Classmates.com 2004 Annual Report Download - page 52

increased the number of brands under which our services our marketed and we may not have adequate resources to maintain all of our brands.
Capital limitations or other factors could cause us to decrease our marketing budget, which would adversely impact our ability to maintain our
brands and grow our revenues. We cannot assure you that our marketing activities will be successful.
We obtain a significant number of new pay access accounts through our offline distribution channels, primarily Best Buy. If the number of
new pay accounts acquired through Best Buy were to decrease, such decrease could negatively impact our pay account growth and our revenues
and profitability could be negatively impacted.
If we are unable to retain users, our business and financial results will suffer.
Historically, an average of four to five percent of our pay accounts were canceled each month, which we refer to as subscriber churn. Our
churn percentage is calculated based on the average number of pay accounts for a period. The average number of pay accounts is a simple
average calculated based on the number of pay accounts at the beginning and end of a period. We make certain normalizing adjustments to the
calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. We do not include in
our churn percentage calculation those accounts cancelled during the first thirty days of service unless the accounts have upgraded from free
accounts, although a number of such accounts will be included in our account totals at any given measurement date. We have experienced, and
will likely continue to experience, a higher churn percentage in our accelerated access services accounts than in our standard access services
accounts. In addition, the churn of Classmates' pay accounts has historically been higher than the churn of our access accounts, and the
Classmates' churn has fluctuated significantly from quarter to quarter due to seasonality issues and the timing of termination of multi-month
programs. As a result, it is likely that our overall churn will be higher in future periods and may fluctuate from period to period. If we continue to
experience a high level of churn in our Classmates and accelerator accounts, it will make it more difficult to grow or retain the number of those
accounts and the size of our overall pay accounts base. If we experience an increased percentage of cancellations, or if we are unable to attract
new pay accounts in numbers sufficient to increase our overall pay accounts, our revenues and profitability may be adversely affected.
In addition, the number of active free accounts has a significant impact on our ability to attract advertisers, on the number of advertising
impressions we have available to sell, and on how many pay subscriptions we can potentially acquire through marketing our pay services to our
active free accounts. Each month, a significant number of free accounts become inactive and we may experience continued declines in the
number of active free accounts, particularly if we continue to focus all of our marketing efforts on our pay services or impose limitations on our
free services. In addition, a user may have more than one account on more than one of our services, and we are not able to determine in most
cases the number of accounts held by an individual. As such, the actual number of unique individuals using our services may be much lower than
our total number of accounts.
We may not successfully develop and market new services in a timely or cost-
effective manner; consumers or advertisers may not accept
our new products.
We may not be able to compete effectively if we are not able to adapt to changes in technology and industry standards or develop or acquire
and successfully commercialize new and enhanced services. New services, such as the proposed VoIP telephony service currently in
development, may be dependent on our obtaining needed technology or services from third parties, which we may not be able to obtain in a
timely manner, upon terms acceptable to us, or at all. Our ability to compete successfully will also depend upon the continued compatibility of
our services with products offered by various vendors, which we may not be able to achieve.
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