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SK Telecom raising its profile as wireless pioneer

01 November 1999

SK Telecom, founded in 1984 as Korea Mobile Telecommunications Services, already has 9.5 million subscribers in Korea. SK Telecom pioneered use of CDMA digital cellular services and is focusing increasingly on wireless data opportunities. Jung Nam Cho, president of SK Telecom, talks to Basil Ballhatchet about the cellular market in Korea

SK Telecom, the leading cellular operator in South Korea, was founded as Korea Mobile Telecommunications Services in 1984. It started offering cellular services in 1988. By 1995 it had one million cellular and four million paging subscribers. In 1996 it launched the world's first CDMA cellular service. In 1997 the operator joined the SK Group and was renamed SK Telecom. It is also partly owned by South Korea's incumbent operator, Korea Telecom.
By the end of October 1999 SK Telecom had 9.33 million cellular phone subscribers, as cellular penetration exceeded the 40% level. Scott Brixen, telecoms equity analyst at Morgan Stanley Dean Witter, talks about the unexpected rate of cellular growth in South Korea: "If you go back two years and you pull out research reports, you will find that no one would have been within 20% of the penetration levels, where we are today in terms of the forecast. So the market has really surprised us as a whole. It has come on the back of the availability of very cheap handsets owing to very high handset subsidies. Where do we go from here? We expect cellular penetration to rise from about 48-49% at the end of this year to about 53-54% next year. Where will it top out? It can clearly exceed 60%. You have the example of Finland as a nation that has crafted that. But the growth should slow pretty significantly starting next year."
Brixen adds: "Over the next year or two, people are going to realize - if they don't already realize - that Korea is one of the most dynamic telecoms markets in Asia. With 46 million people, it has achieved more than enough scale for people to pay considerable attention. Given the size of the market, the high take-up rates of new technology, its high penetration in mobile phones and fixed lines, people are realizing that this is a serious market that you cannot afford to ignore. So I think that it is going to continue to be a very exciting market. In view of the roll-out of new broadband products and the arrival of new companies on the market, it is pretty clear that is going to receive a lot more focus from investors."
In an interview with Global Telecoms Business, the president of SK Telecom, Jung Nam Cho describes the South Korean cellular market, the potential for wireless data, the role of SK Telecom in pioneering W-CDMA technology and the operator's aim to become of the world's top information and communications companies.
As Cho points out, SK Telecom is not only the biggest cellular subscriber in South Korea: "SK Telecom ranks sixth in the world in subscriber numbers and is Korea's top provider of cellular phone services. We boast outstanding call quality and coverage, advanced technology and a business approach that stresses customer service. These factors have made our brand name the best in Korea."
Cho believes that cellular penetration will exceed 50% by the end of the year: "The explosive growth of the Korean mobile phone market over the past two years has been the most salient feature. Three new PCS carriers entered the market in October 1997 and the market has grown on average 84% annually since then. By the end of 1999, some 23 million subscribers, or 50% of the total population, will be subscribing to a mobile phone service."
Adverse impact of the number of players
Cho believes that too much competition in the market is adversely affecting profitability: "The Korean telecoms market is also characterised by a weakening profit structure from excessive competition among the nation's five mobile phone service carriers. Corporate profits are declining in the face of costly promotional activities, lower charges and handset subsidies for attracting new subscribers from the competition. Even market latecomers have already secured at least two million subscribers of their own. So the number of future subscribers has shrunk."
Cho adds that the telcos could simply cut marketing budgets: "A reduction in marketing expenditure would improve the bottom line, but all the carriers believe that growth is of primary importance. Therefore, excessive amounts of money are being poured into marketing at present. This trend is forecast to continue for the time being. On the other hand, the growth rate will slow in future and the nation's service providers are expected to find ways to co-operate in addressing the issue of low profitability caused by excess competition."
