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Thursday, June 14, 2001
 
2001 Small Business profiles

Classmates.com: Fees are fine

By Monica Soto
Seattle Times technology reporter


Jimi Lott / The Seattle Times
Michael Schutzler, president and CEO of Classmates.com, sits below the high-school portraits of Elvis Presley, Janis Joplin, John Elway and Joe Montana. The online service can help you connect with your former classmates, famous or not.

In 1995, Classmates.com charged a modest $5 for a lifetime membership. Even then, Randy Conrads believed his customers would either pay for his service or he didn't belong in business.

If Conrads' approach sounds logical now, it wasn't the conventional wisdom most Internet businesses followed two to three years ago.

The majority of content sites--even early Internet darlings such as TheStreet.com and Salon.com--operated under the assumption that in order to survive in a competitive marketplace they should sell banner ads and give their product away.

As the same Internet sites struggle to build subscription-based businesses or go under, Renton-based Classmates has amassed 20 million names in its high-school and military directories. Of those registered, roughly 1.2 million have paid a subscription fee as high as $29.95 annually to have access to e-mail addresses of fellow alumni and use other services such as high-school reunion-planning tools and message boards.

That places Classmates in rare company, with a sliver of other successful subscription-based online businesses, including Consumer Reports, The Wall Street Journal and America Online.

"Given the right value proposition, (consumers) will spend," said Dan O'Brien, a media analyst for Cambridge, Mass.- based Forrester Research. "It's just (that) they won't spend to browse through content."

To be sure, Forrester predicts consumers will spend $423 million for online content this year, with the number jumping to $2.1 billion by 2005. And more executives are touting online subscriptions these days, comparing the fledgling business model to the early days of cable.

O'Brien said the challenge for content businesses is to change the behavior of users conditioned to get something for nothing. "The mindset seems to be, `I paid my $20 to access the Web and everything should be free,' " he said.

With the switch such a delicate matter, Internet sites have tried to find creative ways to introduce paid services to customers. Menlo Park, Calif.-based Homestead.com, which offers a Web-site-building service, notified its 11 million users this week that it would start charging for services. The letter asks the customers what they could be willing to pay. "I think AOL is someone that has proven that (business model) and Yahoo! is someone that hasn't," said Chief Executive Justin Kitch. "You want to be an AOL in this market."

In the case of Classmates, Conrads, a retired Boeing engineer, started the business after failing to find former high-school classmates through directories listed on AOL and Prodigy.

After amassing its first 1 million customers, the company received an angel investment, then venture-capital financing. To date, the company has raised $15 million, $13 million of which came from Madrona Venture Group, Arch Venture Partners and Brand Equity Ventures.

Michael Schutzler, Classmates' president and chief executive officer, who joined the company last September, said the company is now adding new users at the rate of 80,000 to 100,000 per day. From January to May, with the help of heavy advertising, it registered 10.7 million new basic members (who pay no fee) and 548,000 new "gold" members, who paid a $29.95 annual subscription fee.

Schutzler said that volume has helped the company become cash-flow positive, with plans to turn a net profit by October. It also expects to post $40 million revenue and $30 million in deferred revenue this year. (Because of new accounting rules, every $29.95 subscription must be recorded as sales of $2.50 per month.)

Paul Goodrich, a managing director at Madrona, a Classmates' investor, said one of the company's most critical assets is its 20-million-user base--something it amassed with smart advertising.

"They were doing the heavy lifting that is required to actually know how much it costs to get a customer and how to get a customer at the lowest cost," he said.

Schutzler, the CEO, said the company plans to launch more categories in July, including listings for elementary, junior-high and vocational/technical schools, plus colleges, sororities and fraternities.

Corporate directories listing current and former employees should follow in the fall. Classmates raised its subscription price to $29.95 a year ago. The question now is whether those subscribers will continue to pay for the service.

The challenge, Goodrich said, is "to augment the content they're offering so the reason you go back to Classmates is only, in part, because it allows you to stay in touch with your classmates."

Goodrich himself has searched for his old Navy buddies online. Regrettably, they have not yet signed up with the services.

"Not yet," he said. "I'm waiting."

Monica Soto may be reached at 206-515-5632 or msoto@seattletimes.com.

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