| EARTHLINK INC Item 1A Risk Factors |
| The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may adversely impact our business operations |
| If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected |
| We may not successfully enhance existing or develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet, wireless and IP-based communications services, including new products and services offered in connection with our voice and municipal broadband network initiatives |
| The market for Internet and telecommunications services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs and frequent new service and product introductions |
| We are currently focused on utilizing VoIP technologies to deliver voice services, developing security tools to enhance customers’ Internet experiences, and utilizing technologies to deploy wireless networks to deliver broadband services, among others |
| Our future success will depend, in part, on our ability to use leading technologies effectively, to continue to develop our technical expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis |
| We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards |
| If we fail to use new technologies effectively, to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings may fail to meet customer needs which would adversely affect our revenues and prospects for growth |
| We have spent and will continue to spend significant resources enhancing our existing services and developing, acquiring, implementing and launching new services, such as VoIP services and wireless broadband services |
| We believe wireless and IP-based voice services and wireless broadband services represent significant growth opportunities and may require significant investment |
| These investments would be in the form of initial product development and infrastructure costs in addition to the sales and marketing costs to add customers who generate recurring revenues |
| The operating models for these services are similar to the ISP operating model upon which we have based our current operations |
| Specifically, after developing an infrastructure to support the offering, we plan to invest in sales and marketing to add customers who generate recurring revenues, while incurring customer support and telecommunications costs to provide the services |
| Losses are expected to result in the early stages of these products’ life cycles until a sufficient amount of customers are added whose recurring revenues, net of recurring costs, more than offset sales and marketing expenses incurred to add additional customers |
| Product development also involves a number of uncertainties, including unanticipated delays and expenses |
| New or enhanced services, such as VoIP and wireless broadband services, may have technological problems or may not be accepted by consumers |
| To the extent we pursue commercial agreements, acquisitions and/or strategic alliances to facilitate new product or service activities, the agreements, acquisitions and/or alliances may not be successful |
| If any of this were to occur, it could damage our reputation, limit our growth, negatively affect our operating results and harm our business |
| We may not realize the benefits we are seeking from our investments in the HELIO joint venture or other investment activities as a result of lower than predicted revenues or subscriber levels of the companies in which we invest, larger funding requirements for those companies or otherwise |
| We have made equity investments in several companies, including HELIO, a joint venture with SK Telecom that offers wireless voice and data services to consumers in the US We invested dlra43dtta0 million of 15 ______________________________________________________________________ cash and contributed non-cash assets valued at dlra40dtta0 million upon completing the formation of HELIO in March 2005, invested dlra39dtta0 million of cash in August 2005, invested dlra39dtta5 million of cash in February 2006 and have committed to invest additional cash of dlra58dtta5 million in HELIO at various dates through August 2007 |
| We expect the financing of HELIO’s operations to adversely affect our cash position |
| In addition, we expect HELIO to continue to incur losses due to the start-up nature of its operations, and we include our proportionate share of the losses of HELIO in our statements of operations, which adversely affects our earnings and earnings per share |
| In addition, HELIO may not be successful in developing or implementing its wireless voice and data initiatives, and there can be no assurance that these initiatives will be commercially successful |
| This would adversely affect our financial position, results of operations and liquidity |
| We continue to evaluate investment opportunities and may make investments in the future in companies that offer products and services that are complementary to our offerings and in companies that allow us to vertically integrate our business |
| The value of each of our investments is subject to general economic, technological and market trends, as well as to the operating and financial decisions of each company’s management team, all of which are outside of our control |
| In addition, these companies may not gain the expected number of customers and/or generate the expected level of revenues, and consequently, these companies may require additional funding, any of which could diminish the value of or dilute our investment |
| Our current and future investments in other companies, including our investment in the HELIO joint venture, may not provide the economic returns we are seeking and may lose value, which would materially, adversely affect our financial position, results of operations and liquidity |
| Our service offerings may fail to be competitive with existing and new competitors |
| Competition for Internet Services We operate in the Internet services market, which is extremely competitive |
| Current and prospective competitors include many large companies that have substantially greater market presence and greater financial, technical, marketing and other resources than we have |
