Classmates.com 2003 Annual Report Download - page 30

We may be unable to grow our pay subscriber base.
Increasing our pay subscriber base will be critical to our continued success. Increasing our pay subscriber base involves two components:
converting users of our free services to our pay services and gaining new pay subscribers who have not previously used our free services. From
time to time, we have implemented restrictions and limitations on our free services that have caused a decline in our
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free user base. We may place additional restrictions and limitations on our free services in the future, which would likely result in a further
reduction in our free user base. We also have focused our marketing efforts on our pay services, not our free services. As a result, we have
experienced a decrease in the number of new users registering for our free services. Not only has our free user base declined, the rate at which
users of the free services upgrade to our pay services has, from time to time, declined and may continue to decline. Decreases in the number of
users upgrading from our free services will require us to rely more heavily on signing up pay subscribers who have not previously used one of
our free services. We cannot assure you that we will achieve success in signing up new pay subscribers.
Our marketing expenditures may continue to increase and may not be effective in growing our business.
The success of our business model is predicated upon maintaining a marketing budget that is sufficient to grow our revenues while
continuing to increase profitability. We have increased our marketing expenditures over time and we expect to continue to increase our
marketing expenditures. We may also choose to participate in more costly distribution channels, which could further increase our marketing
expenditures. In addition, as we add additional services, such as our accelerated dial-up services and premium email services, we have
allocated, and may continue to allocate, a significant portion of our marketing resources to these additional services with the goal of adding
new subscribers as well as selling additional services to our existing subscribers. Our allocation of resources to marketing additional services
may adversely affect the overall growth of our pay subscriber base. If our marketing expenditures are not successful in increasing our revenues
by increasing our subscriber base or by selling additional services, our business, financial position, results of operations and cash flows could
be negatively impacted.
If we are unable to retain users, our business and financial results will suffer.
Our business and financial results are primarily dependent on the number of users of our services, particularly our pay services. Currently,
an average of four to five percent of our pay subscribers cancel their accounts or have their accounts terminated each month, which we refer to
as subscriber churn. This percentage does not include those subscribers who sign up for our pay services without previously using our free
service and whose accounts are terminated within 30 days of registration. We have experienced a higher churn percentage in our subscriber
base using accelerated dial-up services than in our subscriber base using only our standard pay service, which has resulted in a higher overall
churn percentage. We anticipate that we will continue to experience a higher level of churn in our subscriber base using our accelerated dial-up
services, which may result in additional increases in our overall churn percentage. This is due, in part, to the relatively short time we have been
offering accelerated dial-up services since, in general, we experience a higher level of churn with respect to new pay subscribers than we do
with respect to pay subscribers who have used our service for an extended period of time. If we continue to experience a high level of churn in
our subscriber base using our accelerated dial-up services, it will make it more difficult to grow or retain the size of that base and it may make
it more difficult to grow or maintain the size of our overall pay subscriber base. To increase our pay subscriber base, we must minimize the rate
of loss of existing pay subscribers while adding new pay subscribers. As our pay subscriber base grows, we will need to add an increasing
number of new pay subscribers both to replace users who cancel their service and to grow our pay subscriber base. If we experience an
increased percentage of cancellations per month, or if we are unable to attract new pay subscribers in numbers sufficient to increase our overall
pay subscriber base, our business, financial position, results of operations and cash flows will be adversely affected.
In addition, the number of active users of our free services has a significant impact on our ability to attract advertisers, on the number of
advertising impressions we have available to sell, and on how
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many pay subscribers we can potentially acquire through marketing our pay services to our free users. Each month, a significant number of free
users become inactive and we may experience continued declines in our active free user base, particularly if we continue to focus all of our
marketing efforts on our pay services or impose additional limitations on our free services. In addition, there may be a significant overlap
between NetZero's and Juno's active free user bases, so the actual number of unique free users in our active free user base may be lower than
we expect.
If we experience a significant decrease in our active free user base or an increase in our rate of cancellations for our pay services,
particularly for our accelerated dial up services, our business, financial position, results of operations and cash flows may be adversely
impacted. We cannot assure you that we will be able to effectively retain users or generate enough new users to make up for lost users.