I guess we should have seen this coming. United Online (NASDAQ:UNTD) is scrapping its IPO for Classmates Media, a spin-off that would have let investors buy directly into the Classmates social-networking site and the MyPoints.com loyalty-shopping hub.

With United's flagship Juno and NetZero Web access businesses languishing, this should have been the company's chance to birth a growth stock worth more than the sum of its parts.

It didn't hurt that Classmates.com is considered a social-networking pioneer, at a time when News Corp. (NYSE:NWS) is laughing its way to the bank on its MySpace purchase, and Microsoft (NASDAQ:MSFT) is bankrolling a suspicious investment that values Facebook at a whopping $15 billion.

Investors weren't born yesterday. They didn't need an Ivy League college degree to know that pioneer badges can be worthless. So what if Classmates predates MySpace, Facebook, Bebo, or Google's (NASDAQ:GOOG) Orkut? If rings around the bark are all that mattered, Friendster and Tribe.net would be Wall Street rock stars.

They're not, and neither is Classmates.

Stay classy, Classmates
I ripped into Classmates' financials when the plan to go public was first announced. Classmates.com was a money-losing premium membership site for college alums when United acquired it for a mere $100 million three years ago.

It didn't clean up any nicer under new ownership, with operating losses continuing to pile up. The real star of the Classmates Media IPO would have actually been the consistently profitable MyPoints.

Classmates blew it long before the IPO got shelved this morning. The site was in the right place at the right time, but it was positioned the wrong way. Instead of embracing the open-ended ways of the real stars of social networking, Classmates spent too much time as a walled community with little to offer those who weren't willing to pay for access. The site had amassed user registrations 50 million deep over the years, but just a sliver of those were paying customers and active participants.

"It's a pity," I wrote this summer. "You've probably seen the Classmates ads for years, urging you to check in on how your former classmates turned out. This was before Facebook became a campus sensation, or LinkedIn became the corporate networking standard. Classmates arrived fashionably early to social networking, but forgot to set its watch ahead a notch to Web 2.0."

Getting it right the next time
United Online isn't going to give up. It will take a roughly $5 million hit during the quarter for withdrawing its IPO registration, but you can already see the company positioning itself to give it another go if Classmates can get it right in the future.

Classmates.com sent out an email to its registered users earlier this month, declaring new user-friendly features that open up more of the site to the freeloaders, while also encouraging them to post digital snapshots.

It's not quite Facebookesque, but at least it's a step in that direction.

At this point, any change at Classmates would be refreshing. Within its niche, it's losing market share to Reunion.com. Instead of focusing on the 47 million of its 50 million registered users that aren't paying subscribers, Classmates needs to address the 37.2 million previous registrants who are now inactive.

Classmates is unlikely to stray from the pole position it commands in keeping college grads in touch. It's too competitive to skew younger. MySpace has the teens, while Facebook and smaller sites like College Tonight, IAC/InterActiveCorp's (NASDAQ:IACI) CollegeHumor.com, and Playboy's (NYSE:PLA) PlayboyU are gunning for the coeds before their cap-and-gown ceremony.

This finds Classmates best suited to make its mark as a more social version of LinkedIn, something that isn't going to happen until it takes a bulldozer to its walled community, making it more inviting to diploma-clutching cybersurfers.

Pulling the IPO is the right thing to do. United Online's stock opened 7% lower this morning, but the Classmates IPO was starting to take on the stench of fraternity row after a night of blowout keggers.

Did you even know that part of the plan was to kick a $50 million dividend back to United Online? And to print Classmates Media shares that had just a fraction of the voting power of the stake that United Online was keeping? That's bold for a hot company worth owning, but brazenly stupid for one teetering on the pass-fail line.

Investors will come to thank United Online for pulling the plug on what would have surely been another busted IPO (and with it, the ominous realization that United Online was probably valued at more than the sum of its parts).

Keep Classmates. Fix it. Then and only then will this be an IPO worth offering.

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