Adam Lashinsky
Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks), the online-media company that prides itself on letting other companies connect its customers to the Internet, plans to announce on Monday an expansion of its free-Internet-access program, sources say. The free-ISP initiative began as a successful experiment with Kmart's BlueLight.com Web site, which offers free Internet access. By expanding the free-ISP service to additional bricks-and-mortar retailers, Yahoo! hopes to grow its user base at a time when Wall Street is concerned that slowing advertising will hurt the company's revenue.
The free-ISP move also is a subtle shot across the bow of America Online(AOL Quote - Cramer on AOL - Stock Picks), which continues to derive a significant percentage of its revenue from its 23 million subscribers, who pay $21.95 a month for Internet access. Yahoo! has steadfastly stayed away from competing on Internet connections against AOL, Excite@Home (ATHM Quote - Cramer on ATHM - Stock Picks) and other Internet service providers. And it isn't planning to change course by going directly after AOL with a Yahoo!-branded Internet service. But according to people close to Yahoo! and its partners, it will announce a cookie-cutter program to sign up additional retailers for the service it offers with start-up Spinway, a free ISP service based in San Francisco. Yahoo! has already signed up catalog retailer Spiegel. Two sources reveal that another major retailing partner to join Yahoo!'s fold will be Toys R Us, though the two companies don't plan to announce their arrangement until the toy retailer is ready to launch its service later in the year. Spinway is a reseller of Internet service, meaning it purchases lines from other service providers and makes its money by selling ads and providing partners like Yahoo! with ad-targeting technology. Its strategy is to keep its expenses minimal by not building a brand -- unlike free-access provider NetZero (NZRO Quote - Cramer on NZRO - Stock Picks), which is spending heavily to promote its name -- and by not owning its own network. Neither Yahoo! nor Spinway would confirm plans for a broader service offering, or confirm that the companies will make an announcement as soon as Monday. However, Drew Lanham, senior director of business development for Yahoo!, acknowledged that the free-ISP experiment with BlueLight.com has been successful for Yahoo! and that the company plans to recruit other retailers with Spinway as its technology provider. "We're a media brand, not an access play," says Lanham, explaining that Yahoo! wants wherever possible to let someone else shoulder the costs of signing up Internet customers. The benefit to Yahoo! is that retailers include Yahoo!'s tools -- including email, messaging and stock-portfolio tracking -- which are incorporated into the Internet service, thus driving traffic to Yahoo!'s sites. BlueLight.com, which began operations late last year and had a six-month exclusive arrangement with Yahoo!, has signed up nearly 3 million customers by distributing CD-ROM disks in Kmart stores and through its Web site. "Yahoo! delivered what it is we were looking for, and we think we mined the Yahoo! base well," says Mark Goldstein, CEO of BlueLight.com. "We welcome the other merchants to the table." Yahoo!'s Lanham says the company will expand its relationships to other merchants that deal directly with the public. Examples include photo shops and retail banks, which offer Yahoo! off-line promotional opportunities and the ability to sign up new Yahoo! users. He didn't specify which photo-shop retailers or banks Yahoo! is negotiating deals with. Lanham says that 40% of new BlueLight.com users are new to the Internet and 40% come from America Online. For its part, AOL maintains that it is not perturbed by Yahoo!'s support of free ISPs. Indeed, AOL has defied predictions that free service would erode its growth by continuing to add customers at the rate of roughly 5 million per year. "The market segments [between brand-conscious and value-conscious consumers] are so different," says a spokeswoman for AOL, noting that AOL has continued to grow by offering AOL service for $21.95 per month and its CompuServe service for $19.95 a month, minus steep discounts that CompuServe uses to hook value-conscious customers. "Access rates aren't going up," counters Yahoo's Lanham. "ISP access wants to be free." Yahoo! reports earnings Tuesday after markets close. Its stock has lost 9% in the last three days; on Friday it lost 5 7/8, or 4.8%, to close at 116 1/2, following a downgrade by an analyst with Deutsche Banc Alex. Brown. Spinway was founded in 1999 and has attracted a raft of prominent investors. These include Softbank Venture Capital, Al Shugart International, Mentor Venture Partners, Deutsche Banc Alex. Brown and Spectrum Equity Investors. Dan Robinson, Spinway's founder and CEO, noted that Spinway and Yahoo! have publicly stated a desire to add more partners. But he declined to comment on any impending announcement, saying that "Yahoo! is a public company that happens to be reporting its earnings on Tuesday."
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