A string of Internet-retail partnerships announced this week promise to heat up competition among the major Internet access providers, resulting in a barrage of bargains for the millions of Americans still off-line, industry analysts say.
Yahoo, the world's most popular Web search and directory site, said yesterday that it is teaming with Kmart Corp. to offer a free Internet service to the retail giant's customers. Some Wall Street analysts said the offering represents the first serious threat to the markets of access providers such as America Online Inc., which charge a monthly fee of around $20.
For its part, AOL announced yesterday that it will set up computer displays in Circuit City's 615 stores nationwide so that visitors can preview the service and sign up in the stores. Last month, Microsoft Corp. announced a similar deal to set up kiosks in the 7,000 Radio Shack stores.
And for about a week now, Wall Street analysts have said that AOL and Wal-Mart have been in talks about an alliance. And on Tuesday, Best Buy, the largest consumer electronics chain, said it would soon announce its own deal with an undisclosed Internet company.
The partnering strategy aims to attract the next wave of Web users--those with moderate incomes and those who are less tech-savvy.
None of these alliances is exclusive. Analysts say the increased visibility of the fight--in stores that serve tens of millions of customers each week--will likely lead service providers to offer creative incentives or even slash prices to stand out.
MSN, for instance, already offers Best Buy customers $400 rebates on computer purchases. CompuServe, which is owned by AOL, recently jumped in with a similar deal at Circuit City stores.
The entrance of the Yahoo name into the free ISP market could be especially foreboding to pay-per-month services that make a huge portion of their revenue off customer fees. Starting next week, visitors to Kmart's 2,000-plus stores will be able to sign up for the free service, which will be launched in February.
The Kmart-Yahoo service, called BlueLight.com, will link users directly to a co-branded Yahoo. Kmart, based in Troy, Mich., will own 60 percent of the venture, which also will get a $62.5 million infusion from Softbank Venture Capital and an undisclosed amount from Martha Stewart Living Omnimedia Inc. The service hopes to make money from advertising.
Until now, free ISP service has been limited to relatively minor players such as NetZero Inc. of Westlake Village, Calif. And most analysts had dismissed the free services, comparing paid ISP access to cable television. But yesterday several analysts, including Henry Blodget of Merrill Lynch, said the trusted Yahoo trademark "lends credibility to the free access trend, which we now expect to be a long-term issue for the industry."
In a report yesterday, Blodget speculated that AOL may be forced to offer an Internet access service for free under the Netscape brand, which it purchased a little more than a year ago.
Indeed, as an incident last summer shows, companies such as AOL with soaring stock prices must worry even about the perception that these free services might be able to invade their market. Rumors that Microsoft would offer a free service drove AOL's stock down 50 percent, although it quickly recovered when Microsoft's plans failed to emerge.
Nonetheless, Kirstin Kappos, vice president of investor relations at EarthLink Networks Inc., which after a pending merger with Atlanta-based MindSpring will be the second-largest provider after AOL, said she is unconcerned.
"You get what you pay for," she said. "If you don't mind these pervasive ads in front of you and your personal, private information sold to marketing customers, then you go with a free service. Our customers don't want that."
Jim Preissler, an Internet analyst with PaineWebber, said the agreement between AOL and Circuit City, based in Richmond, could boost the ISP's presence in the high-speed Internet access market, long seen as a weakness for AOL. Competitors such as EarthLink and Microsoft have been aggressive in moving into that market; indeed, EarthLink is today expected to announce a major partnership to develop content such as live access to video with ABCNews.com, ESPN.com, FoxNews.com and others.