Under the terms of the deal, San Francisco-based BlueLight will acquire all of the intellectual property and ISP facilities of Spinway, in addition to retaining a group of key employees, BlueLight said in a statement.
Financial details of the deal were not disclosed.
Sunnyvale, Calif.-based Spinway provides Internet access to companies, which can then offer free services to their employees or customers. Yahoo and NBC Internet use Spinway to offer free ISP services. In October, Hewlett-Packard began offering Spinway ISP services for free in some of its computers.
The services of Spinway, which will no longer exist as a company, will be absorbed into BlueLight, the e-commerce subsidiary of national retail chain Kmart.
Spinway's closing is one example of the effect the market shakeout has had on the free ISP industry, as many dot-com companies are closing shop, and several high-profile companies search for partners.
BlueLight said it is working with companies that offer Internet access through Spinway to determine if those services will continue through BlueLight.
Monday's announcement caps weeks of speculation about Spinway's future. Questions began swirling after ZipLink, a Lowell, Ma.-based wholesale Internet provider, disclosed that Spinway had defaulted on payments to the company.
In a press release announcing its closure, ZipLink said the decision "was influenced by a recent default on payments to ZipLink by its second-largest customer, Spinway.com, and general market uncertainty regarding the future of providers of free Internet access."
Rob Lancaster, an analyst at The Yankee Group, said BlueLight's decision to acquire Spinway's assets was likely fueled by the company's need to hold onto its customers during the holiday shopping season. Whether BlueLight will continue to operate the free ISP service remains a question.
BlueLight "will do this through the holiday season, and then I expect them to reassess their situation to decide whether a free ISP makes sense for them to maintain," Lancaster said.
In July, Spinway and Yahoo unveiled an agreement to sell a bundled package of content and Internet access to retail partners. The partnership was another instance of a portal teaming with a free ISP to attract new, mainstream Net users to its service.
Yahoo said Monday's decision would not change its existing partnerships with retailers.
"As a result of the agreement, BlueLight.com will maintain Spinway's service to customers using the free ISP offered by Barnes & Noble, Costco and Spiegel, which are fortified with Yahoo," the Web portal said in a statement. "According to BlueLight.com, the transition for their customers is expected to be seamless, and subscribers will see no lapse or change in service."
Since its launch last December, BlueLight has attracted more than 5.2 million subscribers.