| We compete directly or indirectly with the following categories of companies: · established online services companies, such as Time Warner (AOL) and the Microsoft Network (MSN); · local and regional ISPs; · free or value-priced ISPs such as United Online; · national telecommunications companies, such as AT&T Inc |
| and Verizon; · regional Bell operating companies, such as BellSouth; · content companies, such as Yahoo! |
| and Google Inc, who have expanded their service offerings; · cable television companies providing broadband access, including Comcast, Charter Communications, Inc |
| and Cox Communications, Inc |
| ; and · utility and local and long distance telephone companies |
| Competition is likely to continue increasing, particularly as large diversified telecommunications and media companies continue to provide ISP services |
| Diversified competitors may continue to bundle other content, services and products with Internet access services, potentially placing us at a significant competitive disadvantage |
| The ability to bundle services, as well as the financial strength and the benefits of scale enjoyed by certain of these competitors, may enable them to offer services at prices that are below the prices at which we can offer comparable services |
| If we cannot compete effectively with these service providers, our revenues and growth may be adversely affected |
| 16 ______________________________________________________________________ As competition in the telecommunications market continues to intensify, competitors may continue to merge or form strategic alliances that would increase their ability to compete with us for subscribers |
| These relationships may negatively impact our ability to form or maintain our own strategic relationships and could adversely affect our ability to expand our customer base |
| Because we operate in a highly competitive environment, the number of subscribers we are able to add may decline, the cost of acquiring new subscribers through our own sales and marketing efforts may increase, and/or churn may increase |
| Increased churn rates indicate more customers are discontinuing services which results in a decrease in our customer base and adversely impacts revenues |
| Competition in the Telephony Market The market for VoIP services is emerging, intensely competitive, and characterized by rapid technological change |
| Many traditional telecommunications carriers and cable providers offer, or have indicated that they plan to offer, VoIP services that compete with the services we provide |
| Competitors for our VoIP services include established telecommunications and cable companies; Internet access companies including AOL, MSN and United Online; leading Internet companies including Yahoo!, eBay and Google; and companies that offer VoIP-based services as their primary business, such as Vonage |
| In addition, some competitors, such as telecommunications carriers and cable providers, may be able to bundle services and products that we do not offer with VoIP telephony services |
| These services could include various forms of wireless communications, voice and data services, and video services |
| This form of bundling would put us at a competitive disadvantage if these providers can combine a variety of service offerings at a single attractive price |
| We can provide no assurance that our VoIP services will achieve significant consumer adoption or, even if such services do achieve consumer adoption, that our VoIP services will generate growth in subscribers or revenues |
| Many of our current and potential competitors for VoIP services have longer operating histories, are substantially larger, and have greater financial, marketing, technical, and other resources |
| Many also have greater name recognition and a larger installed base of customers than us |
| Because of their greater resources, many current and potential competitors may be able to lower their prices substantially, which could eliminate our ability to offer price-competitive services |
| As a result, our VoIP customer base and revenues would be adversely affected |
| Competition for Other Services We compete for advertising revenues with major ISPs, content providers, large web publishers, web search engine and portal companies, Internet advertising providers, content aggregation companies, social-networking web sites, and various other companies that facilitate Internet advertising |
| Many of our competitors have longer operating histories, greater name recognition, larger user bases and significantly greater financial and sales and marketing resources than us |
| This may allow them to devote greater resources to the development, promotion and sale of advertising services |
| The companies we compete with for Internet access subscribers also compete with us for subscribers to value-added services, such as email storage and security products |
| In certain cases, companies offer value-added services for free, and we can provide no assurance that our offerings will remain competitive or commercially viable |
| While the personal web hosting business is fragmented, a number of significant companies, including Yahoo!, currently compete actively for these users |
| In addition, the personal web hosting industry is very application specific, with many of the competitors focusing on specific applications, such as photo sharing, to generate additional users |
| We can provide no assurance that any of these value-added services will remain competitive or will generate customer and revenue growth |
| 17 ______________________________________________________________________ Competitive product, price or marketing pressures could cause us to lose existing customers to competitors (churn), or may cause us to reduce prices for our services which could adversely impact average revenue per user |
| Competition impacts our ability to price our services and retain customers |
| As the market for Internet access remains competitive, some providers have reduced and may continue to reduce the retail price of their Internet services to maintain or increase their market share, which would cause us to reduce, or prevent us from raising, our prices and potentially causing our subscriber base to decrease |
