Earthlink 2010 Annual Report Download - page 53

Table of Contents
networking require greater bandwidth for optimal performance, which adds to the demand for broadband access. Our narrowband subscriber
base and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for narrowband
access. Changes in technology, such as an increasing number of computer manufacturers not pre-loading dial-
up modems and cable system
upgrades which allow cable companies to provide broadband capable of peak download speeds in excess of 50 Mbps, also may affect our
consumer access services. Additionally, our consumer access services are discretionary and dependent upon levels of consumer spending.
Unfavorable economic conditions could cause customers to slow spending in the future, which could adversely affect our revenues and churn.
In light of the continued maturation of the market for narrowband access, we continue to reduce our sales and marketing efforts and to focus
instead on retention of customers and on marketing channels that we believe will produce an acceptable rate of return. While this strategy has
resulted in a decline in our revenues, we expect the rate of revenue decline to decrease as our subscriber base becomes more tenured and churn
rates decline. Our consumer subscriber churn rate improved from 3.6% during the year ended December 31, 2009 to 3.0% during the year ended
December 31, 2010.
Consistent with trends in the Internet access industry, the mix of our consumer access subscriber base has been shifting from narrowband
access to broadband access customers. Consumer broadband access revenues have lower gross margins than narrowband revenues due to the
costs associated with delivering broadband services. This change in mix has negatively affected our profitability and we expect this trend to
continue as broadband subscribers continue to become a greater proportion of our consumer access subscriber base. However, our consumer
broadband access customers also have lower churn rates than our consumer narrowband access customers. Accordingly, we expect to realize
benefits from a more tenured subscriber base, such as reduced support costs and lower bad debt expense.
Business services.
We operate in the communications industry, which is characterized by industry consolidation, an evolving regulatory
environment, the emergence of new technologies and intense competition. We sell our services to end user business customers and to wholesale
customers. Our end users range from large enterprises with many locations, to small and medium-sized multi-
site businesses to business
customers with one site. Many of our end user customers are retail businesses. Our wholesale customers consist primarily of telecommunications
carriers and network resellers. Our business has become more focused on end users as a result of consolidation in the telecommunications
industry. We have continued to experience adverse trends related to our wholesale service offerings which have resulted primarily from a
reduction in rates charged to our customers due to overcapacity in the broadband services business and from service cancellations by some
customers. In addition merger and acquisition transactions have created more significant competitors for us and have reduced the number of
vendors from which we may purchase network elements we leverage to operate our business.
Our business customers, including retail businesses, are particularly exposed to a weak economy. We believe that the financial and
economic pressures faced by our business customers in this environment of diminished consumer spending, corporate downsizing and tightened
credit have had, and may continue to have, an adverse effect on billable minutes of use and on customer attrition rates, and have resulted in and
may continue to result in increased customer demands for price reductions in connection with contract renewals. We have experienced pressure
on revenue and operating expenses for our business services as a result of current economic conditions, including increased subscriber
acquisition and retention costs necessary to attract and retain subscribers.
2010 Highlights
Total revenues decreased $101.5 million, or 14%, from the year ended December 31, 2009 to the year ended December 31, 2010. This was
primarily due to a decrease in our consumer subscriber base, from approximately 2.0 million paying subscribers as of December 31, 2009 to
approximately 1.6 million paying subscribers as of December 31, 2010, as a result of reduced sales and marketing activities, continued
49