SEOUL, South Korea-South Korea awarded much-coveted third-generation (3G) mobile service licenses to SK Telecom, the country’s largest mobile carrier, and state-run Korea Telecom on 15 December. The race, however, is not over, analysts said.
The Ministry of Information and Communication (MIC), which handled the licensing procedure, rejected bids from LG Telecom and Hanaro Telecom, which could deprive them of a chance to offer 3G service in one of Asia’s fastest-growing wireless markets.
But LG and Hanaro still hold on to a ray of hope, as they will be allowed to submit bids in March for a license based on cdma2000 technology, developed by U.S.-based Qualcomm.
The winners were required to pay 1.3 trillion won (US$1.08 billion) each in license fees to the government, although the amount appeared cheap compared with Europe, where winners had to pay a total of about US$34 billion in the United Kingdom and nearly US$46 billion total in Germany.
For mobile service providers in Korea, as in other countries around the world, a 3G license is crucial for securing revenue and retaining customers. The companies expect further increases in revenues to come mainly from data, rather than voice transmission, as an increasing number of users demand mobile access to the Internet.
SK Telecom, after its acquisition of Shinsegi Telecom last year, has a 53.75-percent market share of Korea’s mobile market. Korea Telecom’s two affiliates-KT Freetel and KT M.com-have a total 31.67-percent market share, leaving LG Telecom a distant third. Hanaro does not operate a mobile network in the country.
Analysts said the 3G winners have yet to prove commercial viability of their investments. There are some doubts about the profitability of the 3G wireless business, because nobody knows whether people will readily pay for such multimedia services beginning around 2002, said Kang Bo-soung, an analyst at Shinhan Securities in Seoul.
3G services, projected by operators to begin in mid-2002 in Korea, promise to offer users wider bandwidth to handle video and high-speed data and provide global roaming services.
Analysts pointed out SK Telecom and Korea Telecom are likely to make completely new investments in W-CDMA equipment, unless they find ways to reuse their existing relay stations and related facilities. In fact, Korea Telecom and SK Telecom will need a combined US$5.39 billion in facilities investment during the next five years for 3G services, but they will find it hard to break even in 2006 at the earliest, said Hwang Chang-joong, a senior analyst at LG Investment & Securities in Seoul.
SK Telecom, meantime, is expected to restart stalled talks with foreign partners. The company had negotiated with several foreign telecom firms, including Japan’s NTT DoCoMo, for a stake sale, but those talks were suspended until Korea finished its selection of 3G service providers. Local media have said DoCoMo could take a 5-percent to 15-percent stake in SK Telecom.
The vendor role
Apart from the challenges facing service providers, stakes are also high for equipment makers. Questions have arisen as to whether they will be able to provide 3G technologies to service providers, while maintaining their profit channels in competition with foreign vendors.
“At this point, most of the 3G core technologies are owned and patented by foreign firms, and it is very unlikely that Korean companies could produce the main chips for the dual-mode mobile stations when service starts in 2002,” said Na Min-ho, a senior analyst at Seoul-based Daishin Securities.
Analysts said the government adopted the two-to-one 3G technology formula after strong lobbying from local telecom equipment manufacturers, including Samsung Electronics, for cdma2000.
Samsung Electronics, the largest worldwide cdmaOne equipment maker, is especially nervous. If LG grabs a cdma2000 license, Samsung may continue to produce its own telecom equipment based on Qualcomm’s technology and carve out a share in the domestic market. But given LG Telecom and Hanaro are at disadvantages to dominant players SK Telecom and Korea Telecom, Samsung could be a loser in the domestic market.
“If such thing ever happens, we will have to change our business strategy regarding cdma2000,” said a Samsung official, requesting anonymity.
The equipment market and technology standard issue was compounded as the government dithered on the 3G technology mandate. The MIC initially said it would let carriers select between the two competing 3G technologies-wideband-CDMA (W-CDMA) and cdma2000. But the ministry later said at least one carrier was required to adopt cdma2000 technology to achieve balanced development of the mobile industry.
Korea was the first country to commercialize the cdmaOne standard and has more users of cdmaOne-based mobile phones than any country in the world.
Except for Hanaro Telecom, all three contenders chose the W-CDMA standard, citing its wider subscriber base. Analysts and industry officials in Seoul said around 80 percent of the global wireless 3G market will use W-CDMA technology.
As the ministry plans to have one more screening to award a license based on cdma2000 technology in March, industry watchers are focusing on the next steps of Hanaro Telecom and LG Telecom.
Third carrier options
Hanaro Telecom spokesman Doo Won-soo said the company accepted the results and would make another bid in the second round of competition. “We are also willing to cooperate with LG Telecom if it wants to bid for a cdma2000 technology license,” he said.
LG Telecom said it would re-examine its telecom business at large after its failure in the bidding for a W-CDMA license, but it did not comment on whether it would bid for a cdma2000 license later.
Industry observers suggested the future for a cdma2000-based 3G service in Korea is bleak, because the two dominant players opted for W-CDMA and left little room for other carriers to conjure up viable marketing strategies.
LG, a family-run conglomerate or chaebol in Korea, had planned to focus on the wireless telecommunications business. To that end, LG intended to separate its telecom business from LG Electronics, a major electronics maker in Korea, and form a new company combining LG’s other related affiliates.
“LG may continue its plan to divide LG Electronics into hardware and communication services firms, after which the company could focus on equipment development,” said Choi Chang-ho, an analyst at Good Morning Securities in Seoul.
But the scenario means LG would sell off its stakes in LG Telecom, Dacom and Hanaro Telecom-in which it owns 13.8 percent-and abandon its ambition to become a global wireless leader with both hardware and services businesses.
Even if LG competes for the cdma2000 license in February, it seems uncertain the firm could turn it into a profitable business, analysts said. Given LG Telecom currently holds a smaller share in the mobile-phone service market than SK Telecom and Korea Telecom, the company would likely find it difficult to compete with the two mobile-phone heavyweights, which will trumpet the W-CDMA standard.
LG Telecom submitted a formal complaint to MIC on 18 December, questioning the fairness of the evaluation process for 3G licenses. It argued the jury gave the company unreasonably low points on technology-related criteria.
“It’s difficult to understand the results, considering LG’s technological lead over other contenders in W-CDMA technology. If the government does not appropriately respond to our complaint, we will resort to all possible means of countermeasures, including taking legal steps,” said Yoon Kyung-hoon, an LG Telecom spokesman.
LG’s demands include full disclosure of score cards, which the jury used to evaluate the four operators vying for 3G service licenses.
Korea has one of the m
ost advanced telecom markets in the world, and like Hong Kong, Finland and Italy, has more wireless phones-26.9 million-than landl
ines as of end-November 2000.
SK Telecom has rolled out commercial 1XRTT service, an evolutionary technology to cdma2000, although industry insiders note the carrier is using the upgrade to stay one step ahead of its competitors in the highly contentious Korean mobile market.
