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Pull the plug on price controls

Published: 16 Feb. 2014, 23:52

The Ministry of Science, ICT and Future Planning is considering whether to scrap state control of telecommunications fees to help bring down mobile service charges. Since 1991, the government has required dominant market players - SK Telecom in mobile service and KT in fixed-line service - to get government approval of their service charges, mainly to help latecomers compete. In the mobile field, market leader SK Telecom is the sole operator that comes under such scrutiny. Once SK gets approval for a new price level, the two other mobile carriers - KT and LG U+ - set their fees accordingly.

The mechanism has prevented a competitive range of service charges among mobile carriers. Since they cannot compete on prices, mobile carriers instead subsidize the purchase of mobile phones to attract customers, which eventually led to market chaos.

The carriers earlier this week vied in wasteful deals by giving away the Samsung Electronics’ latest mobile device, the Galaxy Note 3, for free in addition to a cash voucher of 200,000 won ($189). The Korea Communications Commission plans to recommend punitive actions against the collaborative act, but fines are not likely to make the subsidy competition go away. Fines amount to hundreds of billions of won at most, while revenue from drawing new clients reaches up to trillions of won.

Mobile phone service carriers have to compete with better services and cheaper fees. They must not rely on winning clients by offering more and larger subsidies for phone purchases. Young people change phones easily when new models arrive, thanks to subsidies that end up burdening parents who pay for their phone bills. A family pays 150,000 won on average in telecommunication service fees each month, which eats up 7 percent of household income, sharply higher than the 2 percent average of households in OECD member countries. The three mobile carriers are estimated to have spent 8 trillion won combined to subsidize phone purchases. If they had spent the money to lower service charges, the heavy burden of mobile phone costs would have been substantially eased.

If the government abolishes the outmoded price control system, it could generate competition among the players. The three operators must compete by offering better services at affordable rates, instead of wasteful subsidy spending.