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Classmates.com: Signpost for the Net?

Unlike many other dot-coms, this nostalgia site survived the Internet implosion because it charged money from the start. Get used to it, says CEO Michael Schutzler: The days of "information just wants to be free" are ending.

Remember 1995? The future was the Internet and it was all about eyeballs. Profits would come later. Or so more than a few otherwise sane businesspeople believed at the time.

Classmates.com, a nostalgia site that started out that same year, decided to try a different route. Offering a mix of free and paid services, the company gradually--and quietly--built a business which centered around offering subscribers a way to reunite with lost school chums.

Then about two years ago, Classmates.com enjoyed a spurt of growth, helped in no small part by the flameout of so many dot-com operations and the concomitant collapse in online advertising rates.

Classmates.com, which subsequently emerged as the seventh-largest advertiser on the Internet, watched its database of names soar from approximately 5 million to its current 30 million entries. The privately held company has also been in the black since October of last year, according to Chief Executive Michael Schutzler, who joined Classmates.com in September 2000. Considering the carnage among so many Internet ventures, that's an accomplishment that many of Schutzler's rivals still can't claim.

CNET News.com recently spoke with Schutzler about his ambitions for Classmates.com and the future of paid sites on the Internet.

Q: You managed to avoid getting knocked down like so many of the other dot-coms. Do you think that's because the idea behind Classmates.com is compelling or because you charged subscribers from the get-go?
A: This thing works as a business model very well because we offer something that's already being done anyway. We're not changing a business model or paradigm or consumer behavior.

What do you mean?
When you get into your mid-30s, you look into the rearview mirror of life and think, "My God, how did I get here!" You want to know how Harry is. You haven't spoken with him in 25 years. That extends to college, work and the military. Our database is filled with people 30 or over--80 percent--and that makes it possible for people to reconnect.

The other reason is, again, we're not changing any business paradigm. The myth in the early days...was that information on the Internet wanted to be free, and the consumer won't want to pay for anything. Somehow, you'd make money. (Classmates.com) grew painfully slowly...a couple of years ago, we had 5 or 6 million names in the database. Then came the collapse of inflated advertising rates. We had a product that was compelling and had an opportunity to acquire new customers at an economically viable price.

That's a good segue. There's an ongoing debate about what people can be expected to pay for online (content). Classmates.com obviously come down on one side, a lot earlier than most other dot-coms. Do you think the free Web is destined to evolve into a paying or hybrid model?
I look at it a bit simplistically. To me, the Internet is a direct marketing medium, not a broadcast medium. Therefore, I look to the direct marketing universe to find models that might make sense; the ones that succeed in this space are the ones that work like direct models. You're either a cataloguer or a publisher. A cataloguer may have a whole suite of products, like the Amazon.com approach.

The myth in the early days...was that information on the Internet wanted to be free, and the consumer won't want to pay for anything.
The other side is the magazine or newspaper publisher; you can't make money on advertising alone unless you have an extremely tight niche where you dominate. On the Internet, if you're going to have content available, the only way you're going to make this a win is to create trial subscriptions; this notion of having some form of your product for free is like offering a sample. You give customers a taste of what you're offering and if they enjoy (it), they'll pay to taste what's behind the door. It's not a new model.

So is there a barrier to entry preventing somebody with deeper pockets from getting into this game? Or do you feel you've got the category locked up?
I never feel secure. We're of the mind that anybody who wants to do this can do this. It's a matter of time and money. It's much more difficult to compete with Classmates than it was. We've got 30 million names in our database and we're adding 1.5 million each month.

Would it be accurate to label this a nostalgia site?
Historically, absolutely. It's now a personal-networking site. We're about people connecting for any number of reasons. You have people coming to look for their birth parents, to date, to reconnect with old friends or reconnect with new friends. There's an entire message board in the military area about Vietnam and Desert Storm. These people are connecting because they had some experience in common and they're talking about what it's like to live in the U.S. today, and they support each other. It's a true online community.

I bump into advertisements for Classmates.com all over the place. The dot-com bust must have been a boon to you because advertising rates are down.
Yes, but not necessarily directly. We were using a subscription model from the beginning but we didn't really reach critical mass until a couple of years ago. The timing (of the bust) was propitious because we had started getting...word-of-mouth driven traffic to grow dramatically just as advertising rates normalized.

I saw you recently added a button to your service to point people to find former workplace colleagues. And you also have a link for military veterans as well. Are you reconsidering the name of your Web site?
No. If we were starting this company today, we wouldn't call it Classmates.com because it has become so much more than connecting with school buddies. But we've invested so much money in advertising in the last two years.

How many paying subscribers do you have and how many are you adding every month?
At the moment, we have 2 million paying subscribers. On a monthly basis, we're adding 185,000.

Is it reasonable to expect that rate to taper off?
Our goal is to get to 100 million by 2005, and I'm hoping between 10 million to 15 million will be paying.

Are you turning a profit yet?
We are.

Is that net or operating?
Net income. The kind of profit that the IRS likes.

In the past, like all good start-ups, it was, "Let's try this and see if it works." Now we're a bit more scientific.
In 1995, when the site got going, subscribers could buy a lifetime membership for five bucks. Now it's how much, three bucks a month? So that's $36 for the full year. How do you establish what the price should be?
In the past, like all good start-ups, it was, "Let's try this and see if it works." Now we're a bit more scientific. We've tested pricing to see what makes most sense and we will adjust as it makes sense in the market.

There's one reaction I've heard from people responding to your site, which is, "I hated high school and the people I went to high school with and this is the last thing I'd want to do." How do you get over that hump?
We've got so much more than high school. If they don't want to reconnect with people from high school, they can reconnect with people they knew in college, work buddies, or the military. Also, there's a whole bunch of people who want to keep score. There's a segment that wants to find out if they have a BMW or did they gain weight or not. They want to read the profiles.

In your registration process, there are a series of opt-in choices for people to receive updates and special offers from third parties doing business with Classmates.com. What's the positive response rate?
We don't give out details. Most people sign up on the e-mail that we have which alerts you to new people who joined the organizations you're affiliated with. I'm always surprised how many people are interested in hearing about good deals. It's not everybody's cup of tea (though).

You've had an increasingly high profile. Just this year, you've been featured in Forbes, U.S. News & World Report, the Seattle Times, USA Today, Time and News.com. Are you folks getting ready for an IPO?
(Laughing). I don't know if a company like ours will ever be able to go public. Our philosophy is we have every interest in building a strong, long-lasting company that serves customers really well. Maybe that means an IPO or maybe it means getting bought, or both. But we figure if we do a good job, all that stuff which should come to pass will come to pass.