Telecom Industry Facing Rapid Change

Attention Focused on SK Telecom's Purchase of Fixed-Line Unit

By Kim Yoo-chul
Staff Reporter

The telecommunication industry is facing change as three telecom units of LG Group will merge into a single business entity in the near future.

Amid a convergence move in both broadband and wireless industries, pushing packaged deals is a top priority for telecom carriers to boost their customer base and strengthen services.

The LG Group's plan is expected to accelerate internal talks by SK Telecom to buy its broadband affiliate SK Broadband.

LG Group officials said the three companies ― mobile carrier LG Telecom, fixed-line operator LG Dacom and broadband firm LG Powercom ― may hold board of directors' meetings soon.

They say the merger is necessary to compete with KT and SK Telecom, and will enable LG to bundle mobile, fixed-line and Internet services into a single package.

South Korean telecom operators are trying to find new growth engines that will lead to a breakthrough in the saturated local telecom market.

"We are currently monitoring the situation. In order to secure our bottom line and keep our leading position in the industry, we will take further moves if needed," an SK Telecom spokesman said Monday.

Industry sources say SK is seeking to merge with its Internet service unit, SK Broadband, in April, prompted by the news of the planned LG Telecom merger.

SK Telecom, which acquired its fixed-line unit in 2007, may be slapped with as much as 200 billion won in taxes if it seeks a merger before March 31.

If the units complete the process, then the combined annual sales of a unified SK will rise to 16 trillion won, with total assets of 21 trillion won.

In an earlier press conference, SK Telecom CEO Jung Man-won raised the possibility of the merger, but added that it would be based on the market situation.

Economies of Scale

Analysts say solid infrastructure both in fixed line and wireless networks makes it possible for telecom companies to realize "economies of a scale" in converged services.

Separately, saturation of the domestic mobile services market has encouraged key players to seek alternative sources of revenue.

Telecom officials say understanding customer needs and developing innovative, converged services is crucial to take the market to the next level. South Korea has already providing third-generation (3G)-based services and operators are focusing their investments on new offerings.

"Investments in 3G, long term evolution (LTE) network expansion, and attractive smartphones with lower prices are expected to propel the market. Fixed mobile migration and service convergence will also enhance market prospects," Frost & Sullivan, a market research firm, said in a report to clients.

According to the research agency, South Korea is one of the top six Asia-Pacific countries with the highest household broadband penetration rates in 2008 at 92.8 percent.

"Revenues generated by fixed-mobile convergence (FMC) will dramatically rise over the next few years. Considering the solid telecom infrastructure, here, it would be necessary for businesses to expand their size," a senior manager at KT said.

KT, which has seen sales growth after the successful acquisition of KT Freetel, is more aggressively marketing Internet telephony ― a departure from its previous stance of protecting the traditional landline market, where it used to have a monopoly ― and is opening up an Internet Protocol TV (IPTV) platform.

KT representatives say new FMC services will be introduced to households sometime this month.

"South Korea's telecom industry valued at some 40 trillion won size is destined to be reshaped into three big players. There will be worries over monopolization as size has become the top buzzword for the telecom sector," a senior telecommunication industry source told The Korea Times.

Yet, an official at the Korea Communications Commission (KCC), the nation's top regulator, thinks the reshaping could be beneficial.

"The move will make room to create a new telecommunication player in the saturated and highly-competitive local market. We need a new player to provide better telecom-related services to general consumers via more competition," the official said.

It is expected that the annual combined sales of LG Group's three telecom units could reach 8 trillion won, a viable level to better compete with SK Telecom and KT, analysts say.

Neutral for Stocks

Although size matters amid the convergence trend, it seems highly unlikely that stock prices of LG and SK will gain strong momentum due to regulatory obstacles and a value dilution for earnings-per-share (EPS), analysts say.

The biggest obstacle for the fixed-mobile convergence market is the added costs involved, in terms of both investments in equipment and higher operating costs, which for businesses could outweigh the benefits to users.

"The key focus would be the combination of profitable and unprofitable businesses. It isn't expected that the merged LG will see greater synergy in terms of financial soundness and sales channels," Sung Jong-hwa, an analyst at Meritz Securities, said.

Jin Chang-hwan, an analyst at Shinhan Financial Investment, said, "In terms of growth potential and profitability, LG Telecom lags behind. Considering the situation, the valuation of the combined LG will be lowered to the level of LG Telecom, while the growth potential in fixed-line companies will be diluted."

He added that if the entity is unified, LG Telecom is forecast to capture a maximum of 60 percent of total sales.

But officials and watchers have generally agreed that such drastic moves by leading telecom companies will give a fresh impetus to the nation's crowded Internet market.

yckim@koreatimes.co.kr