Earthlink 2005 Annual Report Download - page 70

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
well as activation and early termination fees. Web hosting revenues consist of fees earned by leasing server space and providing web services
to companies and individuals wishing to present a web or e-commerce presence. Advertising and other value-added services revenues consist
of revenues earned from EarthLink’s partnerships, which are promotional arrangements with advertisers, retailers, service providers and
content providers. Advertising and other value-added services revenues also include revenues from certain ancillary services sold as add-on
features to the Company’s Internet services, such as email storage and security products.
Advertising and other value-added services revenues include amounts derived from selling other companies’ products and services to
EarthLink subscribers, subscribers using and buying other vendors’ products and services, and other companies purchasing advertising on
EarthLink’
s online properties, among other activities. Advertising revenues are recorded when earned based on the per unit contractual rate and
the number of units sold, number of subscriber impressions, or number of subscriber purchases or actions.
Gross versus net revenue recognition. EarthLink maintains relationships with certain telecommunications partners (including cable
companies) in which it provides services to customers using the “last mile” element of the telecommunication providers’ networks. The term
“last mile” generally refers to the element of telecommunications networks that is directly connected to homes and businesses. In these
instances, EarthLink evaluates the criteria outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a
Principal versus Net as an Agent,” in determining whether it is appropriate to record the gross amount of revenue and related costs or the net
amount due it from the telecommunications partner. Generally, when EarthLink is the primary obligor in the transaction with the subscriber,
has latitude in establishing prices, is the party determining the service specifications or has several but not all of these indicators, EarthLink
records the revenue at the amount billed the subscriber. If EarthLink is not the primary obligor and/or the telecommunications partner has
latitude in establishing prices, EarthLink records revenue associated with the related subscribers on a net basis, netting the cost of revenue
associated with the service against the gross amount billed the customer and recording the net amount as revenue.
Cost of Revenues
Cost of revenues include telecommunications service and equipment costs and sales incentives. Telecommunications service and
equipment costs include telecommunications fees and network operations costs incurred to provide the Company’s Internet access services;
fees paid to content providers for information provided on the Company’s online properties, including the Company’s Personal Start Page ;
the costs of equipment sold to customers for use with the Company’s narrowband and broadband Internet access services; activation and
deactivation fees paid to the Company’s network providers for the provisioning and disconnection of services; and depreciation of network
equipment.
Sales incentives include the cost of promotional products and services provided to potential and new subscribers, including free Internet
access on a trial basis and free modems and other hardware. EarthLink accounts for sales incentives in accordance with EITF Issue No. 01-09,
“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” which requires the costs of
sales incentives to be classified as cost of revenues.
The Company also pays fees to retailers, manufacturers or other marketing partners for marketing EarthLink’s products and services.
Depending on the nature of the arrangement, the marketing partners
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