South Korea claims success with 3G – but at what price?

Rosalie Nelson, Research Director, Asia Pacific

Taken at face value, South Korea’s determined early-to-market 3G strategy is paying dividends. Since the November launch of their “Enhanced Version – Data Only” or EV-DO 3G network, South Korea’s mobile leaders SK Telecom and KTF have boasted enviable statistics:

• Within eight months of launch, SK Telecom acquired more than 1 million EV-DO users, equalling roughly 5.6% of total subscribers. KTF has nearly 0.7 million or 7% of total subscribers. This was in spite of having just four to five compatible $US500 handsets in a market where subsidies are banned.

• Better still, the introduction of EV-DO 3G services has caused a spike in data spend. SK Telecom says it’s the monthly ARPU from its EV-DO services is $US14 – nearly three times higher than revenues from the slower-speed CDMA1x. Similarly KTF’s monthly EV-DO ARPU is $US10.

• Wireless video is popular with 3G users. EV-DO networks allows transmission speeds of up to 2.4mbit/s, allowing streaming of video. The most popular services are movies (condensed into snapshot-sized 2.5 minute videos) and mobile broadcasting of news, traffic and sport. More than 90% of KTF’s EV-DO revenues coming from video-on-demand and broadcasting. This is viewed as proof of pent-up demand for 3G services.

But this success has come at a price. Dig deeper and a story of aggressive marketing, cut-throat promotional pricing and heavy early acquisition costs emerge. Not surprising in a new network launch, but raising questions about just how long this growth can be sustained.

South Korea’s mobile market matures – EV-DO growth comes at a price

South Korea’s overall mobile growth has stalled, and subscriber numbers have decreased for two consecutive months. Yes, wireless data revenues are rapidly increasing but still only comprise about 10% of total ARPU. This is still considerably lower than some western markets where SMS-fuelled data ARPU is as high as 14 to 17%. Voice revenue growth is slowing and competition increasing.

EV-DO is therefore the centrepiece to operator’s strategy of increasing customer value. While EV-DO network technology is cheaper to deploy than the competing W-CDMA technology, other costs are high. In 2002 SKT’s overall marketing expenses escalated 80% to $1.4 billion, against total revenues of $7.5 billion. Marketing costs rose 37% between Q3 and Q4 alone – the period when EV-DO was re-launched as a commercial service. This contributed to a 19% drop in operating income. This, coupled with a 60% increase in network capex, lead to a powerful investor backlash against SK’s 3G plans early in 2003.

At the same time, both SK Telecom and KTF offered heavy promotional discounts – all-you-can-eat flat rate packages of $US20 per month until June 2003. While consumption of video and data was high (averaging 40,000 packets) during this period, it more than halved halved to 18,000 packets as soon as new higher tariffs were introduced. For all the range of sophisticated services on offer in South Korea, the vast majority of users still favour cheap and cheerful ringtones, screensavers, logos and messaging. It means video at a higher price tag is likely to prove a harder mass market sell.

Another cost is development of content. Both operators are now keeping a higher proportion of content revenues to cover much higher costs of rights management and licencing. SK Telecom is commissioning as well as creating its own 3G video content. It offers more than 6000 pieces of content, 30% of which are recently developed or custom made. This has lead to a change in business model – SK is directly investing in the production of films and video with content owners, which it is then repurposing for mobile at no extra cost. It’s a strategy that would be prohibitively expensive undertaking for most mobile operators who lack the size and clout of SK.

EV-DO paves the way for W-CDMA

The sustainability of EV-DO’s success will depend on a number of factors. One is the price of handsets coming down – difficult in view of the ban on handset subsidies in South Korea. The other is cost of content. We expect EV-DO data revenues and usage to stabilise and possibly decline in the short term as users re-adjust to higher tariffs and operators recoup costs of content-rich services and move towards a more sustainable business model. But in the longer term, if EV-DO services are to translate into a popular mass market medium, then operators face a tricky balancing act between offering tariffs that encourage migration from the simple and popular services of today without underselling the product.

Yet for South Korean operators, the stakes are too high to risk losing momentum. They need EV-DO to work, in order to shore up the business case and familiarise users with 3G services. Otherwise they risk an investor backlash ahead of the launch of W-CDMA – an entirely new 3G network they are obliged to begin building this year under licence requirements.

Contact Rosalie Nelson in our Melbourne office at rnv@ovum.com.