WorldITShow KT taking quantum leap under Lees leadership
By Kim Yoo-chul
No wonder the KT chief executive Lee Suk-chae is better known as “Mr. Taskmaster” and “Bulldozer.”
The former telecom minister has led KT to an array of smart gadgets such as Apple’s iPhones since taking over the top-tier local telecommunications firm in early 2009.
Just six days after he took the helm, Lee declared the acquisition of KTF, — a former subsidiary specializing in mobile communications services, as a mid-term strategy to transform KT into a provider of convergent services.
Last year, its total revenue rose to a record 20.23 trillion won — an increase of 7 percent from the preceding year.
Operating profits were boosted by 117 percent to 2.53 trillion won while net profit for the full 2010 soared by 93 percent to 1.17 trillion won, data from the Korea Exchange (KRX) showed.
KT is the nation’s dominant fixed-line operator. It is also narrowing the gap with its biggest local rival SK Telecom in the rapidly-growing local smartphone sector.
“Since Lee became CEO of the company, it has seen drastic changes in the decision-making process and human resource management. One thing clear is that such changes are paying off,” said Park Jong-su, an analyst at Hanwha Securities.
Lee believed that the aging telco needed a drastic change but he didn’t intend to hire a bunch of back-stabbing know-it-alls.
Before Lee took office KT had been ailing without any sign of finding a breakthrough.
Its cash-creating structures were heavily dependent upon old-fashioned and unprofitable fixed-line businesses, making stock analysts significantly lower their target prices for KT shares.
By the time Lee became CEO, the firm’s annual profit had retreated to below 2 trillion won, according to KT officials.
“I was concerned that KT didn’t know what it should do and how to prepare for the convergence era. Changes are always painful, but I think we had no option then,” said the CEO.
In a desperate move to achieve corporate sustainability, the chief executive took major restructuring measures in its key business units despite severe resistance from labor groups.
Lee made the bold and ambitious decision of partnering with Apple as there was no question in his mind that smartphones would be the next big thing in the saturated local telecommunications sector.
As expected, Samsung Electronics was upset as the world’s second-biggest handset maker. The nation’s biggest phone manufacturer wasn’t prepared for a direct confrontation with Apple in smartphones.
“I think the CEO’s decision for the iPhone helped the local telecom industry catch up with the so-called smartphone era. We hadn’t seen such determined decision-making before Lee,” said a high-ranking KT executive in a phone interview with The Korea Times, asking not to be identified as he isn’t authorized to speak to the media.
The unexpected iPhone fever forced SK Telecom to cut its years-long exclusive partnership with Samsung Electronics as it thought Samsung’s Galaxy S smartphones weren’t powerful enough to meet the explosive demand from local customers.
SK Telecom is now also selling the iPhone.
The KT CEO is more confident now and upbeat as he sees the ongoing cultural shift at KT will continue to make the firm more efficient in strengthening existing businesses and finding new growth engines.
“Regardless of gender, nationality or age, KT will give more authority to employees who have greater potential to bring us sizable profit,” according to the chief executive.
Sustainable corporate growth
It seems that KT has one clear reason for its sustainable corporate growth — balanced business structure.
Thanks to the continuing iPhone popularity and boost in its handset lineup, KT’s wireless data-related business has emerged as the key earnings driver, buffering the flattening revenue growth of its fixed-line business.
In the first quarter of this year, the revenue from its wireless data-related business rose by 13 percent to 486 billion won.
As of the end of the first quarter of this year, the company had secured 3.84 million smartphone subscribers, surging more than five-fold from a year earlier, the company said.
KT still trails SK which had 5.35 million smartphone customers as of the end of the first quarter and reported a 57 percent jump in profit for that three-month period.
Smartphone sales in Korea, one of the world’s most-wired societies, surpassed 10 million as of the end of March, leaping from 800,000 at the end of 2009, Ahn Jae-min, an analyst at Kiwoom Securities, wrote in an April 20 report.
