Earthlink 2004 Annual Report Download - page 66

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenues from multiple element arrangements in which EarthLink provides equipment, activation and Internet access services are
recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. When the Company’s Internet access services are essential to the functionality of the
equipment, activation and equipment revenues and related costs are recognized over the estimated life of the customer.
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.
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 allowing companies to advertise to EarthLink’s
subscribers, 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. Advertising and other value-added services
revenues also includes fees associated with services which are incremental to the Company’s Internet access services, which are recorded as
earned.
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
TM
;
the costs of equipment sold to customers for use with the Company’s narrowband and broadband Internet access services; and activation and
deactivation fees paid to the Company’s network providers for the provisioning and disconnection of services.
Sales incentives include the cost of promotional products and services provided to potential subscribers as introductory offers, including
free Internet access on a trial basis; free modems and other hardware; and starter kits. 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 . D
epending on the nature of the arrangement, the marketing partners
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