AWSJ:South Korea's Huge Potential Draws Cell-Phone
Investors
By JANE L. LEE
Dow Jones Newswires
Staff Reporter
SEOUL - Overseas telecommunications giants are pumping loads of cash into South Korea's
frenzied mobile-telephone industry, counting on a future in which at least every other South Korean
is carrying a mobile phone.
That future has already arrived at some university campuses, where LG TeleCom Ltd. says 60% of
students now own mobile phones. "All my friends have mobile phones, and it seems these days that
because the phones are cheap, more people are buying them," says Park Young Jin, a freshman
studying engineering at Yonsei University who got his phone early this year. "Now phones ring all
the time during class."
More than a quarter of South Korea's 45 million people have mobile phones; that's about on par
with Japan's penetration rate but pales besides Hong Kong's 38% and Singapore's 30%. As in
Japan, the industry expects the penetration rate in South Korea to reach 50% in the next few years.
It's this huge potential that's attracting industry heavyweights, despite a grinding recession and a
market so competitive that four of the five service providers can't make any money.
British Telecommunications PLC poured 521.9 billion won ($397.9 million) into LG TeleCom for a
23.5% stake last month. That was one of the largest direct foreign investments in South Korea since
the financial crisis began a year ago. BT's investment followed a 350-billion-won deal by Bell
Canada International Inc. and U.S.-based American International Group Inc. with another local
service provider, Hansol PCS Co., in September. Two of the other three service providers also
have foreign investors.
Sir Peter Bonfield, BT's chief executive, says the only risk he sees for BT's investment is a further
downturn in the economy. "But we believe South Korea's economy will recover in one or two
years," he says. If the economy has bottomed out, BT and other companies reason, now is the time
to invest. And, Sir Peter notes, the government plans to allow foreigners a bigger share of the
telecommunications industry, so BT is seizing the chance to gain a foothold.
Foreigners now can own up to 33% of a wireless telecommunications company and the government
is expected to raise that limit to 49% no later than January 2001. To lure more foreign investment,
the government wants to introduce the change as soon as this January, but it's facing opposition
from protectionist lawmakers in parliament.
Raising the limit quickly will add more fuel to the market's already explosive growth, Sir Peter
believes. The number of mobile-phone subscribers has more than doubled in the past year - from
5.6 million in October 1997 to 13 million last month, according to the Ministry of Information and
Communication. In fact, the ministry predicts that as soon as next year, sales of wireless services
will exceed those of fixed-line services.
The rapid spread of mobile phones, however, is proving much more of a bonanza for the customers
than for the companies. The reason: huge discounts for the high-tech, compact handsets now in
vogue. For as little as 40,000 won - roughly the price of two large pizzas in Seoul - customers can
walk away with a new mobile phone and a subscription. The telecom operators pick up the rest of
the cost, hoping that a stream of revenue from chatty subscribers will help them turn a profit
eventually. The country's mobile-phone companies subsidized their handset sales by 1.26 trillion
won in the first half of the year, according to the ministry.
The intense battle for subscribers made generous handset subsidies inevitable. Before 1996, when
SK Telecom, which was then called Korea Mobile Telecom Co., held a monopoly, a customer had
to pay nearly a million won for the most basic phone and subscription. Then Shinsegi Telecomm Inc.
won a license to start providing service in April 1996, and the handset subsidies began. After more
licenses were issued and three new service providers entered the market in October of last year, a
full-blown war erupted.
From the start, telecom analysts predicted that the industry would lose bundles of money and that
the five companies would be quickly merged into two or three. But so far, all five keep firing away
at each other in an all-out promotion and advertising assault and show no sign of surrender. Clusters
of mobile-phone agencies line the busy streets of Seoul. The ministry says there are nearly 10,000
of them in South Korea. Some station tall, slim women in short skirts behind glossy signs that read:
"Hyundai Gulliver (handset) Free" or "up to 800 minutes free between family members."
