• by Mark Walsh  @markfwal, December 13, 2007

United Online is pulling its proposed initial public offering of Classmates.com, citing unfavorable market conditions. The company initially filed to spin off the social networking property through an IPO in August, and last month said it planned to sell up to 12 million shares at $10 to $12 each.

Rather than feeding off the social marketing craze, Classmates' IPO aspirations may have been dimmed by it. The site's subscription model appears decidedly old school compared to faster-growing, ad-supported rivals such as Facebook, MySpace and myYearbook. What's more, only 3 million of Classmates' 50 million registered members are paid accounts.

Classmates' traffic as of November had fallen 6% year-over-year to 11.5 million from 12.2 million, according to Nielsen Online.

Analysts and investors raised doubts about whether Classmates could maintain subscriber growth and attract younger users.

"While multiple high profile transactions in the social networking space involving blue chip names, such as Google, Microsoft and News Corp., were viewed as a positive sign for Classmate's deal getting done, it is likely that investors were sensitive to the proposed valuation given the increasingly crowded competitive landscape and questions about the sustainability of subscriber growth in the face of declining unique visitor traffic to Classmate's flagship website," wrote investment firm Renaissance Capital, in a note posted to its IPOhome.com site Wednesday.

In its IPO prospectus, Classmates conceded that it hasn't been able to expand usage to its various social networking communities beyond its core high school alumnus groups. It also disclosed that it remains under investigation by the Federal Trade Commission in relation to its membership renewal practices. Any changes could lead to an increase in Classmates' churn rate.

Investors have shown little enthusiasm for Internet IPOs more broadly. Internet companies have accounted for less than 1% of the total amount raised through IPOs during the last six months, according to data compiled by IPO Monitor. Internet Brands, which operates a network of e-commerce sites including CarsDirect, recently reduced the size of its offering to $18.8 million from $45 million.

Overall, however, 225 IPOs have priced so far in 2007--a 26% gain over last year, according to IPOhome.com.

United Online said it planned to book a $4.5 million to $5.5 million charge during the fourth quarter in connection with the canceled Classmates IPO.