| We may encounter further market pressures to migrate existing customers to lower-priced service offering packages; restructure service offering packages to offer more value; reduce prices; and respond to particular short-term, market-specific situations, such as special introductory pricing or new product or service offerings |
| Additionally, we may incur increased sales and marketing expenses in an effort to maintain our existing customers or to attract new customers, which would adversely impact our profitability |
| We continue to implement plans to address churn, which is adversely affected by increased competition |
| Our efforts to reduce churn focus on improving the customer’s Internet experience and enhancing service offerings |
| However, we can provide no assurance that our plans will be successful in mitigating the adverse impact increased churn may have on our subscriber base and operating results |
| In addition, competitive factors outside of our control may also adversely affect future rates of customer churn |
| If we experience an increase in monthly churn rates, or if we are unable to attract new subscribers in numbers sufficient to increase or maintain the level of our overall subscriber base, our business, financial position, results of operations and cash flows could be adversely affected |
| We may experience significant fluctuations in our operating results and rate of growth and may not be profitable in the future |
| Our results of operations have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and difficult to predict |
| The following are some of the factors that may affect us from period to period and may affect our long-term financial performance: · our ability to retain and increase revenues associated with our existing customers, attract new customers and satisfy our customers’ demands; · our ability to be profitable in the future; · our investments in longer-term growth opportunities; · our ability to expand our marketing network, and to enter into, maintain, renew and amend strategic alliance arrangements on favorable terms; · changes to service offerings and pricing by us or our competitors; · fluctuations in the size of our subscriber base, including fluctuations caused by seasonality, churn, our marketing efforts, and competitors’ marketing and pricing strategies; · changes in the mix of our subscriber base, particularly changes in the overall mix of our customer base between narrowband and broadband and, more specifically, the mix of our narrowband customer base between value-priced and premium narrowband customers and the mix of our broadband customer base between retail and wholesale customers; · changes in the number of hours users use our access services; · the amount of marketing expenditures we incur, including fluctuations in payments to marketers of our services for adding paying subscribers to our customer base; · changes in the terms, including pricing, of our agreements with our telecommunications providers; · the effects of commercial agreements and strategic alliances and our ability to successfully integrate them into our business; 18 ______________________________________________________________________ · the effects of acquisitions and other business combinations and our ability to successfully integrate them into our business; · our ability to develop an infrastructure to support and timely launch service offerings based on new technologies, such as VoIP, municipal wireless broadband or other advanced services we may offer in the future; · fluctuations and impairments in the values of our investments, including our equity investments in other companies and our investments in marketable securities, attributable to the operating and financial results of the companies in which we have invested; · technical difficulties, system downtime or interruptions; · changes in the demand and rates for Internet advertising; · increases or reductions in advertising and commerce revenues from significant customers; · the effects of litigation and the timing of resolutions of disputes; · the amount and timing of operating costs and capital expenditures; · changes in governmental regulation and taxation policies; · events, such as a sustained decline in our stock price, that cause us to conclude that goodwill or other long-term assets are impaired and for which a significant charge to earnings is required; and · changes in, or the effect of, accounting rules, on our operating results, including new rules regarding stock-based compensation |
| We may be unsuccessful in making and integrating acquisitions and investments into our business, which could result in operating difficulties, losses and other adverse consequences |
| We have acquired and invested in businesses in the past, including the acquisition of the assets of Aluria Software LLC in September 2005 and an agreement to acquire New Edge entered into in December 2005 |
| We also have historically acquired subscriber bases from other ISPs |
| We expect to continue to evaluate and consider a wide array of potential strategic transactions that we believe may complement our current or future business activities, including acquisitions and dispositions of businesses, technologies, services, products and other assets |
| At any given time, we may be engaged in discussions or negotiations with respect to one or more of such transactions that may be material to our financial condition and results of operations |
| There can be no assurance that any such discussions or negotiations will result in the consummation of any transaction |
| The process of integrating any acquired business or assets may create unforeseen operating difficulties and expenditures and is itself risky |
