Our intrepid hedge-fund correspondent has been hard at work dissecting the erstwhile Classmates Media deal. She saw through the marketing hype and predicted that the deal would be pulled–and, lo and behold, it has been. Given the likelihood that parent United Online (UNTD) will eventually try to shove this one down the market’s throat again, we’re running her analysis anyway:
Excited about the Classmates Media IPO? Don’t be. Though technically a social network, Classmates.com is miles behind Facebook, LinkedIn, MySpace, Bebo, and even Friendster.
In parent United Online’s quest to get a higher stock multiple–um, sorry, to “unlock value for shareholders”–by spinning off their Classmates.com and MyPoints properties, they have slapped lipstick on a pig. The first thing to remember is for whom they are unlocking value: current UNTD shareholders, not CLAS buyers. After the IPO, UNTD will continue to hold 80% of the CLAS stock, and 98% of the voting rights. New CLAS investors will be left holding the bag…
After years of mismanagement, Classmates’ seems to have made surface progress. The revenue and expense trends, for example, are encouraging. The recurring revenue stream is predictable, and is attached to a negative working capital business—all good. Classmates.com also has an additional revenue stream through online advertising, and management is keen on marrying their loyalty/lead generation program MyPoints to Classmates.com for even greater ad revenue potential. With bullish assumptions, the price range seems reasonable at $10-12 a share. And it should, because investment bankers get paid to convince you that you are getting a great deal.
Dig deeper, though, and there is no there there: Classmates.com’s most compelling new site innovations are only available if you pony up for a gold membership. Although Classmates.com has 50 million registered members, only 3 million pay an average of $3.33 a month for gold privileges. Churn on those 3 million members is about 4.6% a quarter, which means they have to find about 140,000 new folks willing to pay every quarter to prevent revenue erosion.
The other 47 million non-paying customers are, if you believe the company, an advertising goldmine. After all, Classmates can provide advertisers with all sorts of data such as age, geographic location, gender, and of course, “real name.” UNTD CEO Mark Goldston asserts that advertisers don’t want to market to Icepick72 and BomberGRRL on Facebook or MySpace because they don’t know who they are.
But smart marketers have figured out that psychographic information is much richer than demographic data when it comes to targeting. Facebook might not know my “real” name, but they know a lot about what I and my friends do and care about (maybe too much). Classmates.com knows where I, a non-paying member, went to high school and what year I graduated, but they have no clue what I’ve been up to since then or that I stopped listening to Dinosaur Jr when Lou Barlow left the band.
Also, you may be a non-paying Classmates.com member and not even know it. Only last week did I realise Classmates still considered me one of their members from when I visited the site and gave them my email address in 1999. Apparently, I’ve been a loyal, registered non-user for the better part of a decade. When I tried to cancel my phantom membership, I found there is virtually no way to, though you can stop their insipid emails. I wonder how much site traffic comes from people trying to make the promotional “You’re popular! Three people looked at your profile” emails cease.
According to the company, approximately 12 million uniques visit Classmates.com a quarter. I figure maybe 70% of paying members come once a quarter to look for old classmates, chat, and do the things one does on a social network. That leaves about 10 million visits unaccounted for, potentially good for ad revenue despite the fact users aren’t paying for the service. But then I figure that at least 140,000 gold members came to the site to cancel their membership, another 140,000 minimum decided they wanted to pay for gold membership, and that leaves around 9.5 million visits unaccounted for. At least 1 million probably came through teaser emails, but they won’t end up paying for gold, and another half a million came to unsubscribe from said emails. At least 100,000 people accidentally clicked a banner ad when they meant to read a news article, and, well, you get my point. There isn’t a whole lot of actual social networking activity at Classmates.com to monetise.
I could go on about why I think the CLAS deal stinks. But now it’s your turn: Any compelling reasons why my analysis is flawed?
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