SEOUL, South Korea-As the ban on handset subsidies went into effect 1 June, Korean mobile handset makers, wireless carriers and distributors are undergoing a drastic change in market conditions that will reshape the mobile-phone industry at large.
In a surprise move late in May, the Ministry of Information and Communication (MIC) announced the controversial ban on subsidies, which will affect 10,000 distribution channels of mobile-phone handsets. MIC officials think the Korean wireless market is reaching saturation, and current levels of marketing and handset life cycles cannot be maintained.
Local distributors are now scrambling to tackle the dwindling demand since the handset price hike of as much as 300,000 won (US$268) is slowing the number of new subscriptions. In June, the country added 200,000 new users compared with 1 million new users in May.
The marketing initiatives used by mobile carriers for certain mobile handset models are set to change, and manufacturers and distributors are forced to act aggressively to grapple with the slackening demand from users.
Until June, handset manufacturers were used to a free ride in Korea’s feverishly growing mobile market, enjoying sizable revenues and profits. Before the ban, carriers purchased handsets at full price from manufacturers, and the phones were then sold by the carriers’ exclusive distributors at dramatically reduced rates, with carriers hoping to recoup losses by boosting the number of new subscribers. Without the subsidies in place, handset makers must find new channels to handle their increasing inventories.
Industry observers said the drastic change in the market conditions poses a choice for distributors. Either they can watch their sales plunge and suffer or switch their pre-ban policies of exclusively representing only one carrier.
Meantime, CDMA phone manufacturers said the new policy could put a damper on product development and stifle the free market principle, due to government interference in the marketing practices of private companies.
“Orders for parts and products are being made at least three months before the actual shipping, but the ministry just pushed through the policy without considering its adverse effect,” said an official of a CDMA equipment maker, requesting anonymity.
He expressed displeasure at the MIC, which he said is benefiting wireless carriers with the ban, while ignoring the issues facing manufacturers, including a vastly reduced number of orders.
Consumers also appear disappointed with the policy, which hiked the initial subscription fee as much as 300,000 won. The announcement about the abolition of the handset subsidies did not include any conditions to guarantee benefits to consumers in return for higher initial subscription costs. Adding confusion to the dispute is that the government had attempted to reduce the handset subsidies last year, but failed to force operators to suspend the promotional tool altogether.
However, MIC Vice Minister Kim Dong-sun said, “Mobile-phone operators have expressed their willingness to lower rates and improve service quality if the handset subsidies are scrapped.”
The five mobile-phone operators said they are not considering such measures. They already lowered the basic charges in April to better position themselves, despite their poor profitability, with the exception of the country’s dominant player, SK Telecom.
According to the MIC, the country’s carriers have poured a total of 6.59 trillion won (US$5.9 billion) into handset subsidies to expand their market shares since 1998.
Such costly marketing strategies, coupled with cheaper initial subscription fees, created one of the world’s most successful mobile user bases-more than 27 million subscribers out of the country’s total 48 million population.
With the market showing signs of saturation, carriers may improve their sagging profitability through the abolition of handset subsidies for a while, but the road ahead is shrouded in uncertainty.
