Will mobile subsidy war ever end?
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A man walks past a mobile phone dealer in downtown Seoul, March 13, the first day of the telecommunication carriers’ business suspension. The 45-day suspension prohibits dealers from soliciting new subscribers. The government imposed the suspension on Korea’s three mobile carriers for providing excessive subsidies to attract subscribers. / Yonhap
Repeated suspensions on carriers raise doubts
By Kim Bo-eun
Government-imposed suspensions and fines on telecom companies are nothing new, but the latest sanctions are the most severe so far.
Two of the nation’s major mobile carriers, KT and LG Uplus, have begun serving their 45-day suspensions that ban them from recruiting new subscribers, for providing heavy subsidies to lure users. The third carrier, SK Telecom, will begin serving its 45-day suspension early next month. LG Uplus and SK Telecom have been ordered an additional 14-day and seven-day suspension, respectively, for inciting the excessive subsidy competition. In addition to the suspensions, the three carriers have been fined a total of 30.4 billion won.
The Korea Communications Commission (KCC), the nation’s telecom watchdog, cited the carriers’ lack of efforts to correct their malpractices as the reason for the long suspensions.
However, even the telecom regulator seems to acknowledge the ineffectiveness of suspensions and fines. Accordingly, many wonder whether a telecommunications law on correcting the current distribution and sales structure of the mobile phone market will be able to address the Korean mobile carrier market’s issues, including the excessive competition and subsidies.
Members of the Korea Mobile Distributors Association call on the government to cancel the business suspension of telecommunication companies in Jongno, downtown Seoul, March 13. / Yonhap
Korea’s mobile carrier market
Kim Se-young, 26, was elated a couple months ago when she purchased a Samsung Galaxy S4 mobile phone for 150,000 won through an online channel. She had paid 890,000 won for the same model to an offline retailer six months earlier but subsequently lost the phone. The model currently costs 500,000 won to 600,000 won. Like Kim, an increasing number of people have been turning to underground channels that provide access to subsidized mobile phones. Such channels enable consumers to buy new models at significantly cheaper prices, so consumers wonder why the government thinks such subsidies are bad.
The problem is that the domestic mobile phone market is one where prices vary vastly depending on how and where the phones are purchased. It is illegal for telecom carriers to provide mobile phone subsidies greater than 270,000 won per unit. However, all carriers offer heavily subsidized handsets through online channels. These sales channels are not accessible to everyone — they’re found by some individuals only after rigorously searching online. The rest of the population who are not online- or tech-savvy, including most senior citizens, remain oblivious and purchase the same phone models from traditional retail stores at exorbitantly high prices.
Mobile carriers are able to excessively subsidize handsets because the handset market and carrier market are very closely related. Telecom companies monopolize the distribution of mobile phones. Handset makers provide carriers incentives to sell their products, which carriers then use as subsidies to entice consumers into using their services.
This problematic situation stems from the very saturated domestic mobile carrier market, where the entire population is already subscribed to a mobile communications service. Three telecom companies dominate the domestic market — SK Telecom takes up the lion’s share with around 50 percent, KT follows with 30 percent and LG Uplus with the remaining 20 percent, as of January, according to data from the Ministry of Science, ICT and Future Planning. Unable to gain new subscribers, the three carriers constantly wage war to snatch users away from each other to get a larger piece of the pie. They do so by offering subsidies amounting up to 800,000 won in some cases for the purchase of the newest mobile phones.
The telecom watchdog imposes suspensions and fines as punitive measures against excessive subsidization by the carriers. However, the telecom companies continue to offer heavy subsidies because their market share gains outweigh the costs of the suspensions and fines. It seems that all the parties involved, including the KCC, recognize that such measures are temporary in nature — that the carriers simply go back to their old practices once they have fulfilled their punishments.
“The measures were taken to ease the excessive competition in the market. We recognize the shortcomings of the business suspension measures, and our ultimate aim is for the mobile carriers to lower their fees so that all consumers can benefit. We are working on a measure that will enable this,” said an official at the KCC’s telecommunications market investigation division. He declined to be named.
Suspensions have other downsides. During a suspension, mobile phone retailers and manufacturers suffer as they are unable to make sales. Moreover, the carriers that are meant to be punished may end up benefitting during the suspension as they save on subsidies. According to Daeshin Securities, the three carriers could save up to a total of 600 million won in subsidies during the 45-day suspension.
Fundamental solution?
Last May, lawmaker Cho Hae-jin of the ruling Saenuri Party proposed a bill on improving the retail structure of the handset market. It covers a range of improvements in providing consumers greater transparency and equity in purchasing handsets. These include banning discriminatory subsidies, obligating carriers to publicly state the amount of subsidies provided, preventing carriers from coercing customers to sign up for expensive payment plans, allowing customers to choose between subsidies and discounts in payment plans as well as obligating handset makers to heed incentive payment investigations and related document submissions. The bill is still pending.
While most agree that excessive subsidies are harmful, they also recognize that subsidies will not be eliminated entirely. Some say subsidies are acceptable as long as they do not exceed the legal limit. Lower subsidies would mean that the mobile carriers will be able to lower fees and provide additional services.
“Say, for example, that mobile carriers spend 6 to 7 trillion won on subsidies. Once the subsidies are stabilized and kept below a certain level, expenditures would decrease to say, 4 trillion won. Then, the remaining 3 trillion won could be used instead on lowering fees and providing additional free services,” said Lee Ju-hong, director of civic group Green Consumer Network.
“Ultimately, carriers should compete to lower fees and to provide better services, unlike the current situation, where they compete to provide the newest phones at the lowest prices through subsidies.”
Lee said the government needs to take responsibility in ensuring that the carriers follow through with this.
“If the act does not lead to lower fees, it would only end up benefitting the carriers,” he said.
Ultimately, the mobile phone manufacturer market and mobile carrier market should be separated to break the current monopolized retail structure. This, however, would endanger the livelihoods of small-scale mobile phone retailers, as manufacturers would assume the role of sellers.
“Of course, this should happen gradually, together with measures for small-scale retailers to start new livelihoods,” Lee said.