Assembly passes law to restrict phone subsidies

Starting in October, consumers will notice a change in Korea’s system for distributing mobile phones after the National Assembly finally passed the Mobile Device Distribution Act at its plenary session on May 2.

The legislation aims to even out the prices of smartphones by limiting subsidies regardless of where, when and how a customer purchases the phone. The difference in subsidies offered on smartphones is expected to be capped at 15 percent.

The government hopes the new law will improve transparency in the subsidies offered by mobile carriers.

The law seeks to eliminate the price discrimination caused by subsidies on phone sales, which differ by subscription and region.

The main points of the law are to ban subsidy discrimination, require mobile phone manufacturers, carriers and retailers to disclose their subsidies, ban them from pressuring customers into costly monthly plans and allow customers to choose between subsidies and monthly rate discounts. It also aims to prohibit promotions that disguise price cuts on monthly plans as long term contract subsidies and require mobile carriers to report manufacturers’ subsidies to the government.

When the law takes effect in October, consumers will be able to check the exact amount of subsidies they can get before they purchase smartphones instead of visiting a number of stores to check available discounts.

But starting in October, if the subsidy on a Galaxy S5 is set at 250,000 won ($244), potential buyers will get close to the same price at any retail store. The base subsidy will be set by the Korea Communications Commission.

The stores can offer subsidies within 15 percent of the fixed subsidy, so for example, any store could sell the phone for within 37,500 won of 250,000 won.

When purchasing a new smartphone, a customer will get a similar subsidy whether he is switching carriers, selling a current phone to upgrade or starting a new subscription.

Recent subsidies that mobile carriers have offered to customers who want to switch carriers, which sought to steal customers from competitors, are also expected to be abolished by the law.

However, the subsidy ceiling will only be valid for three years after the implementation of the law, at which point mobile carriers and manufacturers will be able to offer subsidies of their choice.

Mobile phones that were being sold more than 15 months ago will not be subject to the subsidy ceiling.

The KCC now allows mobile carriers, manufacturers and retailers to offer up to 270,000 won in subsidies on a smartphone, but the amount is expected to be increased when the law takes effect.

“The 270,000 won current subsidy ceiling does not reflect reality, as it was a guideline set up in 2010,” said a spokesman for the KCC.

If they choose to, consumers can still receive subsidies if they pay for extra services and high-price monthly plans.

Previously, consumers had to pay for two months of optional services or three months on an expensive monthly plan in order to get many of the available subsidies. The new Mobile Device Distribution Act will prohibit mobile companies from making such requirements.

Under the new law, consumers can choose between a plan that gives them a one-time subsidy and a monthly price cut in their monthly bill.

Advertisement banners at smartphone retailers that promote free phones will also disappear, because part of the bill will ban marketing that disguises monthly rate cuts on long-term contracts as subsidies.

Retailers must separately disclose subsidies and rate cuts on contracts.

The government also plans to implement strong penalties for companies that violate the law. This year the government suspended the operation of the top three mobile carriers for 45 days each as punishment for offering excessive subsidies. But under the new law, smartphone makers and mobile carriers will have to pay a penalty of 3 percent of their sales if they exceed the subsidy ceiling.

If a small store does not disclose the amount of a subsidy or if it offers discriminative subsidies, they can be fined up to 10 million won. Larger retail stores can be fined up to 50 million won.

The new law also allows for mobile company executives to be fined 150 million won or jailed for up to three years.

BY kim jung-yoon [kjy@joongang.co.kr]