Facebook is all the rage these days in Silicon Valley. Every day I hear about a new ‘killer app’ – or in Facebook terminology, ‘killer widget’ – that’s getting downloaded by the millions by Facebook users. In fact, I think that the best way to get any startup funding these days is to describe your company as a ‘Facebook widget monetized by Google AdSense.’ Even if this is a totally nonsensical concept, these are the buzzwords that make VCs start to reach for their checkbooks.

And as much as I like to be a contrarian when it comes to the latest Internet crazes, I have to admit that Facebook is pretty cool. It’s part social network, part voyeuristic, part cool tech apps. I could see myself spending way too much time on the site in the future.

Interestingly, as with all good ideas, Facebook isn’t really that novel. In fact, I’d argue that the basic concept of Facebook is no different than Classmates.com. Indeed, Classmates was founded in 1995, back when the founder of Facebook‘s voice was starting to crack.

So why, then, isn’t Classmates.com Facebook and Facebook nothing? What did Classmates.com do wrong and what did Facebook do right? And what’s to prevent a new challenger to Facebook from doing to Facebook what Facebook did to Classmates?

As with everything online, I have a theory . . .

Classmates.com: A Business Strategy without a Content Strategy

Classmates.com spent and made a lot of money. Unless you have only been surfing Craigslist and NPR.org for the last ten years, it’s hard to miss the ubiquitous Classmates banner ads across the Internet.

Back around 2000, I succumbed to the Siren’s song of the Classmates ads and signed up for a free account. No sooner had a signed up than I received a rather vague email telling me that “a classmate was trying to contact me.” I went into my account, only to discover that to actual see which classmate wanted to contact me, and what they had to say, I had to sign up for a paid account.

To me, this all smelled pretty funny. It reminded me of the Poetry.com ‘poetry contest’ I entered. I wrote the absolutely worst poem I could imagine (it was an ode to my friend Joel’s love of big belts – and even more amazingly, they still have it on their site – read it now by typing in last name “Rodnitzky”) and submitted it. Amazingly, my poem was selected to be published in a fine edition of poetry and I was strongly encouraged to purchase a copy of the book, as well as a trophy, and to attend an International Poet’s Conference. All in, my award was going to cost me $1000 or more.

And that was basically the strategy behind Classmates.com. Get people in the door by blitzing the ‘net with advertising, send them a vague come-hither message promising a reunion with an old pal or fling, and then monetize them.

Did it work? Well, basically yes. When Classmates was acquired by United Online in 2004, the site had 1.4 million paid subscribers, 10.3 million monthly active accounts, and more than 38 million registered members. In the first three quarters of 2004, the company generated revenues of $54 million – 75% from subscription fees. Oh, and they were acquired for $100 million.

On the flip side, however, Classmates must have spent hundreds of millions of dollars and bought hundreds of billions of advertising impressions to generate those 1.4 million subscribers. And even the revenues of $54M only brought in about $4M of operating income.

What this basically means is that Classmates had (and probably has) incredible subscriber churn. They spend a lot of money to acquire a customer, the customer sticks around for a few months, and leaves.

My guess is that customers leave Classmates for the same reason that I never subscribed in the first place – they feel that the site is basically doesn’t have content to keep them paying month after month.

Classmates.com drew people to the site by promising them the addresses of lost acquaintances. But once you got those addresses, what’s the point of sticking around? Why pay $30/month for the off chance that someone new from your high school comes aboard?

Imagine, on the other hand, what would have happened if Classmates had taken more of a Facebook approach. In other words, instead of just creating a database of people sorted by city and high school/college, what if Classmates had invested as much money in content creation as they did in their marketing?

So instead of serving 5 billion impressions of ads every month, they only served 1 billion, and spent the rest creating Facebook-like Apps and feature enhancements? Had they really built out a cool site 10 years ago – a site that actually gave people a reason to stick around for many months – they might have reduced their churn considerably.

And once churn is reduced, the subscribed base would have gone up, consumer interaction would have gone up, and profit would have gone up.

Instead, they went for the $100 million strategy – advertise, monetize, churn, wash, repeat. It worked pretty well. Until Facebook.

