company couldn’t have justified Gmail development, 1 GB quotas, and the fight it is picking with Microsoft and Yahoo.

Microsoft and Yahoo will need to copy Gmail’s business model simply to stay competitive. If they hesitate, Google will continue to steal market share by offering large storage quotas which it can afford courtesy of Gmail’s superior business model.

Actually, Gmail’s business model suits Hotmail and Yahoo Mail even more than it suits Gmail. Hotmail and Yahoo Mail are established players in the webmail market, and these services don’t need to make any effort to capture market share. According to MSN International, Hotmail has 170 million accounts, and an average user views 100 pages on Hotmail each month. This is a huge untapped market for paid search. Moreover, Yahoo and Microsoft can use such ads to shore-up some of their other businesses. For instance, Yahoo could use such ads to lift its sagging Yahoo Auctions unit. Clearly, this new business model has the potential to transform previously stale money losing webmail services into highly valuable assets.

All of this suggests that in the coming months, Microsoft and Yahoo will roll-out much improved webmail user-interfaces, and complement their webmail services with automated email scanning systems for the purpose of ad placement.

More here.