Cho is concerned that average subscriber revenue may decline owing to the number of players in South Korea: "The average volume of mobile call traffic does not change much in an extremely competitive climate, but there is pressure to lower charges to users. Therefore, the ARPU can go down. I fear that the ARPU may decline. I constantly observe the trends. We face increasing pressure from other people to reduce the charges. So I am afraid that such pressure may result in decreases in the ARPU. But our people are trying to increase the ARPU by creating value-added services. This year we maintained the same level of ARPU."
SK Telecom revenues up, but EBITDA margins down
As Cho notes, SK Telecom's revenues are still increasing: "Our net income increased from W124.9 billion ($104 million) in the first half of 1998 to W149.5 billion ($127 million) in the corresponding period in 1999, a rise of 19.7%. This growth was mainly attributable to an increase in cellular revenues and a reduction in depreciation and leased line expenses owing to reduced capital expenditures in 1998 and the near completion of the fibre-optic fixed lines."
The company is also keeping a close eye on interest charges: "Our interest expenses went down by 26% due to a more favourable economic situation in Korea and a reduction in interest-bearing debt. The current debt to equity ratio is about 37% as of September 1999, which is one of the lowest among Korean conglomerates and is extremely manageable without the further issue of debt."
At the same time, in the first half of 1999, SK Telecom's EBITDA margins fell from 40% to 27%, primarily owing to high handset subsidies. Cho believes that the situation will change next year: "This year we have been trying to maintain a 40% accumulated market share, even at the cost of high handset subsidies, as the Korean mobile phone service market had in our opinion a lot of potential to grow. So we took this opportunity to increase our subscriber base as much as possible. However, from next year our profitability is expected to increase significantly, as the market will mature and be more rationalized."
Market segmentation and focus on younger generation
Cho explains that SK Telecom is now focusing on younger subscribers: "Young subscribers in their 20s and 30s, who are looking for sophisticated functions, represent our main target market. Of course, we also offer general services with diverse features for general customers. Until a year ago, we concentrated our focus on high-income groups, the people who were making full use of our services. Our efforts were successful, but we had been losing the younger generation. So last July we launched a new brand, "TTL", which targeted the 18-23 year old age group. It was successful, generating over one million subscribers. Recently, our marketing people have begun to segment our customers: in other words as competition is becoming intense, our marketing is changing from each service to each client. They are now breaking subscribers into six segments by age and occupation. They are offering different pricing schedules and packages to cater for these segments."
Cho continues on the importance of attracting younger subscribers: "People in their late teens or early 20s are entering the market for the first time: they represent the future market for a service provider. Moreover, young mobile service subscribers tend to make a lot of calls and have a strong demand for new services such as wireless text data transmission and receipt. So a service provider cannot ignore this market segment for strategic reasons."
Features of the TTL service
Cho explains some of the features of the TTL service: "The service reflects the youth culture, lifestyles and call patterns. Specific features include a special rate schedule, a recreational area for the young generation, discounts for restaurants and movie theatres, and a cyber campus experience."
According to Cho: "TTL users will be the main participants in Korea's future cyber society, based on the Internet. Therefore, the TTL service must be connected to Internet applications. The TTL college home page has been established for the Internet interface that provides a wide range of benefits to young people."
Wireless data services
Cho goes on to describe some of SK Telecom's wireless data services: "We currently offer an inter-working function that provides Internet and Intranet access. We also have wireless data services with specific content in a short message service format such as news, weather updates, stock price quotes, bank transactions and so on."
Cho continues on some of the new services to be launched in 2000: "We plan to offer multimedia content services based on IS-95C, WAP content services and E-commerce, tele-medicine and other data services through the mobile handset. The competition has already started to provide wireless data services in Korea. Operators are also offering SMS services, but data transmission is restricted to 8-13 Kbps. So this year we introduced IS-95 B to our network. Some time later next year, we will complete the deployment of IS-95 C. Next year, we will start deploying multimedia content services over IS-95 C. Our subscribers will enjoy Internet access, home banking, E-commerce and other services. We are already offering data services called, "n.TOP"."