The number of its customers for Internet-based TV programs is also showing signs of increasing as KT has been offering competitive packages to users.
During the latest quarter, sales of its Internet TV services that allow watchers to stream programs surged 83 percent.
“It’s expected that KT will see a qualified growth. It is controlling marketing costs thanks to the increasing number of smartphone users and we expect KT to see a turnaround in its average revenue per user (ARPU),” said Lee Seung-ung, an analyst at Dongbu Securities.
The local brokerage added KT’s smartphone models have reached a level sufficient to compete with SK Telecom and the added value to KT shares is “quite attractive.”
The company became the nation’s top operator for Internet phones as of the end of the first quarter with 2.93 million subscribers, which is more than those secured by LG Uplus.
To prevent its money-losing fixed-line business from further demise, it is planning to open its own platform to third-party developers as a transitional strategy, according to KT officials.
Although analysts have no doubt that KT will report better earnings in the mid- and long-term, earnings would decrease due to the government’s move to cut phone bills in an apparent move to curb inflation.
The Korea Communications Commission (KCC), the nation’s converged telecom regulator, is considering making mobile phone text messages free of charge.
The possible scenario does not look good for mobile carriers. It’s also uncertain whether the regulator’s plan will materialize as revenue from text messages takes up just five percent of carriers’ sales.
“A more realistic option for the regulator would be to urge phone companies to lower subscription fees and offer more free calls,” Ahn from Kiwoom said.
See the future
KT CEO Lee is not satisfied with the ongoing results as his firm is being urged to find its next earnings sources away from the saturated local telecom market.
Dongbu Securities said local telecom companies should find business breakthroughs in emerging businesses such as cloud computing because the telecom industry is regulation-based in nature, under government policy.
With its strength in fixed-line infrastructure, Lee said cloud computing could be the right thing to make it ideally positioned to groom new cash-cows.
Cloud computing refers to the delivery of on-demand computational resources through a computer network. Cloud computing permits functional separation between a user’s computer and the resources used.
The booming demand for tablet PCs and other advanced mobile devices, as well as the widespread deployment of broadband Internet in Korea, is going to further lift the demand for such services, experts think.
“It’s too early to say that KT’s cloud computing business would yield visible results soon because the market isn’t fully ready to take off. However, KT has formidable strength as we have stations across the country and know-how in managing fixed-line businesses,” said a company spokeswoman Kim Yoon-jeong.
KT is pushing its cloud computing competency. It recently started offering cloud services in three cities in the United States and Germany.
The company is helping Japan’s Softbank by offering its data centers and cloud computing software to Japanese companies, which are still struggling with power shortages after the earthquake and tsunami that hit northeastern Japan on March 11.
KT is targeting 700 billion won in annual revenue in the cloud computing business by 2015, company spokeswoman Kim said.
“We hope to get as many business partners as possible in cloud-computing businesses,” she added.
CEO Lee, who is expected to land a second-term thanks to major contributions in helping the firm rise in the world of smartphones, is also paying more attention to business opportunities outside the peninsula.
Korean telecommunications companies have so far failed to create revenue abroad due to weak corporate brand recognition and the lack of customized products.
But Lee has several reasons to expect different results over the next few years, amid convergence initiatives in the industry.
It has selected an integrated suite of Oracle Communications applications and technology for its advanced billing and service delivery platform. Officials say KT could transform its business platform to offer IP-based converged services.
Meanwhile, KT is becoming friendlier with Samsung after the former decided to use Samsung’s energy-efficient computer memory chips in its cloud-computing systems.
“Business transformations have already begun. By forming partnerships with well-known service providers, KT is seeking more power in platform-related business, capitalizing on cloud computing systems,” said Kim of KT.
KT is also looking overseas for investment with a focus on emerging markets such as Central America and Africa after agreeing to sell its 80 percent stake in Russian carrier New Telephone.
KT agreed to sell New Telephone to VimpelCom for $346 million after buying the then unprofitable Russian company for $22 million in 1997.