Classmates.com 2005 Annual Report Download - page 22

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particular service. We have experienced, and will likely continue to experience, a higher percentage of subscribers canceling our accelerated
access and Classmates services than is indicated by our churn rate, and the percentage of subscribers canceling Classmates service has fluctuated
significantly from quarter to quarter due to seasonality and the timing of termination of multi-month programs. During the December 2005
quarter, we experienced increased churn in our access base as a whole, and this trend may continue. As a result, our overall churn, which was
approximately 5% in the December 2005 quarter, may be higher in future periods and will fluctuate from period to period. If we continue to
experience a high percentage of pay accounts canceling our Classmates and accelerator services, it will make it more difficult to grow or retain
the number of pay accounts to those services 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 accounts and 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 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.
We have expended, and may in the future expend, significant resources enhancing our existing services, such as our enhanced accelerator
service, and developing, acquiring and implementing new services, such as our recently launched VoIP services. Product development involves a
number of uncertainties, including unanticipated delays and expenses. New or enhanced services, such as our VoIP services and our enhanced
accelerator service, may have technological problems or may not be accepted by our consumers or advertisers. We cannot assure you that we
will be successful in developing, acquiring or implementing new or enhanced services, or that new or enhanced services will be commercially
successful.
Our VoIP services may not be commercially successful.
Only a limited number of users have signed up for our new VoIP services, and we have experienced losses in connection with these services
due to fraud and the costs of developing and operating them. It is likely we will continue to expend significant resources developing, enhancing,
operating and marketing these services. We expect these services to continue to adversely impact our profitability, at least in the near term. If our
VoIP services are not commercially successful we will continue to incur operating losses in connection with these services, which would
negatively impact our financial condition and results of operations.
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