IPO Spotlight: Classmates Media

NEW YORK (AP) – As the popularity of social networking Web sites like Facebook Inc. and News Corp.'s MySpace.com has skyrocketed, so have the numbers of high profile investors looking to cash in on the trend.

In October, Microsoft Corp. valued privately held Facebook at $15 billion by paying $240 million for a 1.6 percent stake in the company.

Classmates Media Corp., which operates the social networking site Classmates.com, is hoping to capitalize on the excitement with an initial public offering this week.

Classmates, a subsidiary of United Online, is wooing investors with its large membership base and strong revenue growth. The Woodland Hills, Calif.-based company has more than 50 million users, only slightly less than Facebook's 57 million users. Classmates also increased its revenue 44 percent to $140.1 million in first nine months of 2007.

Several key differences in Classmates' business model, however, have raised concerns among some analysts.

Unlike Facebook and MySpace, which are free for users, Classmates.com has a two-tier membership structure with a paid subscription option. A paid subscription includes more services, like a digital guestbook that alerts members when their profiles are viewed. Classmates.com has boosted the number of its paying members to about 3 million as of Sept. 30.

But Sam Snyder, an analyst at IPO research firm Renaissance Capital, said investors are concerned that paid membership growth is not sustainable, particularly while rivals offer similar services for free.

The company also retains many of its paid members through automatic subscription renewals, which are now the subject of a Federal Trade Commission probe. In its prospectus, Classmates said any change to its renewal policies could hurt the company's renewal rates.

Scott Sweet, managing director of research firm IPO Boutique, also noted that users spend significantly more time on MySpace and Facebook than on Classmates.com.

According to comScore Media Metrix, the average visitor spent about 8.3 minutes on Classmates.com Web sites in October, compared with 195.6 minutes on Facebook.com and 192.9 minutes on MySpace.com.

Of Classmates.com's 50 million members, only about 12.8 million accounts were considered “active” during the third quarter.

“If we are unable to encourage our members to interact more frequently with our social networking Web sites and to increase the amount of user generated content they provide, our ability to attract new users to our Web sites, convert free members to paying subscribers and attract advertisers to our Web sites will be adversely affected,” Classmates wrote it its prospectus.

Classmates is not a pure-play social networking company. Classmates also owns MyPoints, an online targeted advertising program with more than 8 million members. MyPoints' members win points for certain online activities, like shopping online and taking surveys, which can be redeemed for gift certificates with companies including Amazon.com, iTunes, Macy's, The Ritz-Carlton and Target.

Chairman and Chief Executive Mark R. Goldston has said the company plans to integrate its MyPoints service with Classmates.com, but as Facebook has learned, there are potential pitfalls in mixing social networking and targeted advertising.

Last week, Facebook was forced to apologize for its use of a marketing tool called “Beacon,” which tracked its users' purchases and activity at dozens of Web sites and published the information on its network.

Classmates plans to list its shares on the Nasdaq Global Market under the symbol “CLAS.”