Classmates.com 2008 Annual Report Download - page 9

Table of Contents
Many advertisers view social networking Web sites as an attractive marketing medium for their products and services. Most social
networking Web sites are free to the user and rely on online advertising to generate revenues. Some social networking Web sites, including our
Classmates Web site and our international social networking Web sites, rely primarily on paid subscriptions to generate revenues. While the
volume of advertising inventory on social networking sites has increased significantly, certain social networking sites have experienced
difficulty monetizing their inventory due to the volume of inventory and other factors.
Classmates Media Segment—Online Loyalty Marketing
The Internet has been a growing channel for advertising and for consumers to find and purchase goods and services. As a result of both
existing activity and expected growth, advertisers continue to seek effective ways to target and reach online consumers.
Loyalty marketing programs generally are designed to reward consumers with points that accumulate based on their activities and which
may be redeemed for products and services from participating vendors. These programs have long been popular with airlines, credit card
vendors, hotels, and retailers. According to Aite Group, an independent research and advisory firm, an estimated 84% of credit card purchases in
2007 were made on rewards cards in the U.S., more than double the comparable percentage in 2001, underscoring the growth in popularity of
loyalty marketing programs. In recent years, loyalty marketing programs have expanded into a comprehensive direct marketing and targeted
advertising strategy. Consumer adoption of loyalty marketing programs, however, has historically been associated with a single type of activity,
such as airline, hotel or credit card selection.
Online loyalty marketing programs enable advertisers to target consumers in ways that are generally impractical with traditional offline
direct marketing channels. Online loyalty marketing programs often have the ability to, among other things, segment members based on personal
interests, purchasing behavior and demographic profiles in order to create highly targeted advertising campaigns, thereby optimizing value to the
advertiser. Online loyalty marketing programs use points as an incentive for members to update their personal interest profiles, helping
advertisers target consumers interested in purchasing their products and services. Online loyalty marketing programs can also easily measure
click-through rates on display advertising and response rates to email campaigns, providing rapid feedback for advertisers that can be used to
identify potential customers and create new targeted offers.
In addition, an online loyalty marketing program that has attracted a large, responsive and loyal member base helps to maximize returns on
the advertisers' marketing investments. Online loyalty marketing programs that are not explicitly sponsored by a single large consumer brand,
such as an airline, hotel chain or department store, appeal to a potentially broader audience because of the breadth of offers and the ability of the
consumer to earn rewards quickly and more often.
Communications Segment
The U.S. consumer Internet access service market has evolved from one where the Internet was accessed primarily through dial-up access
to one in which consumers can access the Internet through dial-up or a variety of high-speed, or broadband, connection methods including cable
modems, digital subscriber lines ("DSL"), fiber optic, or wireless connections. Consumer adoption of Internet applications, such as music
downloads and video that require a broadband connection, has been increasing, while the retail pricing for basic broadband Internet access
services has generally been decreasing. In addition, the Internet access market is now relatively mature with the rate of growth in the U.S.
Internet population slowing. These factors have led to a significant decrease in dial-
up accounts and a significant increase in broadband accounts.
It is anticipated that the number of dial-up accounts will continue to decrease.
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