It's definitely a case of MS playing catch-up to GMail. They didn't need to bother when Yahoo offered 6MB instead of Hotmail's paltry 2MB, but GMail's offering is so much larger that it's forced MS to react.
After sending and receiving numerous mails to and from my new GMail account (thanks again Richard M
) over the past couple of days, I still think GMail has better functionality than Hotmail. Maybe it's just cause it's still new, but I prefer the GMail way - I seem to be forever clicking to access next page after next page after next page to get to mails. GMail certainly seems to have taken considered usability very seriously