SEOUL, South Korea-Despite the financial crisis in Asia, the wireless telephony market has performed better than expected in South Korea. The number of cellular and PCS subscribers in the country more than doubled from 5.6 million at the end October 1997 to more than 13 million by the end of November 1998.
The market currently has five players, two offering cellular and three offering PCS (personal communications services).
PCS has dominated the field since its launch in October 1997. Two of the three PCS carriers, Korea Telecom Freetel and LG Telecom Ltd., each pulled in more than 2 million subscribers during their rookie year of service. The third PCS operator, Hansol PCS Co. Ltd., pulled in 1.3 million.
With CDMA (Code Division Multiple Access) technology as the national digital standard and with this tremendous user growth, South Korea now has more than 70 percent of the world’s total CDMA subscribers, captured since SK Telecom in 1996 became the first carrier worldwide to successfully commercialize CDMA cellular service. The other cellular player in South Korea is Shinsegi Telecomm Inc., which also launched in 1996.
In contrast, AMPS (Advanced Mobile Phone Service) subscribers decreased to 674,500 in October 1998, from 1.6 million at the end of November 1997. (AMPS service is offered only by SK Telecom.) Paging is declining as well, dropping from 15 million in November 1997 to 9.7 million in November 1998.
The unexpected growth in PCS and cellular is credited to aggressive promotion fees as well as to the use of calling party pays, which is the national billing standard.
All of the PCS carriers subsidize 50 percent to 60 percent (US$250 to US$300) of a handset’s actual retail price as a promotion fee, attracting droves of household users and teens. Battling cellular with these low handset prices and promotion fees, PCS carriers have been attracting new subscribers at twice the rate of cellular operators-an average of 435,000 per month, compared with 205,000 for cellular operators.
Cellular operator SK Telecom still remains the dominant carrier, but its margin is decreasing; in October 1997 it held a 79-percent market share, but only 43.1 percent as of November 1998.
Churn from cellular to PCS has been reported at 10 percent during the first year of PCS service. However, industry observers note that some customers not satisfied with PCS coverage are going back to cellular once their one-year contracts expire. Specific PCS-to-cellular churn figures are not yet available.
The PCS carriers launched service in 1997 simultaneously with the country’s national financial crisis. In panic, they lowered their previous market forecasts, so the ensuing high growth rate was unexpected. Their aggressive marketing strategies and advertisements, which ran for several months, were enough to trigger the demand for new PCS phones. PCS carriers since have adjusted their subscriber forecasts upward.
Korea Telecom Freetel and LG Telecom had forecasted 1.8 million and 1.5 million subscribers, respectively, for year-end 1998, but by the end of November 1998, they already had 2.2 million and 2 million, respectively.
However, the news isn’t all good. There have been many problems in the PCS and cellular arenas as well. The carriers may have been too aggressive, failing to deal adequately with the financial problems. Instead of competing with quality of service, the PCS operators and Shinsegi competed with profitless promotion programs. For the new PCS operators, this meant possibly facing a tremendously lopsided balance sheet after just one year of service.
As their first anniversary approached, Korea Telecom, LG Telecom, Hansol PCS and Shinsegi all started to worry about running out of gas in a market that many say has too many competitors. Varying solutions from consultants suggested infrastructure reconstruction/re-engineering or mergers among the carriers.
As a result, the carriers announced bids for foreign investment as a way to gain more weight in the market while the government considers a solution to the problem of an overcrowded market. As a general government recommendation, companies in all industries were advised to seek foreign investors to survive the national financial crisis.
The PCS carriers since have raised nearly US$1.1 billion in foreign capital.
The first foreign money came to Hansol PCS. In August 1998, the company sold 9.75 percent of its shares to Bell Canada International Inc. and 6.5 percent to American International Group Inc., for a total of US$260 million.
LG Telecom subsequently received about US$400 million from British Telecommunications plc by selling a 23.49-percent stake.
Korea Telecom Freetel in late December also announced a major investment-US$400 million from Callahan Associates International of the United States, for a 20-percent stake. The contract was scheduled to be final 20 January.
Successfully commercialized CDMA technology and the stable subscriber base will encourage the industry to expand more in 1999, though at rates lower than in 1998. The dogfight competition will be obvious as the limited market is getting saturated.
Despite the sensational market growth, the market has many obstacles to face: paying a significant amount in royalties to Qualcomm Inc. for licensing its CDMA technology, investing too much to obtain new subscribers, non-payments from subscribers and weak investment in network buildout.
Hoon Lee is editor and Max Choi is publisher of Cellular Journal, Seoul, South Korea.