| Acquisitions and investments create difficulties or risks such as: · diversion of management time, as well as a shift in focus from operating the business to issues of integration and future products; · declining employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects or the direction of the business; · the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; · the need to implement controls, procedures and policies appropriate for a larger public company at companies that, prior to acquisition, had lacked such controls, procedures and policies; · the need to remediate significant control deficiencies that may exist at acquired companies, which, if unremediated, could result in a material weakness or significant deficiency in our internal control structure; 19 ______________________________________________________________________ · in some cases, the need to transition operations, users, and/or customers onto our existing platforms; · the potential impairment of customer and other relationships as a result of any integration of operations; · the potential unknown liabilities associated with a company we acquire or in which we invest; and · the potential impairment of amounts capitalized as intangible assets as part of an acquisition |
| Additionally, as a result of future acquisitions or investments, we may issue additional equity securities, which could dilute existing shareholders’ interests |
| We may also spend our cash or incur debt or contingent liabilities to complete transactions which could adversely affect our liquidity |
| Lastly, as a result of acquisitions, we would record amortization expenses related to acquired intangible assets, which would reduce our profitability |
| The continued decline of our narrowband revenues would adversely affect our profitability |
| The number of US households using broadband has grown significantly over the last few years and is expected to continue to grow |
| Broadband access generally offers users faster connection and download speeds than narrowband access |
| Pricing for broadband services, particularly for introductory promotional periods; services bundled with cable and telephone services; and services with slower speeds has been declining and is approaching prices for premium narrowband services |
| As a result of broadband adoption, the total number of narrowband accounts in the US has declined, and industry analysts predict the total number of narrowband accounts will continue to decline |
| The decline in the size of the narrowband market will likely continue as broadband services become more widely available at lower prices and consumer adoption of broadband applications, such as online video, telephony and music downloads which depend upon connections that provide significant bandwidth, increases |
| Our premium-priced narrowband service is our most profitable service offering; however, consistent with trends in the market for narrowband access, our premium-priced narrowband subscriber base and revenues have been declining |
| We expect our premium-priced narrowband subscriber base and revenues to continue to decline, which would adversely affect our results of operations in the future |
| We may not be able to successfully execute our broadband strategy, which could adversely affect our ability to grow or sustain revenues and our profitability |
| As of December 31, 2005, subscribers for our broadband, or high-speed, services comprised approximately 30prca of our total customer base, and our broadband services favorably contribute to our overall average monthly service revenue per subscriber |
| However, the success of our business strategy with respect to our broadband services is dependent upon cost-effectively purchasing wholesale broadband access and managing the costs associated with delivering broadband services |
| The costs associated with delivering broadband services include recurring service costs such as telecommunications and customer support costs as well as costs incurred to add new broadband customers, such as sales and marketing and installation and hardware costs |
| While we continuously evaluate cost reduction opportunities associated with the delivery of broadband access services to improve our profitability, our overall profitability would be adversely affected if we are unable to continue to manage and reduce recurring service costs associated with the delivery of broadband services and costs incurred to add new broadband customers |
| Companies may not provide last mile broadband access to us on a wholesale basis or on terms or at prices that allow us to grow and be profitable |
| We provide our broadband services to customers using the last mile element of telecommunications and cable companies’ networks |
| The term “last mile” generally refers to the element of the network that is 20 ______________________________________________________________________ directly connected to homes and businesses |
| We have agreements with several network providers that allow us to use the last mile element of their network to provide high-speed Internet access services via DSL or cable |
| The availability of and charges for access with any of our network providers at the expiration of current terms cannot be assured and may reflect legislative or regulatory as well as competitive and business factors |
| We cannot be certain of renewal or non-termination of our contracts |
| Our results of operations could be materially adversely affected if we are unable to renew or extend contracts with our current network providers on acceptable terms, renew or extend current contracts with network providers at all, acquire similar network capacity from other network providers, or otherwise maintain or extend our footprint |
| One of our largest network providers of wholesale broadband access is Covad, a CLEC Covad has agreements with varying terms with many of the ILECs; however, if Covad is unable to continue to obtain reasonable line-sharing rates due to recent legal and regulatory developments or otherwise, its wholesale broadband access services may become uneconomic or it may cease selling wholesale broadband access services |
| In either event, we may be able to use other wholesale broadband providers’ networks to continue to provide retail broadband services |
| Such events may cause us to incur additional costs, pay increased rates for wholesale broadband access services, cause us to increase the retail prices of our broadband service offerings and/or may cause us to discontinue providing retail DSL services, any of which would adversely affect our ability to compete in the market for retail broadband access services |
| Newly adopted policies by the FCC reclassified wireline broadband services as information services and eliminated the FCC’s long-standing non-discriminatory access requirements |
