Seattle lawyer Eric Koester, right, and his fellow Marquette University alums considered Classmates.com but used Facebook instead to organize their 10-year reunion, because many of them were already on the free service. Pictured: Koester and his wife Allison at the event.

Born in the mid-1990s, Classmates.com is a teenager among toddlers in online social networking. But lately one of those kids has been eating its lunch.

The site, a Seattle-based subsidiary of United Online Inc., experienced a 27 percent decline in U.S. monthly unique visitors over the past year, falling to 12 million in December, according to the comScore Networks research firm. Over the same time period, Facebook’s U.S. monthly unique visitors more than doubled, to nearly 112 million.

Classmates.com isn’t standing still. In a recent message to users, it signaled plans for applications on the iPhone and even on Facebook, trying to keep its service relevant by implicitly acknowledging its rival's growth. And United’s Classmates Media unit is still making money, actually boosting its operating profit by more than 50 percent over the first nine months of 2009.

But Facebook’s rise as a general-purpose social network is challenging Classmates -- particularly in its niche of connecting former schoolmates and helping them organize reunions.

Seattle lawyer Eric Koester, who chaired his Marquette University 10-year class reunion committee last summer, said he and his fellow alums considered using Classmates and an internal Marquette system, but ended up forming a Facebook group instead because it was simple and -- here's the key -- most of them were already using it.

“Everyone was amazed at the power of Facebook,” said Koester, of Cooley Godward Kronish LLP. “It taught me that power will be in numbers — everyone now has an account, which makes that tool the most powerful one.”

The outcome of Classmates’ struggle against Facebook and other rivals could ultimately determine the fate of a site with deep roots in the Seattle region.

Classmates -- known for its widely distributed ads featuring high-school portraits -- has outlasted many other dot-com businesses of its generation, employing 239 people before moving from Renton to the Seattle waterfront last year. United Online in November cut 17 percent of the Classmates work force, without saying how many were in Seattle. Classmates has since started hiring again -- touting its location and profitability in an online video and recruiting campaign.

United Online, headquartered in Woodland Hills, Calif., declined to talk about Classmates’ strategy or future plans this week, citing the traditional quiet period before its February earnings report. Plans for the Facebook and iPhone apps were revealed, but not described in any detail, in a privacy notice to Classmates.com users.

Classmates was an early example of what’s now known as the “freemium” model, offering profile creation and viewing for free but reserving advanced features for a premium subscription service. Classmates.com subscriptions -- which cost as much as $5 a month, depending on the duration -- are a big driver of United’s Classmates Media unit, which also includes the MyPoints loyalty marketing service and the StayFriends and Trombi international social networking sites.

The challenge is that competing sites offer -- for free -- many of the features that Classmates puts into its premium subscription service. That includes the ability to plan reunions, see who has signed your profile page and exchange messages with users.

“I think it’s pretty obvious that having to pay to connect with your friends doesn’t make sense anymore,” said industry analyst Charlene Li, founder of the Altimeter Group research firm, in San Mateo, Calif.

Still, plenty of people are willing to pony up. The number of paid Classmates Media accounts averaged 4.7 million for the quarter ended Sept. 30 — up 19 percent from the same quarter the year before. Classmates Media reported 16.9 million "active accounts" for the quarter, a measure that includes paid accounts and free accounts held by people who have visited the site at least once during the quarter.

In a news release, United Online CEO Mark Goldston credited the increase in paid accounts to price promotions that generated consumer interest despite the tough economy. The resulting $1.9 million increase in revenue from paid accounts wasn’t enough to make up for a $2 million drop in advertising revenue for the Classmates Media unit, and its overall revenue was flat for the quarter, at $58.7 million.

Despite the flat revenue, Classmates Media was able to boost its operating income for the quarter to nearly $17 million, from $12.1 million, by reducing expenses in areas including sales, marketing and personnel. The unit posted $43.3 million in operating income (before depreciation and amortization) for the first nine months of 2009 -- an increase of 54 percent over the same period the previous year.

But in the long run, Classmates will need more than cost-cutting and price promotions to meet the growing Facebook challenge.

"Classmates has to figure out their niche," said Michael Smith, the former Classmates.com CEO, who oversaw its 2004 sale to United Online for $100 million.

Smith, now CEO of online handbag- and accessory-rental startup Avelle, said Classmates experimented at various points with more free offerings and other ways of boosting audience. But sheer traffic, of course, isn’t the ultimate measure of business success.

“With Facebook, in terms of number of people, it is huge,” Smith said. “But in terms of dollars per visitor or any other type of monetization measure, it is not as high. It is the obvious thing, when you have such a broad audience base, to go down the advertising model path, and certainly Classmates had some of that. But we were more focused on monetization just to make sure the business model was strong."

In that way, the Classmates vs. Facebook struggle exemplifies a larger divide in the technology industry.

"The free versus paid is a question comes up all of the time, and I think you have to answer that question (by asking) what is the value we are bringing, and what is the business model?" Smith said. "Is it advertising or is it an e-commerce model? So it is not just about having a lot of people. If that is all you have, that's not a business. You have to monetize it in some way. And you have to be thoughtful about the business model."

Complicating matters in recent years, Classmates.com has come under fire for aggressive marketing and sales tactics as it has tried to grow and sustain its audience.

For more than a year, Classmates.com has been embroiled in a legal dispute with San Diego resident Anthony Michaels, who says he was persuaded to update to a Classmates "Gold" membership after receiving messages that unnamed former classmates were viewing his profile or trying to contact him on the site. After upgrading, Michaels alleges, he discovered that no one had tried to contact him or view his profile, according to the lawsuit in U.S. District Court in Seattle.

Michaels is seeking class action status for the suit, which alleges intentional misrepresentation, fraudulent concealment and other misdeeds. A judge has given the sides a Feb. 4 deadline to report on the progress of settlement talks.

In November, a U.S. Senate committee report named Classmates.com among the companies that benefited from questionable “post-transaction marketing” practices, which often get users to sign up and pay for additional products when, in many cases, they don’t read the fine print and think they’re simply completing the purchase of what they intended to buy.

The report (PDF) said Classmates.com made a total of $70 million from its relationships with firms engaged in those tactics. Afterward, United Online said in a regulatory filing that “certain of its arrangements or practices relating to post-transaction marketing” would be “terminated or modified in the near term.”

New York Attorney General Andrew Cuomo is pursuing a similar investigation involving Classmates and other sites, including Barnes & Noble, Orbitz.com, Staples.com, Priceline.com and others.

In the meantime, Facebook continues to build momentum. In perhaps the ultimate cultural recognition of the challenge Classmates faces, the Onion satirical news site published a fictional story last spring with the headline: "Classmates.com Employees Don't Have Heart to Tell CEO About Facebook."

Seattle lawyer Koester, the Marquette alum who used Facebook to organize his reunion, says his class ended up with some of the highest attendance and levels of charitable donations, compared with other classes that held reunions that year.

The school, he said, has now made it part of the process for all of its reunion committees to set up a Facebook group.