IPO Spotlight: Classmates Media

As the popularity of social networking Web sites like Facebook Inc. and News Corp.'s MySpace.com has skyrocketed, the sites' older cousin is looking to cash in on the trend with an initial public offering this week.

Classmates Media Corp., whose IPO is expected to price this week, owns the social networking site Classmates.com, which has operated since 1995, as the Internet boom began.

The company's IPO will follow on the heels of a rash of high-profile investments in social networking Web sites.

In October, Microsoft Corp. paid $240 million for a 1.6 percent Facebook stake, beating out a competing offer from online search leader Google Inc. The transaction valued the company at $15 billion. More recently, Hong Kong billionaire Li Ka-shing invested $60 million in the company.

Classmates is spinning off from United Online Inc., a publicly traded Internet company, which acquired Classmates in 2004 and will continue to control the company after its IPO.

Classmates is wooing investors with its large membership base and strong revenue growth. The Woodland Hills, Calif.-based company has more than 50 million registrants.

Classmates increased its revenue 44 percent to $140.1 million in first nine months of 2007. During the same period, the company swung to a profit of $1.7 million, from a loss of $3.9 million in the prior year.

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, including paid subscriptions. A paid subscription includes more services, such as 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 from 1.8 million at the end of 2005.

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 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, the 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, the company said only about 12.8 million accounts were considered "active" during the third quarter. Facebook claims 57 million active users.

Classmates is not a pure-play social networking company. The company also owns MyPoints, an online targeted advertising program with more than 8 million members. MyPoints' members win points for certain activities, such as shopping online and taking surveys, which can be redeemed for gift certificates.

United online acquired MyPoints from United Airlines parent UAL Corp. in April 2006.

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 pitfalls in mixing social networking and targeted advertising.

This week, Facebook was forced to apologize for its use of a marketing tool called "Beacon," which tracked users' 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."