Supersized subsidies lead to more telecom fines

The nation’s three mobile carriers were once again slapped with big fines for continuing to offer subsidies to subscribers that exceed the government’s limits.

In a rerun of countless fines in the past, the government will penalize the mobile carriers with fines - without prohibitions on signing new customers up this time around - and the carriers will go back to business as usual as soon as they can because their profits on smartphone contracts exceed the fines they are faced with.

The Korea Communications Commission (KCC) said it has slapped a total of 58.4 billion won ($57.1 million) in fines on SK Telecom, KT and LG U+ for excessive subsidies offered to subscribers between May and June as a way of stealing customers away from each other.

SK Telecom, the largest mobile carrier, received the biggest fine of 37.1 billion won while KT received 10.8 billion won and LG U+ was fined 10.5 billion won.

The KCC said the fines were calculated based on each company’s sales records between May 20 and June 13.

The commission, in investigating 22,000 cases of illegal business activities during the period, said the mobile carriers gave out an average subsidy of 616,000 won, which is well above the government’s subsidy ceiling of 270,000 won.

The fine levied on SK Telecom was 30 percent higher than the initial decision by the KCC and the fine for LG U+ was raised 20 percent as well. The KCC said the two companies led the overheated competition.

Additionally, the KCC decided to raise the fines instead of imposing business suspensions as they did earlier this year.

However, SK Telecom and LG U+ will suffer weeklong bans on signing up new customers around the Chuseok holidays in early September. That ban is not related to the recent offense but to ones committed earlier this year.

SK Telecom’s business will be suspended for a week starting Aug. 27, while LG U+ will be suspended after the Chuseok holidays starting Sept. 11.

The latest fines are not the biggest the mobile carriers have faced. Last December, the three carriers were fined a total of 106.4 billion won - the largest sum to date.

The excessive subsidies for new subscribers are usually offered right before a new smartphone is released. That was the case earlier this year when the carriers aggressively offloaded older models like the Galaxy S4 before the S5 was released in April.

They are getting sneakier in their discounting. Some retail shops provide the legal limit subsidy on paper, but under the counter give cash refunds to customers who switch carriers.

The government has been raising its fines to try to find an effective level, although they haven’t found it yet. In 2012, the combined fines slapped on the companies was 12 billion won. Last year it jumped to 178.7 billion won.

Analysts say the companies still make plenty of profits even after paying the punishments.

“Private companies are not fools,”said Baek Heung-gi, senior research fellow at the Hyundai Research Institute. “The fines of several billion won are just so small compared to their marketing spending, which usually amounts to several hundreds of billion won.

“When they save marketing money during the suspension periods, the government punishment turns out to be a good opportunity to save,” Baek added.

The 45-day sales bans on the mobile carriers earlier this year didn’t hurt their operating profits but improved them by cutting marketing costs.

SK Telecom’s second-quarter operating profit stood at 546.1 billion won, 0.1 percent higher than in the same period the previous year and 16.4 percent higher than in the previous quarter.

KT posted an operating loss of 813 billion won, but this was mainly due to a large-scale corporate restructuring that forced the company to spend more than 1 trillion won on early retirement fees.

LG U+ recorded an operating profit of 98 billion in the second quarter, about 32.3 percent lower than the same period last year, mainly because Pantech failed to pay back its debt to the carrier.

Another market analyst said the problem was the telecom market’s structure.

Illegal subsidies mainly revolve around independent shops that are subcontractors of the three telecom service operators, wrote Kim Won-sik, economics professor at Chung-Ang University, in the International Telecommunications Policy Review last year.

Kim said those shops got the money to spend on illegal subsidies from marketing fees provided by both telecom operators and smartphone manufacturers.

“As the marketing fees provided by mobile carriers are directly delivered to new smartphone buyers, the mobile giants get to rely more on the subsidy competition,” he added.

“The recent solutions rolled out by the government only generate temporary impacts,” Baek from Hyundai Research Institute said. “The upcoming policy [a new mobile phone retail act that mandates public notices for subsidies on each model] is likely to turn out like that.”

“Korea’s mobile field is an oligopoly. The market structure should move towards free competition among multiple players. That’s where government should come in,” he added. “The telecom service providers and phone manufacturers should work towards pricing in a more reasonable way in the first place, like other consumer products are. We don’t receive subsidies for buying a TV.”

BY kim ji-yoon [jiyoon.kim@joongang.co.kr]