Yahoo offers Costco members free Net access

Dubbed "Costco Free Unlimited Internet Access," the ISP will be offered to Costco's 25 million U.S. members. Similar to its deal with Kmart, Yahoo will provide its My Yahoo personalization services, and Spinway will power free Internet access. Costco will also receive preferred exposure throughout Yahoo to market its merchandise to Net users.

The deal is another example of online companies trying to attract Internet newcomers to their services and of offline retailers trying to step further into e-commerce. Retail stores have become the latest battlefront for Internet companies because they can potentially tap consumers trying to take their first steps online.

"It's an extension of our fusion marketing program where we're helping advertisers build an audience and connect with audience online," said Drew Lanham, senior director of business development at Yahoo.

Already, Internet giants America Online and Microsoft have struck deals with retail chains Circuit City and RadioShack, respectively, to market their Internet services to computer shoppers.

For Yahoo, targeting more general goods retailers could help it attract more mainstream Americans as well as old-economy advertisers. Yahoo's free ISP with Kmart, BlueLight.com, had recorded 1 million customers as of March.

"I think that if they've been very successful with Kmart, they're trying to replicate that model and go after that demographic," said Emily Meehan, an analyst at market research firm The Yankee Group. "It's another initiative for Yahoo to try to snap up and get cozy with the consumer segment."

Yahoo also faces competitive pressures from AOL, which is the world's largest ISP with 24 million paying subscribers. Like AOL, the Yahoo-Spinway partnership bundles content and services with Internet access.

Spinway has attracted some 5 million people through such partnerships, according to the company. But it is uncertain that these deals put competitive pressure on AOL, which also is attempting to attract mainstream Americans.

Separately, the business of free ISPs remains questionable. People who use services such as NetZero and CMGI's 1stUp.com do not pay monthly subscription fees, but in return they must accept persistent ad banners on their browsers. Spinway relies on banner ads and video-streaming ads. But unlike other free ISPs, Spinway customers are not required to click on the ads.

AOL has historically criticized the free ISP business and has shied away from launching similar services in the United States. AOL executives have remained adamant that their brand and content will continue to attract new subscribers.

"AOL has really been the only ISP to date that has proven that content and access belong together," said Bruce Kasrel, an analyst at Forrester Research. "These free ISPs have done a good job in getting sign ups, but none of them have come to the forefront and said, 'Our users stay online longer and buy more things.'"

Today's deal is another milestone in the Yahoo-Spinway partnership. The companies are targeting large offline retailers to not only attract more people to their services, but also to get more people to view advertising. This could be beneficial given the increased scrutiny of the health of online advertising and fears that a souring market and a spate of closures among consumer Internet companies will hurt revenue growth.

The effects of these deals have not been clearly seen in Yahoo's bottom line. But the indirect effects may aid the portal giant. Jordan Rohan, an equity analyst at Wit SoundView, said the retail partnership could give the companies an advantage in luring offline advertisers peddling merchandise and other products. As advertising from dot-com companies dries up, it will be crucial for Yahoo to show that traditional advertisers still want online real estate.

The deal "should help to increase the amount of major retailers and consumer goods marketers that advertise on Yahoo," Rohan said. "And that will affect bottom line dramatically."