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Cooking up wireless, Korean style
June 05, 2000
by David James
Venture barbarians, renegade startups and overseas competitors are at the gates of the world's government-owned telecoms.
The bureaucracy-laden behemoths are struggling to adapt to changing technologies and customer demands for a broadening array of new services.
"Korea has become a hotbed for broadband access services."
Typically, the old telecoms are burdened by the political motivations of government owners, management inefficiencies, and outdated government regulations and policies.
Nowhere is the ferment headier than in South Korea, where the fragrance of telecom kimchee fills the air. (Kimchee is that spicy, partially fermented, Korean cabbage dish.)
Korea Telecom, the country's 59 percent state-owned phone company, claims now to be a reinvented "info-tech" company and is moving as quickly as it can into wireless and Internet-related services. But it is just one of the players in Korea's telecom m‚lange.
Vying for leadership
"Korea is one of the most dynamic telecommunications markets in the Asia-Pacific region," says Charles Kenny, an information industry economist at the World Bank in Washington, D.C. "There are numerous facilities-based telecom service providers now operating in Korea providing local, long distance, international, cellular and wireless services, all competing fiercely for market share.
"Moreover, some Korean telecom equipment manufacturers are vying for global leadership in new technologies, like wireless, and foreign companies are actively seeking opportunities to invest or otherwise supply services and solutions."
Korea, a country that has long been dominated by huge bureaucratic chaebols (the Korean word for conglomerates, pronounced "chay-bowls") such as Samsung, Hyundai and Daewoo, a country that typically resists foreign ideas and investments, is breaking from tradition and transforming its future.
Expansion with a bang
"The Asian economic crisis precipitated an enormous restructuring of Korean industries," says Karl Moskowitz, representative director of KSA Ltd., a business-development firm based in Seoul. "Banks were closed or merged, chaebols were pressured to divest noncore businesses and improve financial structures, and timetables for liberalization of foreign investment were accelerated."
As economic activity picked up and Internet-related businesses took hold, there was a huge expansion in the demand for telecommunications services.
Korea, a densely populated country (47 million people), has a telecommunications infrastructure that is adapting rapidly to Internet usage. Extensive fiber-optic networks were laid in the early 1990s, prompted in part by the lobbying of Korean chaebols that had built too many optical-cable factories.
By several usage measures, Korea is now Asia's Internet leader. The early availability of Internet access, and a popular computer game called Starcraft, gave rise to Korea's version of a cyber caf‚, the "PC bang." ("Bang" is the word for "room" in Korean.)
Today there are more than 15,000 PC bangs in Korea, each typically equipped with two dozen or more powerful PCs with high-speed Internet access. For $2 an hour, users socialize while playing Internet computer games, surfing the Net, and chatting online.
Creating a hotbed
"Information technology is the one area that is leading Korea out of their economic crisis," says World Bank economist Kenny.
Today there are some 20 million Internet users in Korea, with more than 700,000 of them having high-speed broadband access. The government expects that there will be 4 million broadband subscribers by next year paying $30-$40 a month for unlimited access.
"Korea has become a hotbed for broadband access services, with carriers rivaling each other to offer ADSL (asymmetric digital subscriber lines) and cable modem access," adds Krishna Kishore, director of international marketing for Asia-Pacific at Telcordia Technologies Inc. in Piscataway, N.J. "This is where the battle will be fought, and this is where investment activity is likely to converge in the next few years."
Korea Telecom plans to install 1.4 million high-speed ADSL lines this year, equivalent to the entire world market for ADSL shipments last year.
Its ADSL rollout is part of a $885 million package of investments in broadband access and Internet services in 2000, comprising one-third of its entire capital expenditures for the year, according to Jae Jin Lee, director of Korea Telecom's network access project.
"A year from now, Korea will have the highest ADSL penetration in the world," claims Thomas Dijohn, vice president of Asia-Pacific at the Fantastic Corporation in Singapore, a multimedia broadband firm that repackages various content applications for broadband. "In addition to ADSL, there are big opportunities in upgrading cable systems. Thrunet (KOREA), for example, is busy buying up small cable companies."
Licenses to drive
The most significant telecom opportunities -- and challenges -- in Korea today, however, involve the move into "third-generation" (3G) broadband wireless services, according to Simon Bureau, managing director of Vectis International Inc., a Montreal-based firm that provides business-development support services in Korea to North American IT companies.
"The fortunes of many Korean telecommunications companies hinge on the government's pending award of IMT-2000 licenses-and a probable consolidation in the wireless segment of the industry," he claims. "The government is pushing to have IMT-2000 service launched by mid-2002 when Korea co-hosts the soccer World Cup with Japan."
IMT-2000 is a standard of capabilities recommended by the International Telecommunication Union in Geneva for wireless access to the global telecommunications infrastructure; it is designed to permit users to roam throughout the world using multiple-mode handsets that will select the appropriate mode automatically.
"The Korean market is strongly heading toward broadband wireless Internet access using the IMT-2000 standard," says Bureau.
