Posted : 2012-04-08 18:55
Updated : 2012-04-08 18:55

Heyday is over

A customer looks around a branch of a local mobile carrier in Seoul in this undated file photo. Mobile carriers of the country had the market cap halve from a decade ago due to market saturation and continuing pressure by the government. Korea Times file

Saturated market, restrictions halve value of mobile carriers

By Yoon Ja-young

There was a time when share prices of SK Telecom were a big issue in the stock market. It set record after record, reaching 2 million won, 4 million won, and surpassing 5 million won in 1999 before it divided the shares by 10 to one. Mobile carriers were regarded the golden goose of the market, and they were the most preferred workplace for college graduates.

The golden age ended. Mobile carriers of the country had the market cap halve from a decade ago upon market saturation and continuing pressure by the government.

The outlook isn’t bright either and the only answer is going beyond telecommunications, according to both mobile carriers and industry analysts.

Falling market cap

The corporate value at 11.1 trillion won of SK Telecom, the country’s biggest mobile carrier has halved from 22.5 trillion won from 2002 April. The value of KT plunged to 8 trillion won from 15.7 trillion won during the same period. In comparison the main index KOSPI has more than doubled since then.

“This isn’t an issue of just a year or two.

The market cap of mobile carriers has been plunging during the past seven to eight years,” said Lee Ji-yeon, an analyst at KB Investment & Securities.

According to industry analysts, there are a number of factors shackling mobile carriers.

Most of all, looking from a long-term perspective, the market has matured. The number of mobile service subscribers has reached 52 million, a number higher than the country’s total population.

“In the telecommunications industry, the service penetration ratio is closely related with the growth curve. The Korean market is in the midst of growth stagnation. The penetration ratio has surpassed 100 percent,” said Choi Nam-kon, an analyst at Tong Yang Investment & Securities.

KB’s Lee explained that the mobile carriers have engaged in cutthroat competition as the market is stunted. “It ate into their profitability. Both their performance and market valuation worsened,” she said.

Bigger government influence

Analysts also cite tough government regulations.

Yang Jong-in, an analyst at Korea Investment & Securities, notes that mobile carriers of the country have lower return on equity (ROE) compared with those of their counterparts overseas. ROE measures profitability of a business. “The profitability was notably weakened recently from tough regulations on mobile rates,” Yang said. The analyst agrees that carriers in other countries also struggle to deal with a saturated market. “But Korean companies suffered further shrinking in their stock market value.

Regulation and excessive competition cause this situation” he added.

Analysts note that mobile rates have always been under government regulation.

But the control has been stronger especially in Korea. In fact, a mobile rate cut was one of the major campaign pledges of President Lee Myung-bak during the 2007 election.

There have been a number of rate cuts since then. The mobile carriers cut the basic rate on top of offering more free text messages last year as well as submitting to the government’s anti- inflation drive.

A shift in technology is also threatening carriers. The surge of mobile instant messengers like Kakao Talk coupled with the penetration of smartphones ate into their profit from text messages. Smart TVs and Internet content businesses like YouTube are also “free-riding” on the network.

Mobile carriers complain about how they are investing trillions of won in network amid explosively increasing data traffic.

The pressure on mobile rates is expected to get stronger this year, with two elections ? the general election and the Presidential election ? scheduled. Statistics show that mobile carriers have underperformed in the market every time there was either a general election or Presidential election here. For the general election this Wednesday, the governing Saenuri Party as well as the main opposition Democratic United Party both place “mobile rates cuts” as a campaign pledge.

The expansion of Internet phones, which now offer better quality thanks to improvements in technology, is also eating into their income from voice calls.

Despite concern over falling profitability, the three players will compete fiercely to gain leadership in the shift from third-generation (3G) to fourth-generation (4G) longterm evolution (LTE) services by offering huge subsidies and increasing data service plans to attract more subscribers.

Beyond telecommunication

Analysts say that going beyond telecommunication is the only solution.

Korea Investment & Securities’ Yang said mobile carriers may fall to the status of “cable operators,” while Internet and contents businesses pick the best fruit. “To create additional value here, they should set up an alternative platform or other profit models.” Consequently, mobile carriers are taking “beyond telecommunication” as the major survival strategy.

“We know that there is a paradigm shift in the industry. We should go beyond taking fees for the network. It depends on what value you can offer consumers. Third party players, including global Internet businesses like Google and handset manufacturers, are also in this competition. The platform is competitiveness,” a KT spokesman said.

KT acquired BC Card, seeking convergence between IT and finance, and is strengthening its cloud business. It also acquired a number of content businesses and is leading the move toward “smart homes.” The KT spokesperson said that the company aims to transform into a global media business.

SK Telecom’s acquisition of the world’s second largest semiconductor Hynix also intends to go beyond telecommunications.

“It is a kind of new growth engine, on top of creating synergy with our old business,” a SK Telecom spokesman said.

SK Telecom split off SK Planet, a platform business, recognizing the importance of setting up a platform to offer diverse services and attracting users. The company is also focusing on IT-based healthcare and education based on smart devices.

LG Uplus spokesperson said that its CEO Lee Sang-chul was the first to raise the issue of “beyond telecom” here. “We should look for additional profit by converging telecommunication with other businesses,” he said.

The company is one of the leading companies in mobile advertisements, and has been active in niche marketing as well. On top of launching “Wagle,” based on the user’s contact list, it has presented specific target groups with specialized social networking services such as “Pet Loves Me” for pet lovers and “Cosmo Style,” for fashionistas.

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