Earthlink 2004 Annual Report Download - page 40

service availability, or if telecommunications bankruptcies generally reduced the level of competition among telecommunications providers.
Our retail broadband access has both a higher telecommunications cost of revenue per subscriber and a lower estimated gross profit
margin percentage than our other principal forms of Internet access and related services. Even though broadband subscribers increased from
20% of total subscribers at December 31, 2003 to 25% of total subscribers at December 31, 2004, telecommunications cost per subscriber
decreased sufficiently in both our narrowband and broadband offerings to cause total average monthly telecommunications service and
equipment cost per subscriber to decrease. We expect that there may be additional, although limited, opportunities to reduce such costs by
continuing to eliminate higher cost providers, reducing costs from the remaining vendors, and achieving higher utilization of existing
telecommunications capacity. These initiatives may offset the negative effect expected to result from broadband continuing to grow as a portion
of our overall business. As a result, we expect to be able to maintain current levels of telecommunications service and equipment costs as a
percentage of total revenues throughout 2005. Beyond 2005, telecommunications and equipment costs as a percentage of revenue may increase
as a result of the expected continuing growth of broadband as a percentage of our total business.
EarthLink’
s principal providers for narrowband telecommunications services are Level 3 Communications, Inc. and Sprint, and our largest
providers of broadband connectivity are Covad Communications Group, Inc. and Time Warner Cable. We also do lesser amounts of business
with a wide variety of local, regional and other national providers. EarthLink purchases broadband access from ILECs, CLECs and cable
providers.
Cost of revenues also includes sales incentives. We frequently offer sales incentives such as free Internet access on a trial basis, modems
and starter kits as introductory offers. Sales incentives decreased 53% from $21.2 million during the year ended December 31, 2003 to $10.0
million during the year ended December 31, 2004 due to a shift in our promotional offers from free products and services to discounted
introductory pricing to attract new subscribers.
Sales and marketing
Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new paying
subscribers, personnel-related expenses and telemarketing costs incurred to acquire and retain subscribers. Sales and marketing expenses
increased 9% from $383.0 million during the year ended December 31, 2003 to $417.3 million during the year ended December 31, 2004, and
increased as a percentage of total revenues from 27% to 30%. The increase in total sales and marketing expenses was primarily due to increases
in general marketing efforts for our value-priced access services and broadband services and expenses associated with the increase in gross
subscriber additions, which resulted in increased payments to our distribution partners for new paying subscribers. These increases were
partially offset by a decline in sales expenses associated with the closing of four contact centers during the first quarter of 2004 which
favorably impacted our telemarketing costs.
Operations and customer support
Operations and customer support expenses consist of costs associated with technical support and customer service, providing our
subscribers with toll-free access to our technical support and customer service centers, maintenance of customer information systems, software
development and network operations. Operations and customer support expenses decreased 14% to $255.2 million. The decrease was a result
of decreased personnel costs, occupancy costs and depreciation expense resulting from closing four contact centers in the first quarter of 2004
as well as decreases in the price of telecommunications services
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