Illegal subsidies cause headaches

A few smartphone retailers began hurriedly withdrawing models of the latest iPhones, which were sold over the weekend at extremely low prices with subsidy offers surpassing the legal limit, after the government warned that it would impose strong penalties that could include legal action.

The move has led to market confusion and frustrated many consumers who lined up to buy the latest iPhone 6. But it has also further deepened the public’s displeasure over the recently enacted Mobile Device Distribution Improvement Act, which was intended to reduce and level the amount of subsidies consumers receive. By law, mobile carriers cannot offer a subsidy higher than 300,000 won ($279) per handset.

Some retailers that sold the iPhones with the massive subsidies started to retract them, requesting that customers who made preorders cancel their subscriptions. With those subsidies, an iPhone 6 could sell for 100,000 to 200,000 won. The official factory price for a 16-gigabyte iPhone 6 is 789,800 won, while a 16-gigabyte iPhone 6 Plus goes for 924,000 won.

Yet despite the government’s ban on excessive subsidies, retailers were busy over the weekend holding “guerrilla sales,” offering the iPhone 6 and iPhone 6 Plus with subsidies amounting to as much as 700,000 won, which would almost cover the entire official cost.

The Korea Communications Commission (KCC) stepped in on Sunday afternoon and warned that the government had been monitoring illegal subsidies since the new iPhones were launched on Friday and that it would impose harsh penalties to any business found to be in violation of the law. This included the possibility of criminal prosecution.

Under the Mobile Device Distribution Improvement Act, which went into effect on Oct. 1, retailers that provide subsidies exceeding the legal limit of 300,000 won can be fined up to a maximum of 10 million won.

Still, the news did not sit well with many consumers.

“Everyone gets a different deal when purchasing the same product, according to the time and place. The new mobile act doesn’t make any sense because it’s trying to control the price of smartphones under the guise of pursuing equality,” said one consumer who recently purchased the iPhone 6 Plus.

The KCC initially dispatched on-site inspectors to look into the type and amount of illegal subsidies smartphone retailers were providing, and it is also determining whether mobile carriers were involved in the illegal subsidies that sparked the weekend frenzy.

“It is still unclear whether the mobile carriers expanded the amount of sales incentives they provided to retailers, which were allegedly used as illegal subsidies,” said a spokesman for the KCC.

Mobile carriers, meanwhile, have placed blame on both smartphone retailers and the new mobile act.

“Sales incentives have always been provided to smartphone retailers. The smartphones stores are the ones that decided to use them as subsidies for consumers,” said a KT spokesman.

“Plus, they are forced to do so because the mobile act froze the market by cutting down all subsidies to the same level. The smartphone retailers had no other choice because their survival is on the line.”

Amid growing complaints regarding a market freeze, some lawmakers are taking steps in abolishing the new law.

Rep. Park Jie-won, a member of the New Politics Alliance for Democracy (NPAD), argued that the subsidy ceiling must be eradicated.

“The Mobile Device Distribution Improvement Act must be revised immediately, and the NPAD should respond actively and review eradicating unnecessary government regulations on the mobile communications market,” the lawmaker said yesterday.

Ruling Saenuri Party Rep. Bae Deok-kwang also proposed a revision to the law that would eradicate the subsidy ceiling.

BY KIM JUNG-YOON [kjy@joongang.co.kr]