Earthlink 2003 Annual Report Download - page 16

We have been intensely focused on and have been successful in improving operating margins. In 2003, we reduced telecommunications
cost per subscriber by optimizing network capacity and entering into more favorable agreements with telecommunications service providers.
We also improved the efficiency of our customer support efforts by closing four contact centers. To further reduce costs and increase
efficiencies, in January 2004, we announced plans to restructure our contact center operations and further rely on outsourced contact center
service providers. Under the plan, we will close contact center operations in Harrisburg, Pennsylvania; Roseville, California; San Jose,
California; and Pasadena, California and reduce our contact center operations in Atlanta, Georgia by the end of the first quarter of 2004. We
continue to analyze opportunities to more cost effectively deliver our Internet access services without sacrificing the quality of services we
provide and, consequently, we expect to continue to devote resources to evaluate the cost structure of our business. However, we may not
experience the level of benefits and related cost savings we have historically realized or expect to realize in connection with further
restructuring our contact center operations or any of our other cost reduction efforts.
We generate lower percentage gross profit margins on our broadband access services than on our other principal forms of Internet access
and related services. Based on management's estimates, broadband gross margins are not currently sufficient to generate positive operating
profits. Despite broadband access services becoming a larger percentage of our business, we have improved overall operating profit margins to
date by reducing telecommunications costs per customer in all product lines; reducing total operations and customer support expenses; and
increasing other operating expenses, including general and administrative expenses and acquisition-related amortization, more slowly than
revenues. We believe gross margins on our broadband access services will become sufficient over time to result in broadband access services
contributing positively to overall operating profit margins as a result of our continuing to reduce telecommunications costs per customer,
customer support costs, and direct sales and marketing expenses required to add new broadband customers. We can provide no assurance that
we may experience the overall cost savings that we expect or that we have experienced historically.
Specifically, we believe the most important factors for us to deliver continued improvements in overall profits are the following:
• Containing the rate of decline of our traditional, premium-priced narrowband access subscribers and revenues, avoiding more
aggressive promotional pricing than currently experienced and continuing to reduce and leverage operating costs
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• Continuing the growth of our PeoplePC-branded, value-priced narrowband access offering in spite of competition from current
and new competitors
• Renewing, extending or otherwise entering into wholesale broadband access agreements with telecommunications providers,
including RBOCs and cable providers, at competitive and improved wholesale broadband access prices and, in the event there
are adverse changes in the retail pricing environment for broadband access services, at wholesale broadband access prices that
decrease sufficiently to at least coincide with declines in retail prices
However, the factors we believe are instrumental to the achievement of our goals, including the factors identified above, may be subject to
competitive, regulatory, and other events and circumstances that are beyond our control. Consequently, although we have successfully
improved overall profits during the three-year period ended December 31, 2003, we can provide no assurance that we will be successful in
achieving any or all of the factors identified above, that the achievement or existence of such factors will result in profit improvements, or that
other factors will not arise that would adversely affect future profits.
Strategic Alliances
We have a marketing relationship with Sprint Corporation ("Sprint"). During the years ended December 31, 2002 and 2003, our
relationship with Sprint generated approximately 10% of EarthLink's total gross organic subscriber additions. Sprint may pursue relationships
with other ISPs, and a significant decrease in the number of gross subscriber additions generated through our relationship with Sprint would
adversely affect our results of operations.
We have an agreement with Time Warner Cable and Bright House Networks, companies whose networks pass more than 22 million
homes, to offer our broadband Internet services over their systems. In connection with the agreement, Time Warner Cable and Bright House
Networks receive compensation from EarthLink for carrying the EarthLink service and related Internet traffic. In the third quarter of 2001, we
started providing services to subscribers via these networks, and as of June 30, 2002, our full package of high-speed Internet access, content,
applications and functionality was available in all 39 markets served. As of December 31, 2003, more than 20% of our broadband subscribers
were serviced via either the Time Warner Cable or Bright House Networks network.
We have a strategic alliance with Apple Computer, Inc. ("Apple"). In connection with this alliance, we serve as the default ISP in Apple's
setup software on its Macintosh branded line of computers through January 4, 2005. We are the exclusive default ISP for dial-up, ISDN and
digital subscriber line ("DSL") services on Macintosh computers sold in the U.S., and we pay Apple for each gross organic subscriber addition
generated as a result of our alliance. Apple may terminate the agreement at any time with 90 days advance notice. There can be no assurance
that Apple will not terminate the agreement or that we will be able to extend our arrangement with Apple beyond January 4, 2005, and a
significant decrease in the number of gross subscriber additions generated through our relationship with Apple would adversely affect our
results of operations.