Broadband poses big hurdle to SKT

By Kim Yoo-chul

Staff reporter

What course of action will SK Telecom take over its troubled affiliate SK Broadband?

This is one question being asked in the cut-throat mobile business community. With its paid-in capital of 1.4 trillion won virtually wiped out, SK Broadband is trying to cut down on its manpower.

But the bigger question is whether it is part of a process leading to its eventual absorption by Korea's largest carrier.

A merger of SK Broadband in its current state would be next to impossible because it would hurt existing shareholders.

Beside, SK Broadband's trouble comes at a time when SK Telecom is also not in great shape.

The domestic market has been saturated so there is little room for internal expansion, while its overseas outreach has been significantly curtailed. Some 95 percent of the population has a mobile phone with broadband accessible to 92 percent of households.

It is an open question why SK Telecom, SK Broadband's biggest shareholder, has been sitting on its hands.

CEO Jung Man-won has done his best, putting more resources in the development of next-generation networks and cross-industry convergence such as combining technology with infrastructure.

But the result has not been satisfactory.

SK Telecom's new growth engine is in its early stages, while it has relatively little presence in the rising fixed-mobile convergence (FMC) market ― a result of its hesitancy over SK Broadband.

In contrast, KT and LG Telecom, SK's biggest domestic rivals, have already been looking for a bigger share in the new sector amid the blurring lines between fixed and wireless products.

KT is taking the lead thanks to the timely merger of its sister firm KTF. LG Telecom followed the shift, merging with LG Dacom.

"CEO Jung lost the best chance to buy SK Broadband. It's not a possible scenario to sell SK Broadband to others. But SK should Telecom wait to acquire the affiliate at the right time and at reasonable price," a source told The Korea Times.

"A future merger with SK Broadband would be a double-edged sword. SK Telecom won't enjoy full advantage as a first-mover in the FMC market as the restructuring of SK Broadband will take years," he added, asking not to be identified.

SK Broadband will implement "three-step mid-term strategies" to slim down its business structure and cut mountainous operating losses.

Some reports say that SK Broadband expects some 170 workers or 10 percent of the total to leave the office via a voluntary retirement program.

Although SK Broadband officially denied any reports about rationalization, few believe that the 10 percent reduction of its payroll will be enough to turn the company around.

SK Broadband hopes to enter into the black in terms of annual profit as soon as possible.

But the company is planning to report just 165 billion won in annual operating profit by the end of 2012.

For the first three months of this year, SK Broadband suffered 26.1 billion won operating losses. In 2009, the company was hit by 109.2 billion won losses throughout the year while it reported 22.6 billion won losses in 2008.

M&A in sight

Analysts expect SK Telecom to combine the broadband unit possibly in the second half of the year.

Earlier, SK Broadband talked about strengthening its content-based product portfolio to revive its stalling Internet TV business.

Still, the company's plan is seeing little progress in securing enough channel sourcing and product coverage for more IPTV users.

The number of its IPTV subscribers reached just 500,000 and analysts say there are no clear measures to boost customers.

SK is the nation's No. 2 IPTV operator after KT. But the market gap with the leader is 15 percentage points, according to recent government data.

"SK Broadband will be made even less significant for FMC products. It has a small capability to prop up its bottom line by promoting its fixed products," Hanwha Securities wrote in a memo to clients.

"We want SK Telecom to take decisive action. KT and LG Telecom are expanding their FMC products. SK Telecom needs fined-tuned strategies to better compete with them," an official at SK Broadband said, asking not to be identified.

Last year, SK Telecom CEO Jung said the company doesn't have an imminent plan to buy its broadband unit, referring to an uncertain outlook in the FMC market.

But the healthy and strong demand for smartphones are driving up the needs for convergence services, pushing KT and LG Telecom to boost their FMC lineups.

"Currently, we are not considering merging the broadband unit. Through business reallocations, SK Telecom could make synergies with SK Broadband," SK Telecom spokeswoman Cindy Kang said.