The Other Side of Competition – Telecom Operators Penalized for Subsidizing Smartphones in Korea

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Fierce competition in one of the most technologically advanced market with the highest smartphone penetration, is forcing telecom operators to resort to “smarter options” to sell. For telecom operators this is a matter of survival in a highly competitive market. But, these “options” may not always be within the legal framework of the Government, and result in undesirable consequences. This is exactly what happened in Korea, where telecom operators are fighting to stay in business and capture each other’s market share.

Competition and Market Saturation

Korea is a saturated market for mobile phones; everyone owns a phone here. With no scope of growth, operators are looking for ways to capture market share from competition. The major telecom operators in Korea – SK Telecom, KT, and LG U+ are providing huge subsidies to consumers. These subsidies are tied to a compulsory of subscription to the mobile operator for a minimum period of time. Consumers are offered as much as 70% price cut, if they choose to opt into their telecom networks.

Lack of growth opportunities and highly volatile markets have led to this price war among telecom operators. Operators are openly flouting regulations with no heed to legal compliance. When one telecom operator starts subsidizing, the remaining players are left with no other option but to match these prices. Else, these companies face losing market share. Thus the industry as whole is selling at lower prices. At the end, operators recover the cost of subsidy through incentives from the handset manufacturer and the consumer, who is now locked into the network for at-least 2 years.

Subsidies in Mobile Handsets

Subsidizing mobile phone is a common practice followed in the United States and some other countries. Here, consumers can buy the device at a very low price in exchange for an exclusive subscription with the telecom operator. Korean companies are trying to implement a similar business model, even against the existing regulations in the country that limits subsidies to 270,000 won.

Telecom operators have been resorting to subsides to lure consumers for many years. Korea Communication Commission (KCC), the county’s telecom regulator has imposed multiple penalties and fines on the mobile operators. Last July 2013, the operators were fined a total of 66.9 billion won and a 7 day business suspension to KT Corp. In December 2013, all 3 mobile operators were fined a combined amount of 106.4 billion won. But, these companies seem to continue flouting the regulations. All three operators are now facing business suspension for 45 days between March 2014 and May 2014 and fines.

Policies and Regulation

KCC wants to curb this practice used to poach consumers from competition. KCC says that this practice does not benefit the consumer as it only decreases the price of the handset. Instead, KCC wants to decrease the prices of the mobile usage plans which is benefitial for the consumer in the long run. KCC is currently looking at implementing new policies that will bring some sanity to the market. Penalties and suspension is still a temporary solution, and a long term solution will benefit the telecom operators and the consumers.

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