Earthlink 2004 Annual Report Download - page 39

Web hosting revenues
We earn web hosting revenues by leasing server space and providing web services to individuals and businesses wishing to present a web
or e-commerce presence on the Internet. Web hosting revenues decreased 5% to $47.5 million due to a decrease in average web hosting
accounts, which declined 8% from 166,000 during the year ended December 31, 2003 to 153,000 during the year ended December 31, 2004.
This decrease was partially offset by an increase in ARPU which increased 3% from $25.01 during the year ended December 31, 2003 to
$25.84 during the year ended December 31, 2004, due to the launch of new products with higher price points.
Advertising and other value
-added services revenues
Advertising and other value-added services revenues primarily consist of revenues from our partnerships, which are promotional
arrangements with advertisers, retailers, service providers and content providers. We earn these revenues by paid placements for searches;
delivering traffic to our partners in the form of subscribers, page views or e-commerce revenues; advertising our partners’ products and
services in our various online properties and electronic publications, including the Personal Start Page
TM
; and referring our customers to our
partners’ products and services. Advertising and other value-added services revenues also include certain ancillary services sold as add-on
features to our Internet services, such as email storage and security products.
Advertising and other value-added services revenues increased 59% to $41.2 million due primarily to increased search advertising
revenues. Also contributing to the increase was a $5.2 million increase in ancillary services revenues.
Cost of revenues
Telecommunications service and equipment costs are the primary component of EarthLink’s cost of revenues and consist of
telecommunications fees, set-up fees and network equipment costs incurred to provide our Internet access services. Telecommunications
service and equipment costs also include the cost of Internet appliances sold, including wireless devices and personal computers.
Telecommunications service and equipment costs decreased 17% from $519.1 million during the year ended December 31, 2003 to $431.2
million during the year ended December 31, 2004, and decreased as a percentage of total revenues from 37.0% to 31.2%. The decrease in
telecommunications service and equipment costs was due to a 22% decrease in average monthly telecommunications service and equipment
cost per subscriber offset by a 6% increase in average subscribers.
The decrease in average monthly costs per subscriber was primarily a result of more favorable agreements with telecommunications
service providers as well as optimizing network capacity to reduce costs. Also contributing to the decrease was a $25.8 million decline in
equipment and related costs due to the discontinuation of certain products including MailStation and personal computers bundled with Internet
access and a $14.8 million decrease in depreciation expense due to network-related assets becoming fully depreciated, lower capital
expenditures in recent years and $2.4 million of depreciation expense in 2003 associated with the write-down of the OmniSky platform.
In general, the telecommunications cost per subscriber has declined over time, resulting from improvements in communications
technology, the increasing scale of Internet-related business, and competition among telecommunications providers. However, the intensity of
competition and wholesale telecommunications pricing, which have benefited EarthLink, have caused some telecommunications companies to
experience financial difficulty. EarthLink’s prospects for maintaining or further improving telecommunications costs, particularly for
narrowband services, could be negatively affected if one or more of EarthLink’s key telecommunications providers were to experience serious
enough difficulties to impact
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