Cho describes the benefits of "n.TOP", launched in October 1999: "In October this year SK Telecom launched n.TOP, which allows users wireless Internet access through the SPEED 011 cellular phone service. The n.TOP service takes advantage of SK Telecom's short message service infrastructure and WAP infrastructure to provide Internet access, data searches, games and recreation, as well as banking transactions in real time."
In October 1997 SK Telekom launched an on-line data service called NETSGO. Cho talks about the service's success and prospects: "NETSGO, SK Telecom's on-line data service, was launched in October 1997. Over 700,000 subscribers have been secured during the first two years, making it Korea's leading on-line service offering. Since everything is Internet-based, NETSGO offers a wide range of multimedia services that are easy to use, even for people who are not familiar with the Internet environment. In 2000 SK Telecom will use its wireless infrastructure and business base of 10 million mobile phone service subscribers to develop NETSGO into an integrated wireline/wireless data communications service."
NETSGO will be used for a new Internet TV venture, as Cho explains: "In October 1999, SK Telecom became involved in the Internet TV business as part of a six-member consortium that includes Chosun Internet TV, Samsung Electro-Mechanics and Samsung Corporation. Each consortium member brings unique strengths to the project to achieve synergy. SK Telecom will supply the Internet TV access network, based on its NETSGO on-line service infrastructure. We will provide a range of content for the new business. NETSGO sales outlets will also be used to sell Internet TV set-top boxes."
Wireless technology and contacts with NTT DoCoMo and Nokia
Cho talks about SK Telecom's wireless technology strategy: "SK Telecom managed to be the first in the world to commercialize CDMA cellular services in January 1996. Our strategy for the future is to attract new subscribers and keep existing subscribers satisfied, by continuing to develop cutting-edge mobile communications technology, create various new value-added services and improve service quality. We will also commercialize next-generation IMT-2000 in 2002, maintaining our leading position in the domestic mobile communications market. Moreover, we are pursuing strategic alliances with Microsoft, NTT DoCoMo and Nokia to ensure international competitiveness."
Cho elaborates on alliances with NTT DoCoMo and Nokia: "SK Telecom is jointly developing technology related to IMT-2000 operations and roaming with NTT DoCoMo, a mobile service provider. We are working with Nokia, a hardware manufacturer, to develop engineering tools and ways to optimize and operate wireless networks for next generation mobile phone service, including IMT-2000. SK Telecom engineers have been dispatched to Nokia to work on a joint project there. We are thinking of the future in terms of Korea, China and Japan."
Cho adds: "The Japanese are very keen to realize such a dream. SK Telecom and NTT DoCoMo agreed to advance the roaming service between the systems and subscribers of the two companies. We expect dual mode handsets in April next year. These are now being developed under NTT DoCoMo's responsibility. System integration was SK Telecom's responsibility. In terms of IMT-2000, we have agreed to exert joint efforts to make sure that the subscribers of both our companies do not encounter any inconvenience. As you know, NTT DoCoMo have already announced their W-CDMA services mode."
Cho explains that SK Telecom is likely to opt for W-CDMA in Korea: "NTT DoCoMo is making a strong recommendation for SK Telecom to follow their way on W-CDMA. The two companies have made a formal agreement to integrate networks. If SK Telecom had to adopt CDMA2000, for example, a different mode to NTT DoCoMo, then the work of the two companies would be a lot bigger. Right now, the system purchased and delivered by NTT DoCoMo is undergoing a field test on our sites. We are testing and preparing for the future, especially for 2002 when the two networks are combined. We are co-operating in various areas, operating and maintenance, new services development and marketing.
Nokia has already opened a laboratory in Seoul, where our engineers are already working with Nokia engineers. The agreement includes optimization of wireless networks for the cellular system and also for IMT-2000. My basic expectation is that IMT-2000 handset development is the major focus for the joint efforts."
