Earthlink 2012 Annual Report Download - page 47

Table of Contents
Business Services
Cost of revenues for our Business Services segment primarily consists of the cost of connecting customers to our networks via leased
facilities; the costs of leasing components of our network facilities; costs paid to third-
party providers for interconnect access and transport
services; the costs of providing IT services; and the cost of equipment sold to customers.
The following table presents the primary reasons for the changes in Business Services cost of revenues for the years ended
December
31, 2011 and 2012 compared to the prior year periods:
______________
We expect continued declines in cost of revenues from traditional voice services and other legacy products, including a decline as a
result of our decision to exit sales of legacy voice equipment after the first half of 2013, which will negatively impact Business Services cost of
revenues in 2013 by approximately $2.2 million. However, Business Services cost of revenues will increase as we grow our IT services and
other growth products.
Consumer Services
Cost of revenues for our Consumer Services segment primarily consists of telecommunications fees and network operations costs
incurred to provide our Internet access services; fees paid to suppliers of our value-
added services; fees paid to content providers for information
provided on our online properties; and the cost of equipment sold to customers for use with our services. Our principal provider for narrowband
services is Level 3 Communications, Inc. We also purchase lesser amounts of narrowband services from certain regional and local providers.
Our principal providers of broadband connectivity are AT&T Inc., Bright House Networks, CenturyLink, Inc., Comcast Corporation, Megapath,
Time Warner Cable and Verizon Communications, Inc. Cost of revenues for our Consumer Services segment also include sales incentives,
which include the cost of promotional products and services provided to potential and new subscribers, including free modems and other
hardware.
The decreases in Consumer Services cost of revenues during the years ended December 31, 2011 and 2012 compared to the prior years
were primarily due to the declines in average consumer services subscribers. Also contributing was lower network expenses related to cost
optimization efforts and more favorable rates with service certain service providers.
We expect Consumer Services segment cost of revenues to continue to decrease as a result of declines in average consumer subscribers.
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, which will negatively affect our Consumer Services segment cost of revenues due to the
higher costs associated with delivering broadband services.
40
2011 vs 2010
2012 vs 2011
(in millions)
Due to acquisitions (a)
$
388.7
$
58.0
Due to increase in reserves for regulatory audits (b) —
8.3
Due to IT services transactions and product launches (c)
2.0
8.3
Due to decline in legacy products (d)
(8.4
)
(11.1
)
Total change in Business Services cost of revenues
$
382.3
$
63.5
(a)
Increases due to the inclusion of cost of revenues from DeltaCom beginning in December 2010 and One Communications beginning in
April 2011.
(b)
Increase due to a charge recorded in the second quarter of 2012 to increase our reserves for regulatory audits, primarily an audit
currently being conducted by the Universal Service Administrative Company on previous ITC^DeltaCom Universal Service Fund
assessments and payments.
(c)
Increase due to IT Services transactions entered into during 2011 and new product launches in 2012 to expand our IT services portfolio.
(d) Decrease due to decline in certain legacy products, including traditional voice, lower-
end, single site broadband services and web
hosting. Partially offsetting this was an increase in cost of revenue for MPLS and hosted voice products.