Earthlink 2012 Annual Report Download - page 46

Table of Contents
be adversely impacted by longer than anticipated sales cycles and installations of our more advanced products, competition, regulatory changes,
timing and market acceptance of our new products and services, shifting patterns of use, convergence of technology and general economic
conditions. However, to counteract these pressures, we continue to emphasize our diverse portfolio of communications and IT services and are
focused on growing our suite of IT services. As a result, we expect the mix of our retail Business Service revenues to change over time, from
legacy services to IT services. We are also focused on growing our wholesale services as we capitalize on unique fiber routes within our
footprint.
Consumer Services
Access services . Access services include narrowband access services (including traditional, fully-
featured narrowband access and
value-priced narrowband access) and broadband access services (including high-
speed access via DSL and cable and VoIP). Access service
revenues consist of recurring monthly charges for narrowband and broadband access services; usage fees; installation fees; termination fees; and
fees for equipment.
The decreases in consumer access revenues were due to decreases in narrowband access and broadband access revenues. This was
primarily due to a decrease in average consumer access subscribers, which were 1.8 million , 1.5 million and 1.2 million
during the years ended
December 31, 2010, 2011 and 2012
, respectively. Narrowband access comprised a larger portion of the average consumer access subscriber
decreases as our consumer access subscriber base continues to shift towards broadband subscribers. The decrease in average consumer access
subscribers resulted from limited sales and marketing activities, the continued maturation of and competition in the market for narrowband
Internet access and competitive pressures in the industry. However, we continue to focus on the retention of customers and on marketing
channels that we believe will produce an acceptable rate of return. Slightly adding to the decrease in revenues during 2011 was a decrease in
average revenue per subscriber due to an increase in promotional pricing. Slightly offsetting the decrease in revenues during 2012 was an
increase in average revenue per subscriber due to targeted price increases implemented over the past year.
Our monthly consumer subscriber churn rates were 3.0% , 2.6% and 2.4% during the years ended December 31, 2010, 2011 and 2012
,
respectively, which moderated the decline in average consumer subscribers. Churn rates decreased due to the increased tenure of our consumer
subscriber base.
We expect our consumer access and service subscriber base and revenues to continue to decrease due to limited sales and marketing
activities, competition from cable, DSL and wireless providers, declines in gross broadband subscriber additions and the continued maturation of
the market for narrowband Internet access. However, we expect the rate of churn and revenue decline to continue to decelerate as our customer
base becomes longer tenured and churn rates go down. Consistent with trends in the Internet access industry, we expect the mix of our consumer
access subscriber base to continue to shift from narrowband access to broadband access customers.
Value-added services revenues. Value-added services revenues consist of revenues from ancillary services sold as add-
on features to
our Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and
advertising revenues.
We derive these revenues from fees charged for ancillary services; fees generated through revenue sharing arrangements
with online partners whose products and services can be accessed through our web properties, such as the Google ™
search engine; and fees
charged for advertising on our various web properties.
The decreases in value-
added services revenues were due primarily to a decreases in search and advertising revenues resulting from the
decline in total average consumer subscribers and decreases in revenues from our security and home networking services. Partially offsetting
these decreases was an increase in revenues from our premium email only service, as customers migrate from their Internet access services to
email only services.
Cost of revenues
The following table presents our cost of revenues for the years ended December 31, 2010, 2011 and 2012 :
39
Year Ended December 31, 2011 vs 2010 2012 vs 2011
2010 2011 2012 $ Change % Change $ Change % Change
(dollars in thousands)
Business Services
$
90,677
$
473,004
$
536,519
$
382,327
422
%
$
63,515
13
%
Consumer Services
143,956
117,482
105,102
(26,474
)
(18
)%
(12,380
)
(11
)%
Total cost of revenues
$
234,633
$
590,486
$
641,621
$
355,853
152
%
$
51,135
9
%