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Toys "R" Us, Yahoo may partner on free ISP

The toy retailer and Web portal are close to partnering on a free Internet service featuring Yahoo's content and services, according to people familiar with the deal.

Toys "R" Us and Yahoo are close to partnering on a free Internet service featuring the Web giant's content and services, according to people familiar with the deal.

The service will mirror BlueLight.com, a partnership between Yahoo, Kmart and free Internet service provider Spinway.com.

Like BlueLight, the Toys "R" Us online service will use Spinway.com as its access provider and Yahoo as its default home page, sources said. Toys "R" Us will distribute free CD-ROMs for the ISP in its retail stores under a plan that could be announced within the month.

Representatives from Yahoo and Spinway declined to comment on "rumors and speculation." A Toysrus.com spokeswoman declined to comment as well.

A deal with Toys "R" Us would expand on Yahoo's efforts to use brick-and-mortar chains to market its service to mainstream consumers and become the Internet entry point for more first-time users. Such a position could become more important to Yahoo as it competes more fiercely with America Online to reach new consumers with little technology know-how and turn them into repeat viewers.

"Yahoo is slightly disadvantaged in that it doesn't own the customer in the way that AOL does," said Jordan Rohan, an equity analyst at Wit Soundview. "AOL has a more proprietary hold on it customer base than Yahoo does by virtue of its role as an ISP."

As of March, nearly two months after it launched, Yahoo and Kmart's BlueLight partnership announced it had accumulated 1 million members.

While Yahoo has outpaced rival portals in traffic and revenue, analysts have recently called attention to potential weakness in its primary advertising revenue stream.

Shares of Yahoo took a hit last week after Merrill Lynch analyst Henry Blodget issued a report predicting a "strong but slightly less robust" second quarter from the company. The report blamed the expectation partly on a drop in online advertising demand as a result of "reduced spending by cash-constrained dot-coms."

For Toys "R" Us, a deal could give the company's troubled online efforts new legitimacy. Toysrus.com has suffered a string of black eyes since its launch last August, culminating last Christmas season when consumers complained of missed deliveries and the company was hit with a class-action lawsuit.

Analysts also said a Toys "R" Us deal could set the stage for Yahoo and Spinway to partner with other retailers down the road.

"The combination is a really good one," one source said about the Yahoo-Spinway partnership and potential future deals with retailers. "They're taking all steps to make sure it's always that solution."