Earthlink 2005 Annual Report Download - page 46

Covad 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 and
modems. 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, and decreased 17% to $8.3 million during the year ended December 31, 2005. The decreases were 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. The
increase in total sales and marketing expenses in 2004 was primarily due to increases in general marketing efforts for our PeoplePC 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.
Sales and marketing expenses decreased 6% to $390.2 million during the year ended December 31, 2005 compared to the prior year. The
decrease was primarily due to declines in amounts payable to our distribution partners as a result of declines in gross subscriber additions and
continued declines in our telemarketing sales expenses, which were favorably impacted by the closing of four contact centers during the first
quarter of 2004. These decreases were partially offset by an increase in our sales and marketing expenses for PeoplePC and broadband services.
Sales and marketing expenses may increase in 2006 due to the launch of new products and services associated with implementing our growth
strategies, including IP-based voice services and wireless broadband services.
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 and 8% to $233.9 million
during the years ended December 31, 2004 and 2005, respectively, compared to the prior years. The decrease during the year ended
December 31, 2004 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 telecommunications prices which favorably impacted our ability to deliver toll-free
customer support. These decreases were partially offset by increased outsourced labor costs associated with outsourcing certain contact center
activities. The decrease during the year ended December 31, 2005 was primarily due to decreases in outsourcing costs resulting from lower
rates from service providers as well as continued cost savings from the contact center closings completed during the first quarter of 2004 .
General and administrative
General and administrative expenses consist of fully burdened costs associated with the executive, finance, legal and human resources
departments; outside professional services; payment processing; credit
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