Handset Law to Check Korean Telcos' Marketing Spending

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Fitch Ratings says that the recent passing of the much delayed Handset Distribution Bill will be positive for Korean telecom operators as it will likely keep marketing spending in check.

Intense competition in the Korean telecoms market has damaged operators' margins and cash flows. In 1Q14, telecom operators' earnings were squeezed by high marketing expenses, most of which was expenditure on handset subsidies. As a result, the Ministry of Science, ICT and Future Planning (MSIP) ordered all three telecom operators - SK Telecom (A-/Stable), KT Corporation (A-/Stable), LG Uplus (Unrated) - to suspend new customer acquisitions during 1Q14 and 2Q14 on a rotational basis.

In passing the bill, the government is seeking to normalise handset distribution and ensure that handset subsidies are transparent. The bill bans price discrimination that results from different subsidies offered by telecom operators and requires operators to disclose their subsidy levels. The bill also covers restrictions on rebates provided by handset manufacturers.

With the new bill scheduled to take effect in October and the suspension on new customer acquisitions, Fitch expects the competitive environment in Korea's telecom industry to further stabilise.

The bill was passed by the Science, ICT, Future Planning, Broadcasting and Communications Committee on 1 May. The ruling party and the opposition finally agreed on the bill after the bill had been postponed for nearly a year due to a gridlock in the national assembly on other issues.

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