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I've always wondered how websites such as hotmail, gmail, yahoo, and all those other have set up an e-mail system for users.

I've googled, and asked people, but I've had no luck in finding out what you need to do this.

Say I want to set up a service on my website, xenmedia.org, for users to create e-mail accounts (e.g. xeno@xenmedia.org). I would see the e-mail working just like hotmail, and yahoo, and gmail etc. You can receive and send between xenmedia.org email addresses and all other email addresses in the world.

Should I buy a server for that? Or does it require something else entirely?

Thanks,
Xeno

Well accessing (I would assume) only pop3s or SMTP or whatever the term is to the mail server. Then displays HTML based off of that. Look for Squirrel mail. It's an online browser for web mail. I'd assume your host has a mail server, so you should simply need to create the email with your cpanel.

I've looked into it, it seems to me like there's not much open source software out there that will let you set up a mail server anyone can sign up for.

Check out http://www.horde.org/

It seems to me like you'll need to set something up that allows users to create their own email accounts though, I haven't done a lot of research into it, but it's not an easy task.

If you're looking for a just setting up a few email accounts for you and your buddies, then your website host should allow you to do that for free for a certain number of accounts. If not, you should look at switching web hosts.

If you're trying to make another "gmail", then you will definately need your own server or vps.