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(Yonhap Feature) Subsidy war benefits few in South Korea's smartphone market

2014/03/12 09:11

By Kang Yoon-seung

SEOUL, March 12 (Yonhap) -- When purchasing smartphones in South Korea, you don't go to a dealer. You sit and wait, and wait, and wait. And good things do come to those who wait, in some cases, the latest smartphone model that costs you only 10 percent of the original price, or better yet is free.

Park Chan-woo, a 26-year-old man who lives in Ulsan, southeast of Seoul, is considering switching his device to a newer version but is hesitant because prices keep swinging drastically every day, and choosing the wrong day or place to buy a phone can mean tens of thousands of won more.

"It gets stressful when visiting different retailers to buy a smartphone at a reasonable price," Park said. "I have to pay closer attention and wait for lucky days."

   For a long time, South Korea's mobile carriers have used "subsidies" to entice subscribers to change their carriers. The subsidies often come in discounts in the price of the handsets and are provided only at a specific time and place. The information cannot be obtained except through web pages and social networking sites, as such incentives are, well, illegal.

The mobile phone market in South Korea, one of the most wired countries in the world, has been growing at an explosive speed. The number of smartphone users at end-January was 37.88 million, almost an unbelievable figure considering the country's population is around 50 million.

SK Telecom Co. currently controls roughly half of the market, followed by No. 2 player KT Corp. with 30 percent and LG Uplus Corp. with the remaining 20 percent.

But as the quality of wireless service grows more equalized, the market seems headed for a lull, and with the size of new customers dwindling, the country's three mobile carriers are in effect stealing each other's clients through subsidies that by law are restricted to a maximum 270,000 won (US$253.2).

The government and telecom regulator have resorted to business suspensions and monetary fines to stop this practice, but since the customers are so used to the system, "normal" purchases adhering to legal subsidy limits seem absurd.

For example, in the second weekend of February, the subsidy on Samsung's Galaxy S4 LTE-A was 1.2 million won, more than the device's factory price of 954,000 won. It allowed buyers to earn pocket money just by changing their mobile carriers.

"I believe subsidies are a part of the free market system," said Song Jin-young, a 27-year-old student in Seoul. "If there is an opportunity, I do not see why we have to pay more."

   But subsidies are prickly. Because of the irregular nature of the benefits, purchasing smartphones almost resembles gambling.

"I changed my carrier from SK to LG Uplus last July," said Kwon Jung-yeon, a 26-year-old office worker in Seoul. "Although I got the device at a bargain, I kept having this feeling that the market is like an underground economy.

"It would be better if I am able to clearly know whether my deal was reasonable or not," said Kwon. "Customers cannot find out details under the current system. We need to bring the market into open sunlight."

   Shin Dong-beom, a 55-year-old from Bundang, south of Seoul, saved 700,000 won by changing his carrier from SK Telecom to KT last month, but still has qualms about it as the discount was only possible with his son's help.

"Younger people seem to have more information on discounts compared to older buyers like me," Shin said. "Although I am glad that my son helped me, this price variation that tends to isolate those who are not friendly to the Internet must be changed."

   Retailers, who are given unilateral orders from mobile carriers on when and how to give out subsidies, are also stressed out.

"We often receive orders from the telecom firms who provide us with guidelines on selling devices with subsidies at a given period of time," a smartphone shop operator in Seoul's southern district Gangnam said, giving only his last name Lee. He did not wish to reveal his identity because of his contract with a carrier.

"The order can be given to all retailers throughout the country, or to only a specific area. We do not know what to expect beforehand," Lee said. "The orders come directly from the headquarters, through emails or Kakao Talk messages."

   He described how some retailers find "creative ways" to evade regulator's watchful eyes.

"For example, some of us do not directly make subsidy-related adverts on web pages based on texts. That would be easy for watchdogs to find on the Internet. Instead, we use video clips or other mobile messengers, which are relatively free from such surveillance."

   Regulators have used fines, business suspensions and heavy-handed warnings to get the mobile carriers to end the subsidies, but they have been anything but successful. Last week, the Ministry of Science, ICT and Future Planning banned mobile carriers from collecting new subscribers for 45 days from Thursday. The Korea Communications Commission (KCC), a telecom watchdog, is expected to slap them with its own punishment as early as this week, most likely business suspensions.

The same three mobile operators were levied a record-setting 106.4 billion won in penalties in December -- SK Telecom with 56 billion won, KT with 29.7 billion won and LG Uplus with 20.7 billion won, for giving out illegal subsidies.

Government officials, however, say they just don't have the manpower to hold these telecom firms in check.

"We only have nine people on the team watching over around 50,000 smartphone retailers in the country," said an official from the KCC who wished his name to be withheld.

"Under current circumstances, we can only take actions afterwards, and it is impossible to take pre-emptive measures," he said, adding they are aware that information on subsidies is circulated secretively.

Following punitive actions by the telecom ministry on Friday, South Korean mobile carriers each released a letter of apology to subscribers and said they will humbly accept the punishment.

They, however, said the new law on the smartphone retail business, pending at the National Assembly, must be passed as soon as possible to give them a legal ground to engage in an orderly competition.

The law aims to boost market transparency by having smartphone manufacturers disclose price details, including incentives that they pay to mobile carriers. While mobile carriers welcome the law, local manufacturers of smartphones, led by Samsung Electronics, are against it, claiming such details are confidential business information.

"The upcoming business suspension is literally causing chaos for retailers like us," Lee said. But he wished that the suspension would turn around the prolonged distortion of prices in the market.

"The government must take stronger action against such practice," he said. Lee, for one, is willing to bear the suspensions. "The market is already too distorted. Some buy a phone at 1 million won, while others take it for almost free. The country must take a deeper look into this."

   Ironically, industry watchers say the business suspension may help increase mobile carriers' earnings as they don't have to spend on subsidies.

Daishin Securities Co. said the three players may save up to 600 billion won during the 45-day business suspension in marketing costs.

"It is so stressful when a client purchases a smartphone and comes back a few days later saying he saw another person buying the same device at a giveaway price, talking to me as if I am some kind of a crook," Lee said.

"The current lottery-like smartphone market must be changed, as those involved -- retailers, clients, mobile carriers and manufacturers -- are all victims except for the very few. Someone has to put an end to this."