When it comes to broadband, South Korea is where the action is
By ASSIF SHAMEEN Seoul
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Park Min, 26, is an office clerk at a small trading firm in southern Seoul. Three times a week, she and her friends walk 10 minutes from their office to a PC bang (literally "PC room," the Korean equivalent of an Internet cafE) to send video clips to their friends and relatives or play network games. Park says her group used to hang out in nearby fast-food joints before the broadband bug bit them. Although she has been an Internet user for three years, only in the last few months has she noticed how fast the Internet has become, thanks to the phenomenal growth of broadband access in South Korea. "I can download video, play games," she says. "This is better than sitting in KFC."
Welcome to ground zero of the broadband explosion. If you want to know which country is on the cutting edge of Internet technology, look no further than South Korea. Nowhere is broadband — Internet transmission that is at least 20 times faster than the narrow-band 56K modems — catching on more quickly. As of July, there were 2.6 million broadband subscribers in South Korea — a ten-fold increase from December last year. Salomon Smith Barney estimates that the country will have 3.4 million broadband customers at year-end, 6.2 million by the end of 2001. Compare this to the U.S., the world's most advanced economy with nearly six times the population of Korea, where total broadband subscribers are actually below Korea's at 2.5 million. Put another way, around 16% of Korea's 16 million Internet users have broadband, compared to 3% in the U.S. and about 1% worldwide.
Not all broadband is created equal. Fiber-optic cables remain the fastest — and most common — channel for broadband access in Korea. Then there is the slightly pokier DSL, or digital subscriber line, which utilizes fixed-line copper wires. Slower still is DSL Light — wryly dubbed "Diet DSL" by Koreans. But even the slowest broadband in Korea is light years ahead of the narrow-band connections that most people in Asia have to make do with.
So what is driving Korea's broadband revolution? Salomon's regional Internet analyst Pratik Gupta points to three important factors: "First, the price differential between narrow-band and broadband in Korea is not as great as that in Singapore or Hong Kong." Second, Korea "has developed content in a much bigger way than Singapore, Taiwan or Hong Kong. You need a critical mass of users before content and applications providers start jumping in to service a big user base." Third is availability. "In Korea, you can have broadband almost anywhere," because most metropolitan areas are connected to cable.
"The explosion of broadband access in Korea has been beyond everyone's wildest imagination," says chairman Lee Young Tae of Korea Thrunet, which provides broadband access through cable modems and runs the Korea.com portal. "The fact that Korea is now the world leader in broadband access or that half of all stock-trading in Korea is now done online has to do with how quickly Koreans adopt new technology, as well as a confluence of factors like pricing, market liberalization and an aggressive government policy to promote the use of the Internet."
Korea's broadband infrastructure is the result of a historical accident. Power utility KEPCO, through its subsidiary PowerComm, had developed a huge network of fiber-optic cables for its own use, but was using just 10% of the network's capacity. Then Seoul liberalized the cable TV market four years ago, which led to the proliferation of small operators who used PowerComm's lines and added the last mile to subscribers' homes. Broadband access providers like Thrunet were able to lease these lines cheaply and roll out their own services. Whereas in many Asian markets former telecommunications monopolies have jealously guarded their fiber-optic networks from competitors, in Korea PowerComm has been happily leasing its under-utilized lines to others for next to nothing.
This has enabled broadband companies to provide their service at low prices. Consider this: In Korea, narrow-band customers pay not only the usual Internet service provider fees but also the metered per-minute local phone charges. "If you use narrow-band dial-up ISP for more than eight hours a week, then narrow-band becomes more expensive than broadband," says Charles Rim, chief financial officer of Thrunet. "The explosion of broadband in Korea is basically because for most users, it just doesn't make economic sense to use narrow-band ISP."
Further keeping the prices low — and fuelling the broadband boom — is the fierce competition. Apart from Thrunet, there are three other major players: state-controlled Korea Telecom, new fixed-line operator Hanaro Telecom, and Dreamline, a subsidiary of Cheil Jedang group (which is controlled by Miky Lee, a niece of Samsung chairman Lee Kun Hee). Korea Telecom is a late entrant to the game, but by virtue of its huge voice subscriber base and fixed-line network — and an aggressive marketing campaign — it has moved into the No.1 spot.
"The reason Korea has so many broadband users today is severe competition encouraged by the government," says Chang Young, an analyst with Goldman Sachs in Seoul. "Every player has been aggressive not just in rolling out the services but also over price." For Thrunet, there is the basic charge of 35,000 won ($31), plus a connection fee of 40,000 won ($36). There is also a modem fee ($174 to purchase one or $4.50 a month to rent it), but this is waived if the customer signs up for more than two years of service. Meanwhile, both Korea Telecom and Hanaro have been "bundling" their voice services with broadband access. "We are bundling not just voice and Internet access but also broadband access, plus a discount on new Samsung PCs," says Hanaro vice president Cho Dong Sun.
As for Dreamline, its main appeal is content. It lags behind the other three in terms of subscriber base, but it has by far the best broadband portal in Korea — DreamX.net. Its parent Cheil Jedang is a shareholder in the Hollywood studio, DreamWorks SKG, and has links to the Korean film and music industry. Thus, Dreamline is able to offer downloadable content for free as part of its package.
Still, many observers expect Dreamline and other smaller players to struggle. "Dreamline has decided that it just can't compete with the likes of Korea Telecom, Hanaro and Thrunet, so it is no longer as aggressive in rolling out its broadband access services," says Chang of Goldman Sachs. He expects Dreamline to be among the first casualties in an impending shakeout. Thrunet's Rim agrees: "This is really a scale business, so if you don't have the size, you're not going to survive. I expect consolidation to happen sometime next year. The smaller players will seek mergers with bigger players."
For ordinary Koreans, the cut-throat competition has been a boon, and they have not been slow to take full advantage. Go to any PC bang and one can sample the latest digital delights at rock-bottom prices. Children, college students and adults alike spend hours on multiplayer network games like Starcraft. ("In Korea, network games are the killer application," says Hanaro's Cho.) Couch-potato types can watch movies over the Internet at 90 cents a pop, or maybe catch up on an episode of a TV soap they have missed. Girls send e-mails with video clips of themselves to their boyfriends. Download MP3s? Sure, but why just go for songs when you can get whole music videos?
Most analysts predict that within three years, more than 40% of all Internet users in Korea will be using broadband. "When you reach a critical mass like that, there is likely to be a bigger explosion in contents," says Rim, "and that will lead to even bigger migrations from narrow-band to broadband." Many industry insiders expect broadband access charges to fall further in coming months as competition gets tougher. Growing subscriber bases and economies of scale should also make it possible for providers to cut charges as they expand. "Korean broadband is now in a 'virtuous' circle," says Cho.
Mark Yoon, an Internet analyst for Merrill Lynch in Seoul, says the government's recent decision to throw open broadband networks by allowing rivals to use one another's network could boost growth even further. The broadband players are still waiting for the government to decide how much "unbundling" of services will be permitted. A complete unbundling would allow for the emergence of virtual broadband service providers — say, portals that currently do not have the capability to provide broadband access but could attain it by piggybacking on Korea Telecom or Hanaro. That would benefit popular portals such as Daum and Yahoo! Korea — and would make it official: Koreans are in Internet heaven. |