| While the long-term implications of the FCC’s new policies are not certain, they may adversely affect our ability to execute our broadband strategy, our ability to sustain or grow our broadband access customer base and revenues, and our profitability |
| We will continue our efforts to partner with wholesale broadband providers, including cable providers, ILECs, CLECs and wireless providers, to expand our broadband footprint and the various technologies we can use in various markets to deliver our broadband services |
| However, we can provide no assurance that we will be successful in our efforts |
| Each of our telecommunications carriers provides network access to some of our competitors and could choose to grant those competitors preferential network access or pricing |
| Many of our telecommunications providers compete with us in the market to provide consumer Internet access |
| As a result, any or all of our current telecommunications service providers could discontinue providing us with service at rates acceptable to us, or at all, which could materially and adversely affect our business, financial position and results of operations |
| Our commercial and alliance arrangements may be terminated or may not be as beneficial as anticipated, which could adversely affect our ability to increase our subscriber base |
| A significant number of our subscribers have been generated through strategic alliances, including our marketing relationships with Sprint and Dell |
| Generally, our strategic alliances and marketing relationships are not exclusive |
| In addition, as our agreements expire or otherwise terminate, we may be unable to renew or replace these agreements on comparable terms, or at all |
| Our inability to maintain our marketing relationships or establish new marketing relationships could result in delays and increased costs in adding paying subscribers and adversely affect our ability to increase or sustain the size of our subscriber base, which could, in turn, have a material adverse effect on us |
| The number of customers we are able to add through these marketing relationships is dependent on the marketing efforts of our partners, and a significant decrease in the number of gross subscriber additions generated through these relationships could adversely affect the size of our customer base and revenues |
| 21 ______________________________________________________________________ The market for VoIP services may not develop as anticipated, which would adversely affect our ability to execute our voice strategy |
| The success of our VoIP service depends on growth in the number of VoIP users, which in turn depends on wider public acceptance of VoIP telephony |
| The VoIP communications medium is in its early stages, and it may not develop a broad audience |
| Potential new users may view VoIP as unattractive relative to traditional telephone services for a number of reasons, including the need to purchase computer headsets or the perception that the price advantage for VoIP is insufficient to justify the perceived inconvenience |
| Potential users may also view more familiar online communication methods, such as e-mail or instant messaging, as sufficient for their communications needs |
| There is no assurance that VoIP will ever achieve broad public acceptance |
| We may not generate the returns anticipated on our investments to construct and deploy municipal wireless broadband networks |
| An important element of our business strategy is to deploy competitive alternatives to DSL and cable for delivering broadband Internet access services, reflected in our municipal wireless initiative |
| In October 2005, Wireless Philadelphia selected us to develop and implement a citywide wireless broadband network and offer high-speed public Internet access to the residents, visitors and businesses of Philadelphia, Pennsylvania |
| Also in October 2005, the city of Anaheim, California selected us to build a wireless broadband network |
| We are pursuing additional similar arrangements with other municipalities, but there is no assurance that we will be successful in these efforts |
| This initiative may result in significant capital expenditures in future periods to develop, implement and build wireless broadband networks in various municipalities, and we may not generate the returns anticipated on the capital expenditures and operating losses that may be incurred in this effort |
| We may not be successful in developing, implementing, and executing our municipal wireless strategy, and there can be no assurance that the municipal wireless broadband service offerings will be commercially successful |
| Our third-party network providers may be unwilling or unable to provide Internet, wireline and wireless telecommunications access |
| Our ability to provide Internet access, voice services and customer support to our subscribers will be limited if third parties are unable or unwilling to provide telecommunications and last mile access to our existing and future customers, we are unable to secure alternative arrangements upon partial or complete termination of third-party network and voice provider agreements or there is a loss of access to third-party providers’ networks for other reasons |
| If we lose access to third-party networks under our current arrangements, we may not be able to make alternative arrangements on terms acceptable to us, or at all |
| We currently do not have any plans or commitments with respect to alternative arrangements |
| While our contracts with our third-party providers require them to provide commercially reliable service to us and our subscribers, the performance of third-party providers may not meet our or our customers’ requirements and we may not be able to procure alternative services, which could materially adversely affect our business, financial condition and results of operations |
| We utilize third-parties for technical and customer support and certain billing services, and our business may suffer if our partners are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us |
| Our business and financial results depend, in part, on the availability and quality of our customer support services and billing services |
