E-tailer Absorbs Failed Free ISP

To prevent the potential loss of over 5.2 million customers during the holiday season, Kmart-backed discount e-tailer BlueLight.com said Monday it is buying select assets from its defunct free Internet access provider, Spinway.com.

As part of the acquisition, BlueLight will hire about 30 Spinway employees to operate the free ISP as an independent BlueLight unit. BlueLight did not say whether it will maintain the free ISP service after the holidays.

Thrown into the complicated deal is Internet powerhouse Yahoo!, which inked an agreement with Spinway in July to sell content and Internet access bundles to the portal's retail partners, including Barnesandnoble.com, Costco and Spiegel. The three retail giants will now have to pay BlueLight to keep their free ISP customer accounts.

"According to BlueLight.com, the transition for their customers is expected to be seamless, and subscribers will see no lapse or change in service," Yahoo! said.

Spin Control

Spinway shut its site down Friday after it failed to earn back enough revenue from its ad sales to stay in business. Spinway was providing companies with Internet access that they can offer for free to their employees or customers.

According to published reports, BlueLight spokesperson Dave Karraker said the Spinway purchase costs were "minimal."

The Spinway closing is the latest in a series of free ISP failures. In July, Juno Online Services bought the assets of free ISPs Freewwweb and WorldSpy. Last month, CMGI closed its free Internet access provider 1stUp.com.

Steady Growth

According to a new report on free ISPs issued by PC Pitstop, a personal computer diagnostics and research company, 4 percent of Internet customers use a free ISP to connect to the Web. That figure is up from less than 2 percent six months ago.

According to the report, growth rates for Bluelight -- the second-leading free ISP, with a 1.5 percent share of the ISP market -- remain consistently steady. However, the report also found that despite a steady increase in advertising, users are not loyal to any given free ISP service.

Fee-based America Online and MSN still dominate the ISP market, garnering 7 percent and 3 percent of the market respectively.

Entry Barriers

The basic strategy of free ISPs is to market themselves heavily, attract a large customer base, then decrease marketing expenditures and start to build profit from ongoing banner advertising. However, some ISPs, such as Spinway, found that they were not able to move beyond their initial ad costs.

Additionally, the number of customers signing up for a free ISP does not necessarily reflect the number of people actually using it, which is a big turn off for advertisers.