Facebook: Content Strategy, Business Strategy Unknown

Now that Facebook is free, I’ve got to assume that the subscriber base for Classmates.com is dropping like a rock. Facebook has basically taken the raison d’etre of subscribing to Classmates and given it away for free.

Moreover, Facebook is cool and sticky. It’s not just about getting information about lost friends, it’s a social community. Combine free and more fun and Classmates.com should just pack it up.

And – at least right now – you could argue that Facebook’s “free and sticky” strategy is also good business sense. After all, Yahoo has reportedly made several billion dollar plus offers for the company. So Classmates spent hundreds of millions to end up getting acquired for $100 million and Facebook has spent far less and is worth over a billion. Advantage Facebook, right?

Well, maybe. I would say that the jury is still out on whether Facebook will be an economic success. Yes, it’s true that someone will pay a lot of money for them at the moment. My question is whether Facebook will really be able to generate revenue as a company.

Facebook basically has the exact opposite problem Classmates had. Classmates was run by business folks who just wanted to find a way to charge people money. People got mad when they paid money and didn’t get much value out of their payment. So they left.

Facebook is run by content people who initially just wanted to find a way to provide great content to people. If Facebook tries to directly monetize their users (either through direct subscription costs, premium services, or heavier advertising presence), their users will get made because they’ll feel that the ‘spirit’ of Facebook is being violated.

It’s possible that such a user backlash could lead to a wide-scale revolt and exodus from Facebook. We are talking about some very touchy, indignant users here. Just ask Facebook about what happened when they released their “new feed” product. As TechCrunch reported at the time:

Frank Gruber notes that a Facebook group has been formed called “Students Against Facebook News Feed”. A commenter in our previous post said the group was closing in on 100,000 members as of 9:33 PM PST, less than a day after the new features were launched. There are rumors of hundreds of other Facebook groups calling for a removal of the new features. A site calling to boycott Facebook on September 12 has also been put up, as well as a petition to have the features removed. Other sites are popping up as well. There seems to be no counterbalancing group or groups in favor of the changes.

Keep in mind, this wasn’t an attempt to monetize users – it was a feature that would reveal limited user information to that user’s friends.

So imagine the outcry when Facebook announces that users can purchase additional bandwidth for a certain cost, or that a large part of the real estate on every Facebook’s user’s page will be sponsored. It could get ugly.

Classmates, Facebook, Something in Between?

My point is basically this: Classmates and Facebook went about creating business with polar opposite approaches – one business-focused at the expense of content, and the other content-focused at the expense of business. In both cases, the companies failed (or have failed to date) to recognize that business without content will fail, and content without business will also fail.

To truly survive as a long-term online business you need to do both. Is Facebook a financial success? Ask me in two years.

1 Comment

  1. Jeremy August 12th, 2007

    Dave,Paraphrasing your post, Facebook is more interesting and more successful than Classmates because it is a destination site (not a utility) that has a chance of becoming a homepage for its users, and thereby usurp the portals. Its feed and its many communications tools (private AND public) are what allow it a shot at this spot. Classmates is still a healthy and growing business but hasn’t seen the inflection in growth that FB has – just compare PV/UU/mth for the two. my 2c

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David Rodnitzky
David Rodnitzky is founder and CEO of 3Q Digital (formerly PPC Associates), a position he has held since the Company's inception in 2008. Prior to 3Q Digital, he held senior marketing roles at several Internet companies, including Rentals.com (2000-2001), FindLaw (2001-2004), Adteractive (2004-2006), and Mercantila (2007-2008). David currently serves on advisory boards for several companies, including Marin Software, MediaBoost, Mediacause, and a stealth travel start-up. David is a regular speaker at major digital marketing conferences and has contributed to numerous influential publications, including Venture Capital Journal, CNN Radio, Newsweek, Advertising Age, and NPR's Marketplace. David has a B.A. with honors from the University of Chicago and a J.D. with honors from the University of Iowa. In his spare time, David enjoys salmon fishing, hiking, spending time with his family, and watching the Iowa Hawkeyes, not necessarily in that order.