| We outsource a majority of our technical and customer support functions |
| We are not currently equipped to provide the necessary range of customer service functions in the event that our service providers become unable or unwilling to offer these services to us |
| Our 22 ______________________________________________________________________ outsourced contact center service providers utilize several geographically dispersed locations to provide us with technical and customer support services, and as a result, our contact center service providers may become subject to financial, economic, and political risks beyond our or the providers’ control, which could jeopardize their ability to deliver customer support services |
| We also utilize third parties for certain billing services |
| If one or more of our service providers does not provide us with quality services, or if our relationship with any of our third parties terminates and we are unable to provide those services internally or identify a replacement vendor in an orderly, cost-effective and timely manner, our business, financial position and results of operations would suffer |
| Service interruptions or impediments could harm our business |
| Harmful software programs |
| Our network infrastructure and the networks of our third-party providers are vulnerable to damaging software programs, such as computer viruses and worms |
| Certain of these programs have disabled the ability of computers to access the Internet, requiring users to obtain technical support in order to gain access to the Internet |
| Other programs have had the potential to damage or delete computer programs |
| The development and widespread dissemination of harmful programs has the potential to seriously disrupt Internet usage |
| If Internet usage is significantly disrupted for an extended period of time, or if the prevalence of these programs results in decreased residential Internet usage, our business could be materially and adversely impacted |
| We depend on the security of our networks and, in part, on the security of the network infrastructures of our third-party telecommunications service providers, our outsourced customer support service providers and our other vendors |
| Unauthorized or inappropriate access to, or use of, our network, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our users and of third parties |
| Some consumers and businesses have in the past used our network, services and brand names to perpetrate crimes and may do so in the future |
| Users or third parties may assert claims of liability against us as a result of any failure by us to prevent these activities |
| Although we use security measures, there can be no assurance that the measures we take will be successfully implemented or will be effective in preventing these activities |
| Further, the security measures of our third-party network providers, our outsourced customer support service providers and our other vendors may be inadequate |
| These activities may subject us to legal claims, may adversely impact our reputation, and may interfere with our ability to provide our services, all of which could have a material adverse effect on our business, financial position and results of operations |
| Natural disaster or other catastrophic event |
| Our operations and services depend on the extent to which our computer equipment and the computer equipment of our third-party network providers are protected against damage from fire, flood, earthquakes, power loss, telecommunications failures, break-ins, acts of war or terrorism and similar events |
| We have three technology centers at various locations in the US which contain a significant portion of our computer and electronic equipment |
| These technology centers host and manage Internet content, email, web hosting and authentication applications and services |
| Despite precautions taken by us and our third-party network providers, over which we have no control, a natural disaster or other unanticipated problem that impacts one of our locations or our third-party providers’ networks could cause interruptions in the services that we provide |
| Such interruptions in our services could have a material adverse effect on our ability to provide Internet services to our subscribers and, in turn, on our business, financial condition and results of operations |
| Network infrastructure |
| The success of our business depends on the capacity, reliability and security of our network infrastructure, including that of our third-party telecommunications providers’ networks |
| We may be required to expand and improve our infrastructure and/or purchase additional capacity from third-party providers to meet the needs of an increasing number of subscribers and to accommodate the expanding amount and type of information our customers communicate over the Internet |
| Such expansion and improvement may require substantial financial, operational and managerial resources |
| We may not be 23 ______________________________________________________________________ able to expand or improve our network infrastructure, including acquiring additional capacity from our third-party providers, to meet additional demand or changing subscriber requirements on a timely basis and at a commercially reasonable cost, or at all |
| We may experience increases in our telecommunications usage that exceed our available telecommunications capacity |
| As a result, users may be unable to register or log on to use our services, may experience a general slow-down in their Internet connection or may be disconnected from their sessions |
| Inaccessibility, interruptions or other limitations on the ability of customers to access our services due to excessive user demand, or any failure of our network to handle user traffic, could have a material adverse effect on our reputation which could cause an increase in churn and would adversely impact our revenues |
| While our objective is to maintain excess capacity, our failure to expand or enhance our network infrastructure, including our ability to procure excess capacity from third-party telecommunications providers, on a timely basis or to adapt to an expanding subscriber base or changing subscriber requirements could materially adversely affect our business, financial condition and results of operations |
