Note 7 presale ignites controversy over subsidy rule application

By Yoon Sung-won

Samsung Electronics’ drive for the presale of Galaxy Note 7 is leading to criticism of the government’s “unfair” application of subsidy limits as the company is offering large gifts for the customers.

As the world’s top smartphone maker is arguing that the marketing measure is “not against the Telecom Act,” the Korea Communications Commission (KCC) remains cautious about ruling it illegal.

“The free gifts with the Galaxy Note 7 can be considered as a subsidy under the Telecom Act,” the KCC said. “However, it is difficult to conclude that it is a violation of law because it benefits all its customers. We need to think this matter over.”

According to Samsung Electronics, Sunday, it is offering its latest smart band “Gear Fit 2,” which is priced at 198,000 won in Korea, for those who preordered the Note 7. In addition, the company also offers a mileage coupon worth 100,000 won for its mobile payment service “Samsung Pay” and promised to discount 100,000 won if customers need repair services. In total, the value of three preorder gifts is about 400,000 won.

The controversy has come amid heated popularity for presales of the Note 7.

According to an online survey on 4,049 adult consumers by market researcher DooIt Survey, 44.2 percent of respondents said they were willing to purchase a Note 7 within a year. Among them, 65.3 percent said they were thinking of buying the handset through a subscription contract with SK Telecom. The Note 7 is scheduled to be rolled out on Aug. 19 here.

To prevent excessive subsidies and to create fairer telecom market competition, the Telecom Act stipulates that the amount of subsidy provided by mobile carriers and handset makers cannot exceed 330,000 won. The act also determines all financial gains offered to users to support their handset purchase as a “subsidy.” Under this, Samsung Electronics’ marketing drive for the Note 7 can be seen as a violation of the act if the telecom agency considers the presale offerings as part of a subsidy.

Such an aggressive marketing drive for the Note 7 comes as the company is pushing hard to dominate the large-screen premium smartphone market here before its biggest competitor, Apple, rolls out new iPhones. As LG Electronics is also planning to release its new smartphone, the V20, next month, Samsung Electronics is adopting an aggressive strategy with a scale that smaller brands cannot imitate, according to an industry source.

Those who criticizes the unfairness of the rule application pointed out that the government is remaining lukewarm whereas it has been relatively more strict in regulating mobile carriers.

“The offerings for the Note 7 can be seen as an indirect subsidy,” an industry source said. “This may undermine fair competition between businesses. The government should thoroughly look into the legality of this case.”