Earthlink 2005 Annual Report Download - page 35

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
•
Exploring and evaluating potential strategic transactions that we believe may complement our current and future business activities and
successfully integrating any new acquisitions and investments into our business
Challenges and Risks
The primary challenges we face in executing our business strategy are successfully developing new products and services, competition,
purchasing cost-effective wholesale broadband access, and maintaining profitability in our existing services.
New products and services.
A growing part of our strategy is to introduce new products and services to enhance our competitive position
and become a total communications provider. In 2005, we focused our technological and product development efforts on VoIP services,
wireless broadband Internet access and additional value-added services. During 2005, we also partnered with SK Telecom Co., Ltd. (“SK
Telecom”) to form HELIO, a provider of wireless voice and data services, and we committed to invest $220.0 million in the newly formed
entity. We also entered into an agreement to acquire New Edge Holding Company (“New Edge”), a provider of managed network solutions, to
expand our service offerings in the small and medium sized business market. We expect to continue to evaluate the feasibility of new
technologies and technological advancements and develop new service offerings that allow us to expand our service offerings or deliver our
services more cost effectively.
Competition. We operate in a highly competitive market for each of our service offerings, and the competitive environment impacts the
churn rates we experience as well as the number of new customers we are able to add. The largest competitors in broadband access are the
cable companies and regional bell operating companies (“RBOCs”) offering broadband access over their own cable or telephone lines.
However, to attract and retain customers, we continue to focus on improving the high-quality Internet experience EarthLink offers, including
providing superior customer and technical support and differentiating our products and services with innovative and useful tools that improve
the Internet experience. We also continue to seek out new marketing partners and distribution opportunities in our efforts to compete more
effectively in adding customers. We expect competitive pressures will result in continued aggressive promotional pricing offers on our service
offerings, which may adversely impact our ability to sustain or grow revenues.
Purchasing cost-effective wholesale broadband access. The success of our business strategy with respect to our broadband services is
dependent upon cost-
effectively purchasing wholesale broadband access and managing the costs associated with delivering broadband services.
The costs associated with delivering broadband services include recurring service costs such as telecommunications and customer support costs
as well as costs incurred to add new broadband customers, such as sales and marketing and installation and hardware costs. While we
continuously evaluate cost reduction opportunities associated with the delivery of broadband access services to improve our profitability, our
overall profitability would be adversely affected if we are unable to continue to manage and reduce recurring service costs associated with the
delivery of broadband services and costs incurred to add new broadband customers.
Profitability of existing services. We have been focused on and have been successful in improving operating margins. During 2005, we
reduced telecommunications cost per subscriber by optimizing network capacity and entering into more favorable agreements with
telecommunications service providers. Our telecommunications cost per subscriber in 2005 was also favorably impacted by the addition of
wholesale broadband and certain retail cable customers, for which we incur nominal telecommunications costs per subscriber. We also
improved the efficiency of our customer support efforts by further
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