Well I fix a lot of computers and I have seen this in two cases.
One, if you don't have XP as your operating system, it won't work with Outlook anymore, Microsoft wants to sell their operating system and want to discourage users by pulling tricks like the Outlook hotmail combo.
Secondly, if you have XP but do not have a private email account with your ISP already linked with Outlook, then hotmail on Outlook won't work. You will have to enter your ISP email account before the hotmail account, and not the opposite.