Prime-time television programs seem to be sandwiched between flashy mobile-phone commercials
starring popular actors and comedians. For example, Shinsegi's string of ads shows a Chinese-food
delivery boy rowing to the far reaches of South Korean waters to deliver noodles to a man calling
on his cell-phone from a motor boat. Each time the delivery boy arrives at the destination, the
customer has zoomed off to another corner of the country.
The promotional blitz has won LG TeleCom, Shinsegi, and Korea Telecom Freetel Co. about two
million subscribers each, and Hansol PCS a little over a million subscribers. SK Telecom, which
enjoyed nearly eight years of monopoly, towers over the others with 5.7 million subscribers and is
the only company making a profit.
The flood of red ink isn't what the government had in mind when it awarded more licenses. So,
despite pledges in the wake of the crisis to become more free-market oriented, it's intervening to
stop the blood-letting. Prodded by the Ministry of Information and Communication, the five outfits
agreed to curb handset subsidies by the end of June, says Chung Hyun Chul, a deputy director of
the ministry's enhanced communications division. The ministry, hoping to speed the subsidy cuts, is
implementing a ban on companies signing up customers for mandatory subscription periods. The
mandatory periods, currently about a year, ensure a flow of income for the companies to help offset
the handset discounts.
Mr. Chung defends the new policy, arguing that it will help protect consumers who could later be
burdened with rising phone bills if companies decide to raise prices on calls to cut their losses on
handsets. "Handset subsidies are like drugs. They become an addiction. It also hurts the South
Korean telecom firms' global competitiveness." But many in the telecom industry say it is absurd for
the government to step in between the consumer and the service provider.
LG TeleCom's general manager, Yoon Du Kun, worries that the government's effort to curb the
competition will end up slowing the demand for mobile phones. And telecom analysts say the
intervention is unfortunate for LG, which, thanks to the BT investment, now has the cash to expand
aggressively.
But BT is still confident that South Korea is a good bet. Its partner, LG TeleCom, expects that
about 50% of South Koreans will own mobile phones in three to four years. "Koreans aren't very
patient," says Mr. Yoon. "And when you are often stuck in heavy traffic jams, it boils down to
whether or not you can wait to make that phone call."
He also notes that fixed-line services are rapidly being replaced by mobile phones, and with time,
customers who use pager services - about one in three South Koreans - will change to mobile
phones. "Most pager customers are young and later will be able to afford a mobile phone."
And BT sees the industry's expected consolidation as another opportunity. "If there is further
restructuring, we would like to take place in that," says Sir Peter. "But who knows what that could
be."
BT has been expanding in many other Asian markets that face consolidation. It has taken a stake in
Malaysia's Binariang Bhd. and participated in the StarHub consortium in Singapore. Its investment
in South Korea is its single-largest investment in the region, notes Sir Peter.
Some telecom analysts, however, aren't so gung-ho. They say South Korea is nearing its peak in
terms of subscriber numbers. Jeff Kahng at ING Baring Securities in Seoul forecasts that 34% of
South Koreans will have mobile phones by 2000, but that the growth will slow after that. However,
he adds a cautionary note to his forecast. "Telecom analysts have always been conservative and the
market has outperformed our predictions before."
The Players and Their Partners
South Korea's five mobile-phone service providers
Company Subscribers* Foreign partner(s) Stake
(millions)
SK Telecom 5.72 None
Korea Telecom
Freetel 2.10 Motorola 2.8%
Shinsegi
Telecomm 2.09 Airtouch Communications 10%
SBC 8.5%
Qualcomm 1.5%
LG Telecom 1.90 British
Telecommunications 23.5%
Hansol PCS 1.22 Bell Canada
International 9.75%
AIG Fund** 6.5%
*As of Oct. 31
**Based on contract for 350-billion-won investment: 200 billion won already
invested, remainder to be paid in January
Source: the companies |