| Business failures and mergers in the telecommunications industry may inhibit our ability to manage our telecommunications costs, which would adversely affect our profitability |
| The intensity of competition in the telecommunications industry has resulted in significant declines in pricing for telecommunications services that we purchase, and such declines have had a favorable effect on our operating performance |
| However, the intensity of competition and its impact on wholesale telecommunications pricing have benefited us, but they have caused some telecommunications companies to experience financial difficulty |
| Our prospects for maintaining or further improving telecommunications costs could be negatively affected if one or more key telecommunications providers were to experience serious enough difficulties to impact service availability, if telecommunications companies continue to merge reducing the number of companies from which we purchase wholesale services, or if telecommunications bankruptcies and mergers reduce the level of competition among telecommunications providers |
| Government regulations could force us to change our business practices |
| Changes in the regulatory environment regarding the Internet could cause our revenues to decrease and/or our costs to increase |
| Currently, ISPs as “information service” providers, are largely unregulated, other than with respect to regulations that govern businesses generally, such as regulations related to consumer protection |
| As information services and telecommunications services converge, however, the FCC may seek to impose additional regulations, including the imposition of regulatory fees such as Universal Service Fund payments, on information service providers that could adversely affect our business |
| VoIP The current regulatory environment for VoIP services remains unclear |
| Our VoIP services are not currently subject to all of the same regulations that apply to traditional telephony |
| It is possible that Congress and some state legislatures may seek to impose increased fees and administrative burdens on VoIP providers |
| The FCC has already required us to meet various emergency service requirements (such as “E911”) and interception or wiretapping requirements, such as the Communications Assistance for Law Enforcement Act (“CALEA”) |
| In addition the FCC may seek to impose other traditional telephony requirements such as disability access requirements, consumer protection requirements, number assignment and portability requirements, and other obligations, including additional obligations regarding E911 and CALEA Such regulations could result in substantial costs depending on the technical changes required to accommodate the requirements, and any increased costs could erode our pricing advantage over competing forms of communication and may adversely affect our business |
| The tax treatment of activities on or relating to the Internet is currently unsettled |
| A number of proposals have been made at the federal, state and local levels and by foreign governments that could 24 ______________________________________________________________________ impose taxes on the online sale of goods and services and other Internet activities |
| Future federal and state laws imposing taxes on the provision of goods and services over the Internet could make it substantially more expensive to operate our business |
| Our business is also subject to a variety of other US laws and regulations that could subject us to liabilities, claims or other remedies, such as laws relating to bulk email or “spam,” access to various types of content by minors, anti-spyware initiatives, encryption, data protection, security breaches and consumer protection |
| Compliance with these laws and regulations is complex and may require significant costs |
| In addition, the regulatory framework relating to Internet services is evolving and both the federal government and states from time to time pass legislation that impacts our business |
| It is likely that additional laws and regulations will be adopted that would affect our business |
| We cannot predict the impact that future regulatory changes or developments may have on our business, financial condition, results of operations or cash flows |
| The enactment of any additional laws or regulations, increased enforcement activity of existing laws and regulations, or claims by individuals could significantly impact our costs or the manner in which we conduct business, all of which could adversely impact our results of operations and cause our business to suffer |
| We may not be able to protect our proprietary technologies or successfully defend infringement claims and may be required to enter licensing arrangements on unfavorable terms |
| We regard our trademarks, service marks, copyrights, patents, trade secrets, proprietary technologies, domain names and similar intellectual property as critical to our success |
| We rely on trademark, copyright and patent law; trade secret protection; and confidentiality agreements with our employees, customers, partners and others to protect our proprietary rights |
| The efforts we have taken to protect our proprietary rights may not be sufficient or effective |
| Third parties may infringe or misappropriate our copyrights, trademarks, patents and similar proprietary rights |
| If we are unable to protect our proprietary rights from unauthorized use, our brand image may be harmed and our business may suffer |
| The protection of our trademarks, service marks, copyrights, patents, trade secrets, domain names, proprietary technologies and intellectual property may require the expenditure of significant financial and managerial resources |
| Moreover, we can not be certain that the steps we take to protect these assets will adequately protect our rights or that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights |
| Such events could substantially diminish the value of our technology and property which could adversely affect our business |
| We may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future |
