At a time when "dot com" companies are throwing billions at wacky online marketing campaigns, Internet service providers are opting for a decidedly old-fashioned approach to gathering new customers: Instead of trolling for them on the World Wide Web, find them at the corner store.
America Online Inc., the world's largest Internet service provider, is in negotiations with Wal-Mart Stores Inc., the world's largest retailer, about a possible marketing alliance.
Shares of both companies have jumped in recent days on speculation about a deal, which one investment firm called "imminent." Wal-Mart stock hit an all-time high yesterday, rising 7.5 percent, to $68. America Online shares edged up $2.50 to close at $94 after touching a 52-week high of $95.62 1/2 earlier in the day.
Sources at AOL confirmed that discussions were taking place. Officials from Wal-Mart declined to comment on the talks, which have been rumored on Wall Street for several weeks and were reported by the New York Times. A spokeswoman for Microsoft Corp. said the Seattle software giant has also been in talks with Wal-Mart about a possible partnership.
A number of other old-line/online deals have been struck recently, representing what some analysts call a revolution in Internet companies' attitudes toward bricks-and-mortar competitors. Even as established companies are trying to jump online, Internet companies are moving back to physical stores with "foot traffic"--blurring the line between the two.
Said Daniel Berry, a Merrill Lynch analyst who covers retailing, "I think in the long run most of the major successful Internet companies will be multichannel companies--with both online and off-line components."
In a major coup last month, Microsoft beat out AOL for a deal with Tandy Corp. to feature Internet products in Radio Shack's 7,000 stores. EarthLink Network Inc., which after a pending merger with MindSpring Enterprises Inc. would be the nation's second-largest Internet provider, already features kiosks at Fry's Electronics stores along the West Coast. And all the major service providers have dropped millions of colorful software disks at retail chains nationwide.
"Having a footprint in the local market has becoming more and more important. A lot of people talk about virtual models, but we believe that no company is truly virtual, especially if it's a consumer services company. People want to deal with a live person," said Abhishek Gami, an Internet analyst with William Blair & Co.
Microsoft, for instance, will train Radio Shack employees to help people install and navigate MSN, Microsoft's Internet service, said spokeswoman Deanne Sanford.
A Wal-Mart/AOL pact would be a substantial blow to other ISPs, which have been struggling to increase their market share against AOL's dominance but still have only several million customers each as opposed to AOL's 19 million, analysts say.
With 2,500 stores nationwide, Wal-Mart receives 90 million to 120 million visitors a week. Those customers, analysts say, represent what may be the country's last untapped demographic.
"Wal-Mart's customer base is not the techie crowd," Gami said. "It's the middle-class market. It's those who are trailing."
Youssef Squali, an Internet analyst at ING Barings, said, "If this relationship were to be true, [it] will bring the Internet to the masses."
Analysts said capturing this new generation of users is especially critical to the ISPs' growth today as the number of new Internet users has slowed down for the first time in the past six months.
According to a report released Friday by Richard Church, a Salomon Smith Barney analyst, Wal-Mart could act as a showroom for the AOL service. Wal-Mart could also sell cheap or free Internet devices that could feature a stripped-down version of AOL that could be cheaper than the standard service AOL sells for $21.95 a month. AOL already runs a similar co-branded product for computer maker Gateway Inc.
Dulles-based AOL already has smaller marketing deals with Blockbuster Inc., Circuit City Stores Inc., Barnes & Noble Inc. and other retailers to distribute free AOL 5.0 disks in their stores.
Other Internet services have launched successful marketing deals. MSN offers discounted service to members of the Costco buying club and $400 rebates to customers in Best Buy Co. electronics stores who buy personal computers along with three years of Internet service.
The possible deal between AOL and Wal-Mart, of Bentonville, Ark., also underscores the difficulty the retailer has had in breaking into the online market. Wal-Mart's first e-commerce site flopped, and the retailer missed its goal of launching a revamped service this holiday season. The new online store will open in January.
"In some ways you can look at this as almost like a surrender flag from Wal-Mart," said David Zale, vice president of equity research at Sands Brothers & Co.