Korean Tariff Cuts to Hurt Operator Profits - but Less Than Forecast
Earlier this month, the Korea Communications Commission (KCC) announced a plan to widen the eligibility group for mobile service rate discounts from the current lowest income households to the lower-middle class and expand the range of discounts from 35% to a maximum 50%.
Under the plan, the lowest income households (numbering 1.53mn) who receive government cost-of-living subsidies would have their basic fees scrapped and receive a 50% discount on monthly voice calls. The lower-middle class of 2.63mn, who so far have not received any discount benefits, would be offered a 35% discount on basic fees and voice calls.
The KCC estimates the number of expected recipients will rise from the current 70,000 to 3.73mn and the amount of discount will soar from W5.9bn to W505bn (US$490 million) a year.
In a research note, Korea Investment & Securities says that the government's plan to widen the rate discounts is certainly negative for the mobile telecom services sector since: 1) the government is committed to lowering rates, and 2) the waived basic fees or raised discounts will surely affect profitability. However, they still find it positive that the government's stance toward rates overall is not to force but encourage voluntary rate cuts through the introduction of diverse marketing efforts such as bundled sales.
Meanwhile, the research firm says that there is a possibility the actual discounts may be less than what the KCC proposes, thereby diminishing the negative effects.
They suggest the following three reasons as to why they believe the actual discounts will be less than the KCC's forecast. 1) In order for the low-income households to be eligible for the discounts, a cumbersome application is needed on an annual basis. This explains why only 10% of those qualified take advantage of discounts at present. 2) Low-income earners cannot enjoy double discounts – they must choose between the government plan or service provider. It is thought that a majority of the low-income class are already signed up for discounts from service providers. 3) The low-income class makes fewer calls than average and so the actual discount amount should not be significant.
The government plans to revise the related laws and contract terms to put the measures in effect from October.
Posted to the site on 23rd June 2008