"Operators who cannot offer that access will clearly be at a disadvantage. Moreover, an IMT-2000 license will be the key to business-to-business wireless Internet access, the most promising segment of the market."
Cooking up wireless, Korean style
page 2: Overseas connections
Korea's Ministry of Information and Communication (MIC) will soon announce the terms of the IMT-2000 license awards. Telecoms will submit their proposals a few months later, and the MIC is expected to announce the awards by year-end.
"Everyone
has high expectations for the expansion of wireless and broadband opportunities."
It is anticipated that at least three licenses will be awarded. Analysts expect that one license will be awarded to a consortium of Korea Telecom and its affiliate Korea Telecom Freetel (the leading personal communications service-PCS-operator) and that a second license will be awarded to SK Telecom (the leading wireless operator). A third license may be awarded to a consortium of Dacom and LG Telecom, or a consortium of Hanaro Telecom (HANA) and Onse Telecom.
Consortia and consolidation will prevail in the wireless markets, says Bureau, because a limited number of IMT-2000 licenses will be awarded and because operators will need to avoid the high cost of redundant infrastructure.
In addition to the consortia mentioned, and SK Telecom's acquisition of Shinsegi Telecom, there is an IMT-2000 consortium headed by Hansol M.Com and speculation that Korea Telecom Freetel or LG Telecom might soon acquire Hansol.
Overseas connections
Although minority foreign investment in telecommunications services was already nominally permitted prior to the Asian economic crisis, the crisis opened opportunities for players such as British Telecom (BTY) and Bell Canada (BCICF) to buy stakes in new capital-hungry PCS service providers, according to Moskowitz of KSA.
"Korea still does not permit foreign control of telecommunications services (see "The disappearing monopoly"), but the rapid uptake of wireless and Internet-based services continues to provide immense opportunities for foreign vendors of equipment and technology," he says.
A prime example is the CDMA (code division multiple access) technology of the U.S.'s Qualcomm Inc. (QCOM), for which Korea has been a pioneer market. Cisco Systems Inc. (CSCO), Lucent Technologies Inc. (LU), and other overseas equipment manufacturers have such a strong market in Korea that the Asian crisis was only a momentary setback for them.
Foreign vendors of the chipsets and technologies that power the mobile handsets and telecom equipment manufactured by Samsung and other Korean firms (Korea is the world leader in manufacturing CDMA handsets) have high-volume sales to Korea.
And, in areas such as Internet services and businesses, many leading U.S. names such as Yahoo (YHOO) and Lycos (LCOS) are well represented, in addition to software powerhouses like Microsoft (MSFT).
High expectations
"Tons of foreign investors have been entering Korea in the past six months, mostly looking at Internet and telecom ideas," says Sandor Hau, managing director of HelloAsia Inc. in Seoul, an Internet loyalty and marketing services company. "Everyone has high expectations for the expansion of wireless and broadband opportunities."
For investors, a number of Korean companies are available on the Nasdaq as ADRs (American depositary receipts) -- Thrunet is a recent example. And the liberalization of Korea's foreign investment restrictions in 1998, in reaction to the economic crisis, opened Kosdaq (Korea's new OTC market, heavy in technology listings) to foreign investment.
"In fact," says Moskowitz, "while foreign telecoms may still be frustrated in direct investments, certain of the Korean telecom services they covet are becoming available to portfolio investors as ADRs on the Nasdaq and New York Stock Exchange."
Direct foreign investment in Korean telecoms is also expected to rise as a result of Korea's participation in the World Trade Organization's Agreement on Basic Telecommunications, which loosened Korea's foreign investment restrictions. In 2001, the limit on foreign investment in Korean Telecom will rise to 33 percent, and in Korean wireline and wireless companies it will rise to 49 percent.
Local partnerships
However, because of Korea's nationalistic culture, foreign firms doing business in Korea often do so in partnership with Korean firms. "Our company uses a 'through channels' model in Korea, working with local partners, not end users," says Gary Workman, president of Cabletron Systems Asia Pacific in Singapore, a data-networking company.
While there is strong growth throughout the Korean telecommunications sector, from rapid deployment of high-speed ADSL lines to expanded Internet-related services, many feel that the best opportunities in Korea lie in wireless manufacturing and services.
"The wireless markets are dynamic in Korea," says Albert Jordan, director of CDMA management at Lucent Technologies in New Jersey.
"In a country with a population of 47 million there are 25 million wireless subscribers, a very high penetration for so large a country," says Jordan. "And Koreans demand lots of wireless features and services, such as SMS (short message service), more than in the United States. This makes Korea an excellent test bed for developing wireless technologies and products."
"Korea has a very high adoption rate for new wireless services, and the competition to meet the demand is very high," adds Ted Cho, CTO of Dialpad.com Inc. and co-founder of Serome Technologies in Seoul, providers of Web-based PC-to-Internet telephony.
"On the development side, Korea has a large pool of really creative engineers. And our culture is perfect for the fast-moving information age-we're very aggressive!"
