What Has SKT Up Its Sleeve?
By Kim Tong-hyung
Staff Reporter
The gloves are coming off in the latest telecommunications fight, with KT and SK Telecom trading verbal blows over the former's plans to absorb its mobile telephony unit.
The two industry giants have consistently attempted to steal each other's lunch. KT, the fixed-line telephony and Internet leader, is desperate to leverage its dominance to the wireless sector, while SK Telecom, the top mobile telephony operator, is using its fixed-line affiliate, SK Broadband, to erode its rival's customer base.
Earnings reports suggest that SK Telecom got the better end of the exchanges in past years, but KT is now looking to turn it into a whole new ball game by merging with KTF, the No.2 wireless carrier with a market share of nearly 32 percent.
Predictably, KT's plan is meeting fierce opposition from the rest of the industry, with SK Telecom and other rivals claiming that the merger would eliminate competition in the market.
By consolidating KTF, KT becomes a company that controls more than 51 percent of the country's combined customers in fixed-line, mobile and broadband Internet, according to SK Telecom officials, while hogging more than 46 percent in revenue.
KT, of course, crunches numbers differently, pointing out that SK Telecom's operating profit of 2.17 trillion won (about $1.58 billion) in 2007 was bigger than the combined 1.87 trillion won of KT and KTF.
So, after years of battling for supremacy, KT and SK Telecom find themselves in the unusual situation of competing to underrate their own competitiveness.
Despite the complaints from SK Telecom and LG Group's three telecommunications companies ― LG Telecom, LG Dacom and LG Powercomm ― the KT-KTF marriage looks to be a done deal.
The Korea Communications Commission (KCC), the country's broadcasting and telecommunications regulator, has two months to approve the deal, although the deadline could be extended by 30 days. And the guessing game lost some suspense when KCC vice chairman Song Do-kyun told reporters that there is ``no reason'' for the commission to block a merger between private companies.
According to Korean law, the KCC has the power to approve mergers between telecommunications operators, with the Fair Trade Commission (FTC) only capable of ``advising'' on the issue. Not that the FTC is likely to provide strong resistance anyway.
``Under the Korean fair trade law, subsidiaries are considered as a single group and a merger doesn't change things,'' said a FTC official.
``However, we will review the antitrust concerns claimed by other carriers if we are asked to,'' he said.
Although SK Telecom chief executive Jung Man-won suggests otherwise, KT's industry rivals don't have a prayer of stopping the consolidation, and are clearly more interested in what regulators impose as the preconditions for the merger.
KT Likely to Keep Phone Lines
KT's industry rivals are suggesting that the merger should be allowed only under certain conditions, such as the company being forced to resell its wireless Internet networks, banned from providing handset subsidies and facing stronger restrictions for bundling its fixed-line and wireless products.
The rival companies are also claiming that KT should be forced to spin off its local loop operations, considering the company's dominant ownership of infrastructure.
The KCC will certainly have to pick and choose from the wish list in order to quiet the bickering. However, it seems unlikely that KT will be forced to give up on its phone lines.
``You have to say the suggestions that KT needs to open its WiBro and HSDPA networks are reasonable, but demanding that KT gives up its phone lines is obviously over-the-top,'' said a KCC official who declined to be named.
``Why would KT even consider merging with KTF if giving up on its fixed-line network would be the cost? You have to think that the claims have more meaning as rhetoric,'' he said.
Indeed, KT has no competition in terms of infrastructure, controlling nearly 96 percent of the country's wire connections in length and over 50 percent of the optical cable network.
Rival companies complain that KT's massive network would deprive them of a fighting chance.
``It will take 4 trillion won to rebuild SK Telecom's nationwide wireless network, but more than 40 trillion to duplicate KT's fixed-line network,'' said Cho Shin, CEO of SK Broadband.
``KT's dominance in infrastructure will have increasing weight as the industry moves on to fiber to the home (FTTH),'' he said.
However, KT is balking at the claims, pointing out that it is already opening its network to rivals through local look unbundling (LLU). Rival companies requested KT access to the phone lines in only 145 cases over the past eight years, as they also had the options of borrowing facilities from the Korea Electronic Power Corporation (KEPCO) and cable system operators, KT officials said.
Industry watchers believe that in demanding KT to spin off its local loop operations, SK Telecom is trying to gain more access to KT's infrastructure, including the company's new FTTH network, which would allow SK Broadband to save money as it looks to expand its Internet protocol television (IPTV) coverage nationwide.
Merger Frenzy Expected
Despite the concerns of its competitors, the chances of KT gaining a chokehold of the telecommunications market through the merger seem unlikely.
Although swallowing up KTF may help KT reduce costs, it wouldn't provide a solution for the company's lagging competitiveness. KT continues to lose fixed-line customers to voice over Internet protocol (VoIP) services and SK Broadband has been threatening its top spot in broadband Internet.
``A synergy effect would be non existent,'' said Kim Hong-shik, an analyst from NH Investment and Securities.
``KT is hoping that one plus one becomes three. I still see it as a two,'' said Kim.
Industry watchers believe that the KT-KTF deal will trigger a merger frenzy within the industry, which would be completed by SK Telecom merging with SK Broadband sometime next year.
``SK Telecom has to take care of its fixed-line affiliates, but since the company already owns more than 90 percent of SK Tellink and also has dominant stakes in the other units, they will be able to clean the mess virtually whenever they want,'' said Choi Nam-gon, an analyst at Tong Yang Securities.
``It would be possible for SK Telecom to complete the merger with SK Broadband during the first-half of next year, although the merger between LG Dacom and LG Powercomm will come a lot earlier,'' he said.