Cho believes that 3G licences should only be awarded to existing mobile operators: "I oppose the granting of business licences to companies that are outside the information and communications industries or even to allow new telcos in. As IMT-2000 is a step beyond existing mobile communication services, the right to pursue this business should be granted to existing mobile service providers in view of the technology research, network construction and service operation involved. If a company not initially involved in information and communications received an IMT-2000 licence, this would mean that redundant investments had been made in the entire range of service infrastructure. This would be detrimental to national competitiveness.
I have heard that new operators are being granted licences in Europe, but I believe that these newcomers intend to compete in the existing cellular phone market. On the other hand, the Korean second generation market is already subject to much competition. Therefore I see no reason to intensify the competition by allowing new players to offer IMT-2000 services."
The competitive environment may change in South Korea
SK Telecom has a 6.6% in Hanaro Telecom. Cho dismisses speculation that SK Telecom might acquire its competitor: "Hanaro was originally established to evolve into a secondary local network service provider without any managerial monopoly of any specific shareholder or company. SK Telecom respects the reasons for Hanaro's establishment and has maintained its equity share in the company, as have other major shareholders."
At the same time Vodafone Airtouch has been involved in negotiations to acquire another competitor in South Korea, Shinsegi. Cho believes that such a development would only be beneficial: "If an international operator assumes a controlling interest in Shinsegi, excessive competition over handset subsidies and so on would abate, and the competitive focus would be more on profitability through sophisticated marketing. In addition, competition is expected to intensify over the use of Korea as a platform for moving into China and the rest of north-east Asia."
International strategy
SK Telecom is focusing on the Asia Pacific. The company plans to move into the Chinese market to offer CDMA services, Internet services and manufacture handsets, once the market is opened to foreign companies. SK Telecom has a joint venture in India, which is already successful, as Cho notes: "We have established India DSS, a joint venture paging service provider, with Samsung Electronics and Dalmia of India. By the end of October DSS was operating in 10 major Indian cities and had a 38% market share."
The operator has also established a joint venture with LG Information (LGIC) to operate in Vietnam. Cho comments: "SK Telecom has been working with LGIC to promote the CDMA mobile phone business in Vietnam since 1995. We are currently involved in a business corporate contract with Saigon Post & Telecommunications Services, which is the second company in Vietnam to receive approval to provide CDMA cellular services. SK Telecom and LGIC plan to form a joint venture to proceed with this project. Our contribution will be mobile communications technology and marketing know-how, while LGIC will supply the CDMA hardware."
In addition, SK Telecom acquired a 25% stake in the second largest cellular provider in Mongolia in April 1999. Cho notes that the venture is already profitable: "Instead of seeking to make a profit on investments, we made use of our ample AMPS hardware and transferred our existing technology and marketing know-how to help popularise mobile phone use in Mongolia. This past April, SK Telecom purchased a 25% share of Skytel, Mongolia's second mobile carrier. Service was launched in July, and we were in the black in the first month of operations, even though another operator is also present on the Mongolian market. The break-even point for this operation is 2,000 subscribers. There were 6,093 subscribers at the end of October. Therefore, the foundation has been laid for a solid, profitable business. In future, we will switch from analogue to CDMA, as we aim to make Skytel the leading carrier in Mongolia."
Conclusion
Cho wants to transform SK Telecom into a global player: "Over the next two-three years I would like to introduce very strong data services into the market. I would like to obtain an IMT-2000 licence from the government and put it into commercial service. I would like to have two or three overseas operations in Vietnam, preferably in China and some other profitable areas. I would also like to derive greater profits from paging services. We call our vision MOVE 21. We aim to achieve this lofty goal by 2005. MOVE 21 is part of a corporate vision to make SK Telecom a major world player and also represents the will of all organizational members to play a leadership role in the 21st century. The quantitative goals of MOVE 21 include annual sales of W15 trillion ($12 billion) by 2005, transforming SK Telecom into one of the world's top 20 information and communications companies. To achieve this target, we will maintain our leadership position in the domestic market for existing business lines. We will also become involved in new business areas to ensure continued growth. We will also apply our core competencies in technology, marketing and service operations in overseas markets to develop as a global player.






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