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Dot-com content that works?

NetCap Ventures banker Tom Taulli says the example of Classmates.com provides instructive evidence that it's still possible to make money by offering online content.

When Classmates.com was founded in 1995, the company decided to use the subscription model. "If customers are not willing to pay," said CEO Michael Schutzler, who joined in 2000, "it's not a business."

Other Internet operations, such as ConsumerReports.com and WSJ.com, also used the subscription model with success. But those sites were able to leverage existing brands.

By contrast, Classmates.com had the formidable task of creating a new brand that could attract the masses. What's more, the company did not have a huge war chest courtesy of an IPO (the company instead raised $15 million in venture capital).

Despite all that, Classmates.com has enjoyed great success. The company last year generated $35.6 million in revenue and is on track to generate $70 million for 2002. The operation is currently EBIDTA positive.

So what are the lessons? Let's take a look.

Magazine model
Schutzler considers the traditional magazine model as the best approach to selling content.

"I do not look at the Web as a broadcast medium that relies mostly on advertising," he said. "Rather, I think the Web is a direct-marketing medium. This is what a magazine is. For a magazine to survive, it needs multiple revenue streams, such as annual subscriptions and advertising."

Classmates.com relies heavily on subscriptions, with a $36 annual rate. Currently, the site has more than 2 million paying subscribers.

Growth curve
When a site gives away content, the growth curve is immediately steep. Thus, it does not take long to accumulate a substantial number of visitors. With a subscription-based company, it's a much different story.

Simply put, content must be unique and useful. It also greatly helps if the content is nearly impossible to replicate in the traditional print world.
America Online took quite a while to build up a respectable subscriber list. Up until a year ago, Schutzler said, Classmates.com was still encountering difficulty getting subscriber growth.

"It was about getting one customer at a time," he said. "But once we hit critical mass of over 2 million users, the growth started to accelerate."

Compelling content
Simply put, content must be unique and useful. It also greatly helps if the content is nearly impossible to replicate in the traditional print world. Kind of obvious, right? Well, there were many companies during the dot-com boom that failed to realize that.

As for Classmates.com, it is based on a simple idea: nostalgia. Are you curious about your high school prom date? What about the person who was voted the most likely to succeed? How about the bully who picked on you?

Basically, Classmates.com uses a hybrid model of free and premium content. The free content entices customers to the subscription service yet avoids a drop-off in advertising income.

For example, people can register free at Classmates.com to learn whether people they knew in high school are listed on the service. So far, Classmates.com has over 30 million registered users. No doubt, this traffic is sold to advertisers and sponsors.

But if you want to make a connection with an old friend, you need to pay--and people are certainly willing to pay.

Low costs
Ironically, the low amount of money raised by Classmates.com has been an advantage.

"We've had to be frugal," Schutzler said. Every initiative must be analyzed with strict cost-benefit analysis.

However, cost-consciousness must not go overboard. Whenever a site takes subscriptions, the visitor expects strong customer service.

Customer acquisition

Classmates.com is based on a simple idea: nostalgia.
Getting customers to pay can be prohibitively expensive, as was shown with the blow-ups of eToys and Pets.com. Classmates.com, though, is not afraid of online advertising and uses it aggressively. (Then again, advertising rates are much lower and tend to be based on performance.)

"It helps that our advertising does not have to be targeted," Schutzler said. "Just about anyone has been to high school."

Brand loyalty
Getting out of the gate with a strong focus was instrumental in helping build the Classmates.com brand, though Schutzler acknowledges that he would choose another name had he started the business today.

"Our business is more than high school reunions," he said. "It is a personal network for reconnecting people."

Still, he added, the Classmates.com name has not posed a big problem.

"We have built a trusted brand," he said. "Our customers are intensely loyal. In fact, we have been able to expand into other areas successfully, such as colleges and even the military."

Lessons learned
A recent study by Jupiter Media Metrix estimates that subscription content will grow from $1.4 billion this year to about $5.8 billion in 2006. Already, there are many examples of companies testing subscription services:

• AmericanGreetings.com charges $1 per month for greeting cards.

• The New York Times weekly crossword puzzle costs $19.95 per year, generating $800,000 annually.

• Yahoo is charging for e-mail services and online games.

• Sony plans to charge for old episodes of soap favorites like "Days of Our Lives" and "The Young and the Restless."

• RealNetworks recently launched a new software service to allow companies to sell their content to the public.

No doubt, consumers will resist paying, but that's nothing new for any type of media. Learning from success stories like Classmates.com may help companies ease through whatever turbulence they encounter during that process.