Let them compete

Cho Dong-keun

By the end of 2013, each member of the Korean population owned more than one mobile phone. Subscribers to mobile phone services reached 54.06 million, 109 percent of the population. More than 70 percent of the population use smartphones, with that number topping 37 million. The telecom market has reached saturation point.

And yet its fees are not fully liberalized. There is still a huge gap in the system and reality. Currently, mobile phone fees are determined through an “umbrella pricing” system. Once the dominant player - SK Telecom - gets approval for a new set of rates and discloses them, the other two competitors - KT and LG U+ - follow up to set their prices at the same level or below it. It is a de facto government-led price cartel. Operators are suspected of profiteering because they don’t need to compete on service charges.

The price approval system was imposed when new carriers were introduced in the 1990s both for protection and to give latecomers a head start. But with smaller carriers now making profits, there is no need to sustain a system that favors the carriers at the expense of consumers.

The system is deeply flawed. The practices in the domestic mobile market do not befit its desire to be considered cutting edge. Hundreds line up from dawn in order to grab free phone handouts. Telecom companies play hide and seek around regulations to lure customers away from competitors with subsidized phones. Such abnormalities take place because operators cannot compete in selling their services apart from offering subsidies. The heart of the lawsuits between carriers and civic groups demanding disclosure of basic service rates also hearken back to the state’s misguided control.

Households are hurt by rising telecommunication fees. According the national statistics office, telecommunication fees accounted for seven percent of overall household expenditures in 2011. Koreans pay nearly three times more than the average of 2 percent among members of the OECD. Construction of the mobile telecommunication infrastructure has been nearly completed. And yet fees never seem to go down.

Consumers are more sensitive to fuel prices than how much a car costs. The same goes for mobile phone services. To bring down the fees, mobile carriers must compete over charges. The government must leave pricing to the market.

South Korea is the only country among OECD members to govern mobile phone prices. There are few cases of irregular or exploitative pricing or serious threats to fair competition in these countries. Since Japan scrapped its approval system in 1996, latecomer telecom SoftBank challenged predominant rival NTT DoCoMo, and that helped bring down overall mobile subscription and service fees. Simulations in Korea have shown that if latecomers come up with innovative marketing strategies after price protection is lifted, they could, in fact, offer cheaper rates.

Apart from the three major network providers, there are also 28 thrift-phone carriers. With price competition, companies in the industry could hardly collude to keep prices overly high. Once rates are rationalized, operators won’t have to use their own money to subsidize new phones to attract customers. And they will be shunned by the market if they keep their rates high.

The government will be suspected of working in favor of the carriers if it maintains its price-setting powers. The regulation does not protect fair competition. It precludes it and undermines the mobile market’s dynamism and efficacy. To raise the quality of services and transparency, rates must be liberalized. Korea is on a national campaign to deregulate. The rate system is the one regulation that should go first.

Translation by the Korea JoongAng Daily staff.

*The author is an economist professor at Myongji University.

By Cho Dong-keun