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Classmates IPO Least Likely to Succeed

The company will hit the public market with sluggish site traffic and growing competition.

Attention, fellow classmates of Skyline High School: If you want to contact me, use the email address above. It's free.

But Classmates.com is not. And that's the core problem with the imminent IPO from

Classmates Media

, the company running the popular alumni-tracking Web site.

I signed up for Classmates.com back in June 2000 -- when the term "social networking" referred to rooftop Bacchanalias. Back then, Classmates.com boasted 6.8 million registrants and vowed, "We are going to find them all, eventually."

Eventually is a long time. Only 128 members of my class have signed up, about one-fifth of the total, and nearly all have the barest profiles. Six of them have browsed my own minimalist profile over seven years (making me wonder if I wasn't a lonelier geek than I remember), and three have signed my guestbook.

I'll probably never know who those three are, because there's no reason for me to pay the subscription -- between $15 for three months and $59 for two years -- that's required in order for me to look at my guestbook and email other members. And if I send an email to any of them, they would have to buy a subscription to read it.

Classmates is pitching itself as the IPO equivalent of the poor man's Facebook, for people who can't wait to get in on the real thing.

But this is a case where waiting for the real thing is very much worth it.

Facebook has introduced a platform for which developers are going out of their way to write applications. Facebook has the feel of the Web's next generation about it. Facebook is free.

Classmates.com is none of these.

In the S-1 filing that Classmates Media submitted last month, the social-network angle was played up high: "Online social networking is rapidly growing and evolving to include a broad spectrum of Web sites and online services," the filing said.

Then it offered this bit of data: "From a category that attracted a relatively small number of users a few years ago, during June 2007, social networking Web sites attracted approximately 464.4 million unique visitors worldwide and an average of 155.4 million daily visitors."

True enough, but this glosses over the fact that Classmates.com may be losing share in that growing market -- and this is no position for an IPO candidate to be in.

According to

data

from Web analytics firm Compete.com, Classmates.com had been doing a decent job of holding pace with Facebook until this February, when the number of monthly visitors to Facebook began to surge. Facebook's visitors are up 124% in the last year while Classmates.com's visitors are down 3%. Both are still dwarfed by

News Corp.'s

(NWS) - Get Report

MySpace.

And as competition grows among social networks, Classmates.com's subscription-based model -- one of the few to be embraced among the most popular networks -- is likely to be even more of a disadvantage. Last year, subscriptions made up 58% of Classmates Media's revenue, mostly from the 2 million subscribers it had at year's end.

That growing competition seems especially relevant to potential investors, given that the Classmates.com site has failed to post an operating profit even since it was bought by its current parent,

United Online

(UNTD)

(which also owns the subscription-free, ad-supported ISPs NetZero and Juno).

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In 2002 and 2003, the company was then known as Classmates Online and had operating expenses equal to 86% and 80% of revenue, respectively. But as soon as United Online bought it in November 2004, it

started showing an operating loss

.

In the last six months of 2004 and all of 2005, respectively, operating expenses were 127% and 114% of revenue.

In April 2006, United Online bought MyPoints.com from

United Airlines

(UAUA)

(no relation) as part of the carrier's bankruptcy proceedings. MyPoints is a "loyalty marketing" company that rewards members with points for reading emails and shopping at MyPoints' marketing partners.

It's not clear how MyPoints and Classmates.com will help each other strategically, but MyPoints' profits are helping to shore up Classmates' losses ahead of its IPO. Classmates.com would have posted a $994,000 operating loss in 2006. But by rolling in MyPoints' profits, Classmates Media (the reorganized entity that now includes both companies) had a pro forma profit of $227,000.

Then there's the matter of where the proceeds from the IPO will go. While it's still not clear how much Classmates Media will raise, it's certain that the first $50 million will go to repay a loan that the company took out from its parent, United Online.

The loan was needed to pay a $50 million dividend to its parent, United Online.

If you think such a rich dividend is a sign of what's to come, don't hold your breath. The S-1 says it's "not representative of our dividend policy and should not be considered indicative of future dividends." Rotten luck, new investors.

These kinds of pre-IPO insider perks are growing

more and more common

these days.

EMC

(EMC)

received a $350 million dividend from

VMWare

(VMW) - Get Report

when it spun off its unit in a recent IPO. On the other hand, VMWare is probably the year's hottest IPO, while Classmates Media can expect a tepid response.

Classmates.com is no Facebook. Investors looking to get into a Facebook IPO -- which some are already predicting will be the biggest IPO since

Google

(GOOG) - Get Report

-- will have to wait for Facebook.

And if you're searching to re-connect with old high-school buddies, it's cheaper -- and easier -- to try Google itself.