Facebook is now the second-most heavily trafficked website in the U.S., according to Compete, attracting more than 134 million uniques in January, and overtaking Yahoo in the process. It has evolved into far more than a social network; Facebook is equal parts portal, news-sharing service, social gaming hub, and soon, an e-commerce marketplace. So how does a smaller network compete, - particularly when its target audience is increasingly migrating to Facebook?

For Classmates.com, the plan is to offer something that Facebook doesn't have: digitized yearbooks. Mark Goldston, CEO of Classmates.com parent company United Online, explained the thinking during the company's Q4 earnings call: "One of our key strategic objectives for 2010 is to broaden the amount of nostalgic content on the Classmates website," he said (per TechFlash).

The big question is whether people will want to pay for that "nostalgic content," and if so, will it be enough to offset the site's revenue declines from both subscriptions and advertising.

Classmates.com by the numbers

At first glance, Classmates.com's subscription business and overall usage seem healthy: In Q4, paid accounts were up 13 percent year-over-year, to 4.9 million. "Active accounts," meaning both subscription and free users, were up 21 percent year-over-year, to 19.4 million.

But the increased usage isn't translating into increased revenue: Subscription "services" revenue was down 3 percent to $36.7 million; ad revenues declined by 4 percent to $24 million. Meanwhile, average revenue per user (ARPU) has been steadily declining: From $2.98 per user in Q408, to $2.81 in Q209 and just $2.53 per user in the last quarter. Offsetting that decline is where the yearbooks come in.

In the midst of touchscreen, e-Book and digital magazine fever, a "digitized" yearbook fits right in. The task for Classmates.com is to make it enough of a value-add that people will want to pay to have access -- instead of catching up with grade school, high school and college friends on Facebook. That's a huge challenge, given the seemingly unstoppable popularity of Facebook. (I, for example, seem to find more horrid photos from college popping up on what seems like a weekly basis).

Do you need a digital yearbook? 

Goldston said the site will use a "very high-tech piece of equipment" to digitize the pages of yearbooks over the next two years. Members will be able to view thumbnails for free, but they'll need to pay for full access, including customization tools. The company will also partner with third-party vendors to offer DVD and hard-copy versions of the yearbooks as gifts -- though, that would seem to defeat the purpose of digitization.

Classmates.com will also focus on helping people create reunions and make money through ticket sales, affiliate deals with travel sites, as well as branded merchandise (think: Class of '98 T-shirts, mugs and keychains). There's even a Facebook app in the works that would let members get alerts for upcoming class reunions, as well as the ability to search through and view Classmates.com content without having to leave Facebook at all.

Other networks like MySpace and Hi5 have tried to differentiate in the face of Facebook's non-stop innovation onslaught. MySpace has continued to focus on building out its music and video content sections, while Hi5 and myYearbook have made virtual goods and subscriptions their primary revenue drivers.

Photo Credit: jwalsh