Improve opaque regulations

Chun Eung-hwi

SK Telecom, the country’s predominant mobile carrier, earned an average of 42,377 won ($40.80) from each customer last year. The revenue from phone service charges was about 1,200 won more than that earned by its two smaller rivals. For the average family of three, the monthly phone bill would have come around to 123,000 won to 127,000 won. According to Korea Statistics, the share of telecommunication fees in household spending rose steadily over the last 10 years, hitting 6.56 percent in 2012 compared with 5.3 percent in 2003.

Based on the 2011 data, a Korean family pays the most for telecommunication services among 19 OECD countries. Japan is the second highest. In Mexico, which is the third, one mobile carrier dominates the market with a more than 80 percent share, but telecommunication costs compared to monthly household spending are about 67 percent of ours. The rates are excessive in Korea even when compared to monopolistic markets. Mexico, China and Switzerland are just a few other countries that maintain monopolistic rate systems. Other countries do not need to regulate prices because the market provides a competitive system.

The government has maintained a regulatory price system because of our unique market structure. Despite regulations to curtail a monopoly, the ranking based on revenue for the three operators remained stubbornly unchanged over the last decade, with SK taking up 50 percent, KT 30 percent and LG U+ 20 percent.

Each company steals customers from its competitors with subsidies on handsets instead of lower service fees. The so-called thrift-phone market remains on the periphery with a market share of 1 percent as of 2011. The state-funded Korea Information Society Development Institute concluded that the subsidy competition has barely changed the market structure, and the thrift players do not pose any competitive pressure on the main mobile phone industry players.

Despite its complaints about how much it was spending to upgrade to its new superfast LTE network, SK Telecom’s operating profit ratio has hovered above 10 percent for the last four years. Even last year, when the economy was slow, the company’s operating profit ratio improved to 12.1 percent from 10.7 percent in 2012. It profited because telecommunication fees for its 3G service were 25 percent higher than for second-generation phones. Fees for 4G (LTE) phones are 15 percent more expensive than for 3G. Not a bad way of making more money every year.

Moreover, revenues from new multimedia services are greater than earnings from voice and data services. Smartphone users use just 75 percent of their paid call quota and less than 65 percent of their data limit. Mobile carriers are able to profit through abnormal pricing levels, all authorized by the regulators. It is hard to understand whether the government is trying to regulate or encourage higher mobile fees.

Under the price rating system, there is no need for the players to compete on price because they can still afford to hand out handset subsidies. Under the current system, a reduction in rates need not be approved, just reported to authorities. SK Telecom has not failed to bring down prices because it’s over-regulated. It just didn’t want to.

The problem is the government system condoning expensive price levels. In a recent legal case, the court ruled that the government must release the basic rates companies report to the authorities. The ruling underscores the need for transparent regulations to contain mobile phone rates. What the government needs to do first is to improve its opaque and suspicious regulatory system.

Translation by the Korea JoongAng Daily staff.

*The author is the president of Open Net.

By Chun Eung-hwi