Telecoms fined for phone subsidies

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Telecoms fined for phone subsidies

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A sign on a smartphone store in Seoul reads “smartphone and free phone.” The Korea Communication Commission on Monday slapped a fine and sales suspension for more than 20 days on the three telecommunication companies for their excessive subsidy to attract customers. [YONHAP]


Miss Chung, a 35-year-old artist, recently got an iPhone 5. And she didn’t have to pay much. While the selling price is usually 800,000 won ($744) and 1 million won, Chung is paying 150,000 won in installments over the next two years.

“I couldn’t believe that I got the latest iPhone at such a cheap price,” Chung said.

The price was whittled down by a subsidy offered by telecommunication company KT. Chung got an additional discount for turning in the iPhone 4 she used for two years.

Competition for subscribers is so fierce among the three local telecommunication companies that the government has stepped in to stop the heavy discounting. On Christmas Eve, the Korea Communication Commission (KCC) fined all three companies for over-subsidizing customers’ phone purchases, and even put a temporary sales ban on all three. They are not allowed to sign up any new customers for 20 to 24 days.

It’s the first time the commission has handed out fines together with a sales ban.

“When we fined the companies in September of last year for their excessive subsidy policies on mobile phone sales we warned them that they were already on strike two and if they are caught once more we would suspend their businesses,” said Cho Kyung-sik, a spokesman for KCC.
The reason for the overheated competition is the large sums spent by the companies on their fourth generation LTE (long-term evolution) networks and their need to sign up subscribers for them.

The most efficient way to get consumers to upgrade from 3G services to LTE is to offer discounts on smarphones.

In fact, SK Telecom, the market leader, has already exceeded its target and now has more than seven million LTE customers, while LG U+ trails behind with four million and KT with 3.5 million.

In total there are roughly 15 million people subscribing to LTE services with the figure expected to easily pass 16 million soon. This is an astonishing achievement since LTE services were launched in July 2011 and smartphones that supported them started to pour into the market around October and November of last year.

As a result of the competition, major LTE smartphones including Samsung’s Galaxy S3, which is worth 1 million won, are sold for as low as 170,000 won.

LG Electronics’ LTE smartphones like the Optimus G are getting subsidies of 400,000 won to 500,000 won.

The subsidies are exceeding the telecommunication authority’s limit of 270,000 won.

In the third quarter of this year, SK Telecom spent 1 trillion won on marketing, which includes subsidies, 33 percent higher than the same period last year. KT spent 694 billion won, up 75 percent from a year earlier, and LG U+ spent 499.7 billion won, 41 percent more.

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While marketing costs have gone up, operating profits have fallen. SK Telecom’s third quarter operating profit shrunk 46.4 percent from a year earlier, while KT’s decreased 51 percent. LG U+ had a 6.1 billion won loss for the first three quarters.

After investigating the subsidies from July, the KCC on Christmas Eve announced fines of nearly 11.9 billion won on the three telecommunication companies and sales bans. The punishments differed for each company.

SK Telecom was handed the largest fine of 6.89 billion won, followed by KT with 2.85 billion won and LG U+ with 2.15 billion won.

LG U+ will be the first to be hit with a sales ban. The company will be barred from accepting new subscribers for 24 days starting Jan. 7. SK Telecom will be prohibited to conduct sales for 22 days starting Jan. 31. KT will not be allowed to accept subscribers for 20 days starting Feb. 22.

The companies will, however, be allowed to upgrade plans of existing subscribers.

“Offering excessive subsidiaries to a certain number of subscribers is unfair trade,” the KCC said in a statement.

The commission said LG U+ was the most aggressive with its subsidies, which accounted for 45.5 percent of its subscriptions, trailed by SK Telecom with 43.9 percent and KT at 42.9 percent.

The most violations were made for customers who switched their subscription from a rival company and SK Telecom was the most aggressive.

SK lost some subscribers to KT when the first iPhone was released in 2009 because KT had exclusive rights to sell the iPhones for a year and a half.

The sales bans were calculated according to how many accounts received subsidies, while the amount of the fines was calculated according to the market shares of each company.

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Overall, SK Telecom leads the industry with a 51 percent market share followed by KT with 31 percent and LG U+ with 18 percent.

The three companies will have to submit a plan to the KCC within a month on how they would correct their business practices.

This is not the first time they have been penalized for excessive subsidies.

The first time was in 2002 followed by another sales suspension in 2004.

In 2004, the government imposed a fine of 33.3 billion won on the three companies for the same reason.

In 2006, fines of 73.2 billion won were levied.

In 2010 and 2011 the companies were slapped with 20.3 billion won and 13.6 billion won fines each.

“The strict penalties were inevitable as they continuously violated the policy despite numerous warnings since LTE phones were on sales in November last year,” said the KCC spokesman.

LG U+ said the KCC sales suspension was regrettable. SK Telecom called the decision “harsh.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]


By Lee Ho-jeong

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