| Internet, technology and media companies often possess a significant number of patents |
| Further, many of these companies and other parties are actively developing or purchasing search, accelerator, security and other Internet-related technologies |
| We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection |
| As a result, disputes regarding the ownership of technologies and rights associated with online business are likely to continue to arise in the future |
| From time to time, third parties have alleged that we infringed on their proprietary rights |
| We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the patents, trademarks and other intellectual property rights of third parties |
| None of these claims has had an adverse effect on our ability to market and sell and support our Internet access services |
| As we expand our business and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims |
| Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the imposition of damages that we must pay |
| We may need to obtain licenses from third parties who allege 25 ______________________________________________________________________ that we have infringed their rights, but such licenses may not be available on acceptable terms or at all |
| In addition, we may not be able to obtain or utilize on terms which are acceptable to us, or at all, licenses or other rights with respect to intellectual property we do not own in providing and supporting our service offerings |
| If we are unable to successfully defend against legal actions, we could face substantial liabilities |
| We are currently a party to various legal actions, including class action litigation |
| Defending against these lawsuits may involve significant expense and diversion of management’s attention and resources from other matters |
| Due to the inherent uncertainties of litigation, we may not prevail in these actions |
| In addition, our ongoing operations may subject us to litigation risks and costs in the future |
| Both the costs of defending lawsuits and any settlements or judgments against us could materially and adversely affect our operating expenses and liquidity |
| Our business depends on the continued development of effective business support systems, processes and personnel |
| In recent years, we have expanded our service offerings and will endeavor to expand further by offering new products and services to maintain and increase our customer base |
| Such expansion increases the complexity of our business and places a significant strain on our management, operations, financial resources, and internal financial control and reporting functions |
| Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our growth initiatives which would strain our management, operational and financial resources |
| Consequently, we may not be able to hire, train, retain, motivate and manage required personnel and develop, implement, and manage adequate systems, procedures and controls to support new products and services, which may limit our growth potential and adversely affect our business |
| Additionally, our business relies on our financial reporting and data systems, including our billing systems, which have grown increasingly complex due to the diversification and complexity of our business |
| Our ability to operate our business efficiently depends on these systems, and if we are unable to modify or develop new systems to support our growth initiatives, our business will be adversely affected |
| We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us |
| We believe that our success will depend in large part on our ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional and technical personnel |
| We may have limited or no experience in new product and service activities, making it more important to find qualified personnel |
| We have experienced significant competition in attracting and retaining personnel who possess the skills that we are seeking |
| As a result of this competition, we may experience a shortage of qualified personnel |
| In addition, the loss of any of our key executives could have a material adverse effect on us |
| Our stock price has been volatile historically and may continue to be volatile |
| The trading price of our common stock has been and may continue to be subject to fluctuations |
| Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results; announcements of technological innovations or new products by us or our competitors; developments in our business strategy; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance of other companies that investors may deem comparable to us; and news reports relating to trends in the markets in which we operate or general economic conditions |
| 26 ______________________________________________________________________ In addition, the stock market in general and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies |
| These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance |
| Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock incentive awards |
| Provisions in our second restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay a change of management |
| Our second restated certificate of incorporation, amended and restated bylaws and shareholder rights plan contain provisions that could make it more difficult or even prevent a third party from acquiring us without the approval of our incumbent board of directors |
| These provisions, among other things: · divide the board of directors into three classes, with members of each class to be elected in staggered three-year terms; · limit the right of stockholders to call special meetings of stockholders; and · authorize the board of directors to issue preferred stock in one or more series without any action on the part of stockholders |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and significantly impede the ability of the holders of our common stock to change management |
| In addition, we have adopted a rights plan, which has anti-takeover effects |
| The rights plan, if triggered, could cause substantial dilution to a person or group that attempts to acquire our common stock on terms not approved by the board of directors |
| Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock |