August 25, 2009
Now that it’s official that KT will be launching the iPhone in South Korea, it’s time to ask how the illustrious device will fare in this market. While neither KT nor Apple have released details surrounding the terms of their agreement, Pyramid Research believes that the iPhone, if marketed appropriately, will be a hit in South Korea, in part because KT is in a much better position than other players to make this happen.
Why do we think the iPhone will be a hit in South Korea? While local giants Samsung and LG have traditionally held the lion’s share of the handset market (more than 74% as of Q2 2009), this was largely possible through regulations that favored local manufacturers. These regulations have recently been scrapped, which now makes it possible for foreign vendors such as Nokia and Apple to break into the market. However, access does not always lead to sales, and foreign vendors are struggling to increase their presence in the market. South Koreans take their mobile phones very seriously and often spend in excess of US$800 on purchasing the latest models. While operators provide subsidies to offset the high handset cost, these are typically in the range of $150-200, leaving the consumer responsible for the balance. But consumers are willing to give up neither function nor design—which are areas where the iPhone excels. While most consumers were unaware of the iPhone brand just a couple of years ago, the growing popularity of the iPod touch has ignited strong interest in the iPhone in South Korea. When a local information website, smartphonenow.kr, recently asked its visitors if they were interested in purchasing an iPhone, 51% of the 1,712 respondents said that they would buy it unconditionally, while another 41% said they would do so under certain conditions, such as whether the device supports Wi-Fi connectivity. While the results of the survey should not be considered representative of the general market, it at least illustrates strong interest among early adopters. In addition, local manufacturers Samsung and LG have already educated the market on the benefits of both a touchscreen and an iPhone-like user interface by releasing similar devices. South Koreans value originals, as seen by the number of restaurants claiming to have “the original recipe” for a dish, and the iPhone will do well by claiming its status as the original touchscreen smartphone.
Then why would KT be in such as good position to make the iPhone a success in South Korea? First of all, KT is motivated: it can leverage the iPhone to increase its own market share, which currently lies at 31%, whereas incumbent SK Telecom may be hesitant to do so given its dominant position. In order to avoid closer scrutiny from the regulator, SK Telecom’s strategy has long been to maintain and guard, rather than increase, its steady 50% market share. KT, on the other hand, can afford to market the product aggressively by offering attractive terms and higher subsidies.
Second, KT has more than 42,000 Wi-Fi hotspots around South Korea that it can use to enhance the iPhone user experience. Internet connectivity is one of most important functions of the iPhone, and mobile operators around the world report that iPhone users consume multiple times more data than other 3G users. One of the rumors coming out of South Korea is that the iPhone may be released without the Wi-Fi function. However, it would be unwise for KT to do so for a few reasons. Most important is the issue of traffic offloading. Mobile networks are more expensive to run than fixed networks, and eliminating the Wi-Fi capability from the iPhone would also eliminate some opex and capex savings for KT. Another issue is related to customer expectations. South Koreans are used to the broadband speeds of 50-100Mbps that they enjoy at home, and while the iPhone supports HSPA, 3G downlink speeds still pale in comparison with those of Wi-Fi. Finally, KT would miss out on an opportunity to attract high-end mobile users to its fixed-mobile bundled packages. Convergence and bundled packages are hot topics in South Korea these days, and a package bundling an iPhone with wireless broadband at home plus public Wi-Fi access would fit well with Apple’s traditional all-you-can-use data plans while adding a minimal additional cost for KT.
Of course, there are some problems that KT might encounter with the iPhone. Samsung’s and LG’s dominance in the local market is not due to just favorable regulations. These companies have significant brand power and are trusted not only for producing quality products, but also for providing superb after-sales service. Apple will find it difficult to build this type of trust from the start, and KT may have to step in to help build that initial trust. In addition, the iPhone needs to be tailored to better fit the customs and habits of local consumers. However, these obstacles are minor compared with the gains that KT can reap if it markets the iPhone well.
— Tae-Hyung Kim, Senior Analyst
Communications Markets in South Korea
Telecom Insider published August 2009
The South Korean telecom market, excluding traditional pay-TV, generated $28.9bn in service revenue in 2008. Over the next five years, the services included in most double-play and triple-play bundles, such as VoIP and IPTV, will be the fastest-growing market segments. This Country Intelligence Report analyzes South Korea’s communications, media and technology industries, including key trends, regulatory pressures and the competitive landscape, making it an excellent complement to our Forecast products.
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