Cooking up wireless, Korean style
page 3: Betting on CDMA
T.W. Kang, managing director of Global Synergy Associates, a management consulting firm in Tokyo with activities in Korea, agrees.
"People are leaving the chaebols and government ministries in droves to work for startups."
"I visited a variety of cell phone manufacturers in Korea and Japan recently, and my impression is that the Koreans are more aggressive and open to possible future designs. In particular, Samsung, which has achieved a significant volume in the CDMA market, has a more progressive attitude about trying new technologies and partnering with other companies. Also, I believe Korean manufacturers are encouraged by the fact that cell phone manufacturers in countries with smaller populations than Korea, namely Finland [Nokia (NOK)] and Sweden [Ericsson (ERICY)], have done well in export markets."
The focus in wireless technology and services in Korea is heavily on CDMA (see "Competition in space"), an American technology that was first commercially developed by Korea's Electronics and Telecommunications Institute in partnership with Qualcomm.
The Korean government has funded a three-year research and development project to develop technologies for the IMT-2000 standard. The MIC recently reported that the first phase of the project resulted in 75 international and 231 domestic patents pending.
The government hopes that Korean CDMA technologies will provide Korean IT firms with a significant advantage in serving global wireless markets.
Development boom
SK Telecom, Korea's leading wireless operator and the world's first commercial CDMA service provider, recently announced its own R&D program. It plans to spend $111 million in developing a commercial IMT-2000 system jointly with local equipment manufacturers, mobilizing 120 researchers and making its technologies freely accessible to the equipment manufacturers, including system design, core chips and test equipment.
In addition, Motorola has announced that its research center in Seoul will be expanded to become its global R&D base for CDMA mobile phones.
With broadband global roaming expected to be a key feature of the new technology, SK Telecom and Japan's NTT DoCoMo (Nippon Telegraph and Telephone Mobile Communications Network) (NTT) successfully demonstrated the service using IMT-2000 technology at a test last January. SK Telecom's president Cho Jung-nam, in a moving vehicle in Seoul, and NTT DoCoMo president Keiji Tachikawa, in a videoconference room in Tokyo, talked with each other on a multimedia call at 128 Kbps.
"We are confident that we can begin offering commercial service by May 2002," says Cho.
From chaebol to venture
A major factor in wireless development in Korea, however, is a sea change in the national business culture, from chaebol-led to venture-led.
"Graduates of Korean universities no longer want to get jobs in the biggest and best chaebols," says Jay Eum, a Stanford MBA from Korea who is now a director at Dialpad.com Inc. in San Jose, Calif. "Young people like the meritocracy of small companies. In addition, people are leaving the chaebols and government ministries in droves to work for startups. Before the Asian economic crisis, planners at the chaebols were working on expansion strategies -- now they're working on survival strategies."
The technology-heavy Kosdaq is a great incentive to Korean entrepreneurs. The recent average price of 147 venture issues listed on the Kosdaq, including Serome Technology and Daum Communications, was more than eight times the average price of issues on the Korean Stock Exchange.
"Just like in North America," says Simon Bureau, "venture companies want to be listed on the Kosdaq. Three hundred to 400 new firms are scheduled to be listed this year."
Starting up in Venture Valley
Now a critical mass, technology startups are clustering in an area in Seoul just south of the Han River called "Venture Valley."
"There is a growing feeling of admiration for the new entrepreneurs," says Bureau, "and venture capital funds are rushing to feed their needs. In 1998 only ten venture capital funds existed in Korea. Now there are more than 175."
Even the chaebols are trying to muscle in on the act, announcing plans to invest in venture companies, funding employee ventures and offering stock options. Samsung Corporation says it wants to transform itself into a venture-holding company, expecting to invest in more than 100 firms by 2005 and reorganize into smaller divisions, says Bureau.
In addition, Hyundai will soon inaugurate a massive new "intelligent" building located in Venture Valley, providing free rent and venture support to IT startups.
The government is not to be left out either. Every level of government is promoting or supporting venture companies and the development of IT industries.
The Seoul city government plans to give various financial and tax incentives to IT companies locating in Venture Valley. A $270,000 Seoul city fund has been earmarked to give financial support to small and medium IT companies.
The Ministry of Information and Communication has established a $135 million fund to invest in high-tech projects. The Ministry of Finance and Economy is expanding tax benefits to small- and medium-sized venture companies.
And the Small- and Medium Business Administration, in the face of high demand for engineering talent, plans to help companies recruit foreign scientists.
CDMA kimchee
Koreans are well-known for their competitive focus.
They are not defending the telecom gates against venture barbarians -- they themselves are helping to tear down those gates and rebuild the industry. Their resiliency and competitiveness has helped them digest their telecom kimchee with little difficulty to date.
But in the wireless sector they have put a large commitment to CDMA technologies on their plates. It will be interesting to see if they develop a case of indigestion.
David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in Asia-Pacific business opportunities. |
