Mobile Operators Hand Out US$1.07 bil. in Handset Subsidies in South Korea

Since the South Korean government partially lifted a ban on mobile phone subsidies in March last year, mobile carriers have spent more than 1 trillion won (US$1.07 billion) in handset subsidies to lure subscribers from rivals amid fierce competition in the mobile market, the Korea Herald reports, citing government data released yesterday. According to the data compiled by the Ministry of Information and Communication (MIC), in the 12 months starting March last year, South Korea's three mobile operators—SK Telecom, KT Freetel (KTF) and LG Telecom—spent a total of 1.03 trillion won in mobile phone subsidies that were available for subscribers that have been using a mobile operator's service for more than 18 months. During the period from 2003 to March 2006, the government had banned handset subsidies over concerns about excessive competition. The government eased regulations last year to help long-term handset users receive partial financial aid from the three mobile carriers to purchase a new model at a relatively low price.

According to the MIC, the total number of handset subsidy users reached 16.9 million in the year starting March 2006 and the average handset subsidy stood at 96,000 won (US$103) per person. However, taking into account illegal subsidies including rebates for retailers and "encouraging funds" from phone manufacturers, the average handset subsidy was estimated at around 200,000 won per person. The country's largest mobile carrier, SK Telecom, spent 591.5 billion won in handset subsidies between March 2006 and March 2007, giving out 100,000 won per new handset buyer, the ministry's data showed. The second-ranked KTF spent 236.7 billion won during the same period, handing out over 92,000 won per person, followed by LG Telecom, giving out 130 billion won in total handset subsidies, and spending 86,000 won per person. The three mobile operators and the fixed-line giant, KT Corp, have, on several occasions, been fined by the Korea Communications Commission (KCC) for offering illegal handset subsidies.

Outlook and Implications

• High Marketing Costs Hit Profitability: In South Korea’s highly competitive mobile market, where the mobile penetration rate stood at 83.2% at end-2006, competition among the three mobile carriers has significantly intensified following the re-introduction of partial handset subsidies. High marketing costs, a large portion of which were used to subsidise subscribers' handset purchase, have hit the operators’ profitability, amid an expensive marketing war (see South Korea: 24 January 2007: High Marketing Costs Hit Q4 Earning of South Korean Mobile Operators).
• Competition Moving towards HSDPA: The debuts of nation-wide HSDPA mobile services from SK Telecom and KTF in March have initiated another round of marketing wars between the two largest players on the next generation of mobile services (see South Korea: 28 March 2007: SK Telecom Launches Nationwide HSDPA Mobile Service). As HSDPA terminals are still relatively expensive, the two carriers will have to hand out substantial handset discounts to attract customers to adopt the new services. Both operators expect HSDPA to help generate future revenue and ARPU (average revenue per user) growth in a market where organic growth opportunities are limited. However, high marketing expenses, as well as the costs of building and running the new networks, will further weaken their margins before sales growth from HSDPA becomes significant. Nevertheless, as the market moves towards HSDPA, the future remains gloomy for LG Telecom, the only operator that does not offer the service. Having failed to win permission to operate on the W-CDMA platform, the third-largest mobile carrier is upgrading its network to CDMA 2000 EV-DO Rev. A.