Hanaro Telecom to Acquire Onse's Broadband Operation

Hanaro Telecom has signed an initial agreement with Onse Telecom to take over the latter's broadband subscribers who agree to the switch in providers, with a takeover cost of 250,000 won per user. "The deal will boost our presence in the high-speed internet service market and provide a stepping stone to our new IP TV business," Hanaro said in a statement. Onse, which had about 270,000 broadband subscribers as of the end of last month, said it will instead focus on internet-based and international call services.

Outlook and Implications

• Acquisition for Expansion: The deal would strengthen Hanaro's number-two position in the South Korean broadband market, where the company had a 26.3% share at the end of July. In late 2005, Hanaro bought the then-bankrupt broadband firm Thrunet in an effort to challenge industry leader KT. Following the acquisition, Hanaro's market share surged from 22.7% to 29.2% at end-January, but dwindled back to its current level, due to serious competition from newcomer LG Powercomm. In August 2005, the Korean regulator granted Powercomm a licence to provide broadband services. Powercomm, which had been leasing network facilities to retail telecoms operators, entered the retail broadband access market in September 2005. Dacom, the parent company of Powercomm, has therefore transferred its retail broadband access business to Powercomm. Adopting an aggressive pricing strategy, Powercomm has been successful in acquiring broadband subscribers, largely from is competitors. During the first half of 2006, Powercomm had accounted for 80% of the entire market’s net additions. The operator has signed up more than one million broadband subscribers since its service launch in September last year and expects to attract a further 300,000 customers by the end of 2006.
• Regulatory Hurdles on IP TV: Hanaro commercially launched IP TV in July, under the Hana TV brand. This is a TV-based content-on-demand service. Hanaro is targeting 250,000 subscribers by end-2006 and one million by end-2007. The operator expects IP TV operations to turn profitable by end-2007, on 70-80 billion won in revenue, upon reaching one million subscribers. Key contents currently consist of video-on-demand of recent movies, delay-broadcasts of local programmes, some foreign programmes, and online games. It has also recently signed contracts with leading foreign content providers, including Walt Disney, Discovery Channel, and Warner Brothers. However, the government does not currently permit real-time broadcasts of local content through the IP TV service. Cable-TV system operators have also been vocal in lobbying against telecoms operators entering the TV market. Hanaro expects the government to eventually address such issues and permit full-blown IP TV service by 2008. Despite such regulatory uncertainty, the IP TV service is expected to at least help Hanaro reduce subscriber churn on its broadband side. KT is also looking to commence IP TV service in early 2007.
• WiBro Takes Off Slowly: In March 2005, KT and SK Telecom acquired a licence, at 120 billion won each, to provide wireless broadband (WiBro) services. While SK Telecom is taking more of a wait-and-see approach regarding WiBro, KT harbours a strong ambition to grow this new service. The broadband market leader conducted a trial service of WiBro in parts of the Seoul and Gyunggi provinces in April, and commercially launched the service in these areas in June. KT has earmarked 500 billion won in capital expenditure (capex) for WiBro in 2006 and plans to spend a total of 1,000 billion won over five years. However, the adoption of the service has so far been minimal. It remains uncertain whether WiBro will be a commercially viable service, given that demand for portable data devices in South Korea remains uncertain and WiBro still needs to differentiate itself from mobile operators’ W-CDMA/HSDPA offerings.