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There It Goes: United Online Cancels Classmates IPO

So much for the first pure-play social networking IPO in U.S.: United Online (NSDQ: UNTD) has canceled the proposed IPO of its social networking unit. The company originally announced its plan to hive off the company in August, and in late November it said it expected to raise $177.7 million via the sale. But, citing the standard “market conditions,” the company now says that such a move wouldn’t be in the interest of stockholders. In other words, the interest wasn’t there. While there had been some excitement over a social networking pure-play IPO,, with its subscription-driven business model and earth-bound growth rates, couldn’t fully capture the buzz. United Online said it will take a $4.5-$5.5 million charge in Q4 associated with the aborted process. Release.

A recent report from Cowen & Co. analyst Jim Friedland spells out exactly why United Online couldn’t cash in with Classmates. One line sums up his thesis: “We expect the subscriber base to peak in the first half of 2008, followed by a steady decline to zero by 2012.” Much of the report hones in on the fact that Classmates is no Facebook. The biggest difference is that Facebook is free and offers far more robust features. Other factors weighing on Classmates:

— Classmates has little value for young users, since there’s no need for them to re-connect; they’re already connected through other sites. Meanwhile, Facebook is making major inroads into Classmates’ adult demographic.
— User engagement is 95 percent lower than on Facebook, suggesting that users see little value in the service they’re paying for
— The company’s auto-renewal system has come under investigation at the FTC, potentially causing churn to spike.

3 Responses to “There It Goes: United Online Cancels Classmates IPO”

  1. It isn't much of a surprise that investors weren't tickled by this IPO. Here is the basic pitch:

    "We know that we need to get rid of the subscription model. But that means losing $80 million in revenues, per year, until we can build up the advertising business. We plan to use your $177 million to weather the storm while we change our business model. Oh, and that assumes of course that at the end of the day we can compete adequately with Facebook and MySpace, and that we continue spending $20 million a quarter on marketing just to stay alive . . ."

    So . . . who is going to bite the bullet and monetize those 50 million users?

  2. big bopper

    Classmates was once the poster child for monetizing content on the Web. But, they really dropped the ball as conditions changed around them. I always found the user experience a bit calculating and dishonest but they were a bright shining star for awhile despite all that. Guess it just goes to show that you should be good to your customers and keep in touch with what is going on with them…

  3. John C. Smith

    This always seemed like a pipe dream in any case. (As in crack pipe.)

    Charles Hilliard was completely the brains of that operation, and with him gone (to run Demand Media) don't think UNTD has the juice or genius in house to leverage the (not inconsiderable) cash generated by its declining asset(s) into something sustainable.

    Ride the dividend, RIP. (although dial-up ISP will continue to generate cash into the next decade.)