LGT Holds Key to Mobile Future

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LGT Holds Key to Mobile Future


2005-03-31


Can LG Telecom, Korea's smallest wireless carrier, stay afloat in the long term despite being sandwiched between its bigger rivals SK Telecom and KTF?

 

Experts are split into two opposing camps on the issue.

 

Some claim that LG Telecom will be unable to survive in the thin-margin telecom market while some say that it should stay alive to assure competition.

 

But one thing that all of the observers agree on is that LG Telecom holds the key to decide the future of the domestic mobile market.

 

The government is not likely to step in in the wireless industry restructuring, according to the Ministry of Information and Communication (MIC), which oversees wireless telephony service competition.

 

``We will by no means spearhead an abrupt overhaul in the mobile business. For the time being, the status quo will continue,'' an MIC director said.

 

At the end of last month, SK Telecom represented 51.3 percent of the mobile market with 18.9 million subscribers. KTF followed with 11.9 million users and LG Telecom came in at a distant third with 6 million.

 


Analysts say that the revamping of the telecom business would be spurred by end users instead of the government when they take issue with LG Telecom's inability to bring next-generation services.

 


``The government will not make any overt push on LG Telecom. In the long run, the market and customers will speak out and the industry will have no choice but to listen to them,'' Dongbu Securities economist Lee Young-ju projected.

 


2004: Dubious Year for LG Telecom

 

The year 2004 was a year to remember for LG Telecom.

 

Shrugging off recent setbacks, the operator chalked up a net gain of more than 1.2 million clients with its customer pool crossing the 6-million threshold in 2004.

 

The increased number of customers caused the carrier's sales to jump 31.5 percent in the banner year to 2.29 trillion won from a year ago.

 

Encouraged by the exploit, LG Telecom chief executive Nam Yong said the firm plans to add 1 million more users this year.

 

``We aim to catapult LG Telecom to a firm, which posts 20-30 percent growth per annum,'' Nam said in a press conference last December.

 


At a glance, LG Telecom appears to have suddenly become a potent force in the market. Yet, a closer look reveals that an asymmetric government policy of a phased number portability system was behind its success.

 

Starting last year, only users of business leader SK Telecom were allowed to switch operators while keeping their phone numbers and the one-way rule expanded its coverage to KTF last June.

 

The system, tailored toward diluting the dominance of market leaders, goes full-scale this year as LG Telecom users were also allowed to flee to other carriers without having to change numbers.

 

This means that the special benefit is now gone. Among LG Telecom's 1.2 million-user gain last year, 1.1 million came from the partial implementation of the number portability.

 

In fact, LG Telecom lost about 330,000 clients to its bigger competitors for the past two months because of the full-way number portability.

 

As a result, the 6-million plateau is under serious threat as its customer base stood at 6,038,000 as of the end of last month.

 

On a more negative note, LG's 2004 success took a heavy toll. Although its revenue rocketed 31.5 percent, its high-rising marketing costs of up to 500 billion won resulted in a huge hit to the bottom line.

 

The firm's net profit nose-dived to 22.6 billion won in 2004 from 78.8 billion won a year before.

 

In comparison, SK Telecom posted a 1.5 trillion won net income and runner-up player KTF, a mobile unit of the nation's dominant telecom outfit KT, earned 284 billion won

 

``Apparently, LG Telecom advanced much last year but the hitch is that the firm cannot sustain the notable growth this year. Even keeping the 6-million mark will be a tall task,'' LG Securities analyst Stan Jung said.

 

Jung concluded that LG Telecom's seemingly stellar achievement of 2004 doesn't assure seamless growth of the company and in this climate, concerns about its commercial viability flare up.

 

LG Telecom: Value Destroyer

 

Those who argue that LG Telecom will collapse or merge give three reasons for such a doomed prediction: its lack of a next-generation plan, the high debt-equity ratio and the harm that the entity does on the entire telecom industry.

 

Korea's mobile carriers of SK Telecom and KTF are busy pouring money in third-generation (3G) networks of wideband code division multiple access (W-CDMA) on top of their existing CDMA 2000 1x EV-DO (evolution data only).

 

The two 3G platforms offer mobile broadband connectivity, enabling services such as video calls, video conferencing, real-time online gaming and multimedia mail.

