Are Customers Really Benefiting?

At the Yongsan Electronics Plaza in Seoul, where mobile phone agents assembled on June 1, banners are hanging here and there, declaring, “Here you can find the lowest price” and “No need to look further.”

An employee from a mobile phone agent haggling over price even whipped out a “rebate price table” that a mobile phone company made. For some models, mobile phone companies take the burden of more than 120,000 won. It is said that the table is updated on a non-regular basis and sent to the agents.

Motorola’s “Minimoto” costs buyers only 200,000 won when changing mobile phone companies but 350,000 won when merely purchasing the phone.

It has not been a month since mobile phone companies were levied a substantial sum in penalties, but on site it appeared as if subsidies were still being provided.

Debate over Subsidies Reemerging-

The subsidies on mobile phones that mobile phone companies provide for distribution channels were prohibited by law for three years starting from March 2003. The measure was intended to prevent foreign currency waste caused by overspending and to stabilize the market.

With the expiration date of this law, March 2006, fast approaching, an insistence that the date should be extended has been developing around civic groups.

Despite the enactment of the law, however, subsidies have been secretly provided and “free phones” have been traded. According to the Korea Communication Commission, each mobile phone company was given 10-13 punitive measures on average for two years from 2003 to 2004, mainly due to providing subsidies. SK Telecom was levied a penalty amounting to 23.1 billion won last month.

The Ministry of Information and Communication does not express its formal position in regard to the law’s extension, but it plans to submit a new law in September this year.

They Are All Talking about Customers’ Benefit-

A seminar about regulation on mobile phone subsidies was held at the Korea Federation of Banks, Myeong-dong, Jung-gu, Seoul, on May 27. Lee Sang-yong, a professor in the department of information and telecommunication at Hanyang University, pointed out, “Customers who heavily use mobile phones have benefited from decreased mobile phone fees derived from regulation on subsidies.”

A survey introduced by Professor Lee revealed that mobile usage revenues per minute per head has dropped to 166.79 won after the enactment of the law from 204.37 won in the first half of 2000, which clearly demonstrates that mobile phone fees have fallen.

However, there were also objections.

Ahn Il-tae, a professor of economics at Chung-Ang University, pointed out that “competition tools should be diverse to increase customers’ welfare and subsidies can be seen as a competition tool.”

Among the mobile phone industry, opinions vary from company to company.

SK Telecom contends, “The market has entered a state of stabilization and there will be no ‘bloody’ competition.” On the other hand, KTF and LG Telecom assert, “Customers can be benefited temporarily from the subsidies but harmed in the long term,” Behind this assertion resides their fear about SK Telecom’s funding ability.

Avoiding Investment-

There is an assertion that domestic mobile phones could gain competitiveness through the subsidies. The Korean mobile phone market has advanced because customers were able to buy mobile phones more cheaply due to the subsidies, which has been a springboard for domestic mobile phone companies to enter the international market.

However, plenty of skeptical views also exist.

The investment three major mobile phone companies made this year was a little more than 3 trillion won, and the figure has stayed constant for the last several years. Moreover, marketing expenditure has exceeded investment since last year, which means that the companies are spending money on “snatching away competitors’ customers,” rather than investing on long-term growth.

The contention that customers cannot benefit in the long term when the mobile phone industry is engrossed in near-sighted competition holds water. The mobile phone subsidies are a good example.

Suk-MinHong Sang HoonKim smhong@donga.com sanhkim@donga.com