By Kim Yoo-chul
Moody's Investors Service expects a more industry-wide negative impact from the fierce competition between SK Telecom and KT.
"Competition among Korean telecom companies is not likely to abate any time soon, and this trend has obvious credit negative ramifications as the carriers speed up capex spending to meet the huge demand for high-speed data services," said Laura Acres, a Moody's vice president, in a recent report.
The senior credit officer added an ever-rising spiral of capital expenditure and marketing costs to retain customers have obvious negative implications for profitability and cash-flow.
Cindy Kang, a spokesman for SK Telecom, declined to comment about the report, Wednesday. Rhee In-won, a senior spokesman at KT, said the report was ``nothing special.’’
In detail, KT has announced that it will invest 5.1 trillion won or $4.3 billion on fixed-line and wireless networks until the end of 2014 to enjoy what the company claims is the "first-mover" advantage in the rapidly-growing local wireless sector.
SK Telecom, which lags in terms of the number of Wi-Fi zones compared to its biggest domestic rival, is also planning to step up the efforts for an early adaptation of the next-generation telecom technology called long-term evolution or LTE.
Although the telecom regulator designated a marketing cap ― no more than 22 percent of the total revenue ― to soothe fiercer competition, the top three local carriers including LG Uplus have failed to meet the guideline.
Data from the Korea Communications Commission (KCC) said the three spent a combined of 3.8 trillion won only for marketing during the first six months of this year. Among them, 3.1 trillion won or 26.3 percent was spent for new customers.
What makes the situation further gloomy is that the carriers don’t seem to worry about increased marketing expenses in the latter half as they've been set an "ambitious and bold" goal for new smartphone and multi-device customers.
SK Telecom said the number of its Android phone users exceeded over 1 million in the six months of 2010 thanks to heavy marketing expenses. But it is destined to spend more as KT and LG Uplus are near to introducing Apple’s latest iPhone and more smartphones, respectively.
"It's not surprising that Moody's has warned of our deteriorating cash-flow. Honestly, we have little room to cut marketing costs to keep our edge in the wireless sector," a KT executive told The Korea Times, asking not to be identified.
The average revenue per user ― a key measurement to gauge the profitability of carriers ― at SK and KT has seen a drastic fall in the second quarter from a year earlier. Moody’s said the frenzy by the carriers to introduce "unlimited data pricing" will further weigh on their financial soundness.
As of the end of the first half, SK secured 1.7 million smartphone users, while those by KT were 1.09 million. LG just got 180,000 smartphone users as LG Electronics was late to release such advanced models, the KCC said.
"KCC's guideline hasn't been fully worked considering the massive customer flocks to shift new carriers. Competition is still hot cornering the carrier to scratch their heads whether to cut cost the marketing costs," said Choi Nam-gon, an analyst at TongYang Securities.
"While good for local consumers ― who enjoy a wider array of offerings at declining prices ― this approach is unlikely to restore weakened margins to a point where they are consistent with those of similarly rated global peers before 2006," said Jung Jay-won, a Moody's associate analyst.