 

SK Telecom plans to spend 600 billion won on W-CDMA this year while KTF will set aside 350 billion won in the promising segment.

 

In a stark comparison, LG Telecom, the only mobile operator that does not have the EV-DO network among the nation's three players, has no plan to get into the holy land of the 3G mobile telephony.

 

Its initial scheme was to set up EV-DV, the most advanced technology among the CDMA family, but the firm actually jettisoned the format as developer Qualcomm put it on the backburner.

 

Instead LG Telecom announced that it will select EV-DO revision A (rA) as its next technology but still has no plan to spend on the standard this year, arousing suspicion on its investment intention.

 

``This is just a delay tactic. LG does not appear to be serious about spending a lot of money to establish 3G networks of its own,'' Dongbu Securities' Lee said.

 

Another downside is LG Telecom's high debt-equity ratio of 246 percent on 2.42 trillion won in debts and 985.1 billion won in equities as of the end of last year.

 

``A firm with a 250-percent debt-equity ratio can face a meltdown at any time. Suppose creditors decide to collect their loans, then what will happen?'' Meritz securities analyst Jeon Sang-yong said.

 

Dongbu's Lee claimed that the very presence of LG Telecom dents the overall mobile market in sync with the wide-ranging trend of digital convergence, which blurs conventional industrial categories.

 

He said that in carrying out offerings such as mobile banking, music services via handsets and telematics, LG Telecom has given away too much to its bank, music industry and carmaking partners.

 

``That sets a bad example, which negatively affects negotiations of SK Telecom and KTF with other industries. LG cuts the telecom pie and gives it away to other industries. In this sense, it can be called a value destroyer,'' Lee said.

 

To start the above-mentioned convergence services sooner than its rivals, Lee said LG Telecom accepted unfavorable terms, such as low commissions or small shares in dividing profits.

 

Kim Kyung-mo from Mirae Asset projected that LG Telecom will be able to stay afloat during the next couple of years but thereafter its survival would be tough without drastic measures such as mergers.

 

``In a nutshell, LG Telecom is in a situation of choosing between going away now or going away after doing something,'' he noted.

 

Competitive Market

 

Some market watchers, such as University of Seoul Professor Sung Nak-il, says that LG Telecom should continue its operations. He claims the wreckage of LG Telecom would lead to the monopoly of the Korean telecom industry once and for all.

 

``Given that there are only two mobile carriers _ SK Telecom and KTF _ the two firms will forge a duopoly, hurting wireless customers,'' Sung said.

 

He added that no countries with an economy of Korea's size maintain just two wireless carriers and three players are a minimal must to ensure fair competition.

 

``The MIC is required to aid the mobile market quickly to ensure the existence of LG Telecom because the ministry is the one who is responsible for causing the current imbalanced telecom market,'' he claimed.

 

He meant that the government's approval on the mergers between SK Telecom and Shinsegi Telecomm in 2002 played a major role in distorting the market.

 

Through the amalgamation, SK Telecom could carve out about a half of the market and has maintained its dominance ever since.

 

In response, Dongbu's Lee points out that the concerns about market engrossment can be addressed by introducing the mobile virtual network operator (MVNO) system.

 

``Although the number of operators decreases to two, competition can be accelerated if several MVNO players come to town,'' he said.

 

MVNO alludes to a mobile service operator that does not have its own licensed spectrum or network. Instead, it buys mobile capacity from network providers and signs up users under its own brand.

 

The MVNO system has been popular in Europe and its presence was later extended to countries like Japan, Hong Kong and the United States.

 

Lee projected that it is possible for LG Telecom to emulate to large-sized MVNO with the local market being bisected by SK Telecom and KTF.

 

``Actually, LG Telecom shows the typical characteristics of large-sized MVNO player at the moment as it doesn't invest in networks and focuses solely on signing up new customers,'' Lee said.

 

By contrast, LG Securities' Jung predicted the industry retooling will happen in the form of mergers.

 

``The market consensus is that LG Telecom will be swallowed by KT because of synergy effects. As you know, KT's affiliate KTF and LG Telecom use the same-range spectrum,'' Jung said.

 

SK Telecom facilitates its mobile telephony services based on 800 MHz frequency while KTF and LG Telecom use spectrums in the 1.8 GHz bandwidth.

 


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