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After a long period of industry consultation, the Korean Communications Commission (KCC) announced that it would allow mobile operators to charge for mobile VoIP traffic over their networks. This seemed to be a victory for KT and SKT, and the announcement was met with sharp criticism from over-the-top (OTT) providers and consumer groups.

However, the KCC is taking a cautious approach, and has not yet approved any new mobile tariffs that take advantage of this announcement.

The underlying problem is that traditional price structures bear little relation to the costs of IP-based networks. While this problem is not specific to South Korea, slowing revenue growth is having a greater impact on South Korean operators than on operators in other markets. As a result, operators need to find ways to recoup their costs. In February 2012, this same tension precipitated a confrontation between KT and Samsung over access to fixed networks.

We expect the KCC to avoid any dramatic moves that could disrupt the industry. Instead, we believe that the industry will gradually work out new revenue arrangements for both users and content providers, with the regulator playing the role of umpire and matchmaker.

Mobile VoIP a key flashpoint

In our report “Operator Strategies to Combat Social Messaging: South Korea Case Study”, we described how South Korean operators’ SMS revenues have been devastated by OTT messaging players. OTT messaging player Kakao’s launch of a VoIP product in March 2012 further increased the threat to operators’ revenues as voice still generates over two-thirds of mobile revenues in South Korea.

The KCC’s announcement to allow mobile operators to charge for mobile VoIP traffic over their networks was clearly driven by this threat. The KCC’s decision to allow discriminatory treatment of mobile VoIP goes significantly beyond the FCC’s decision in the US. While both decisions recognize that mobile networks need more flexibility to manage traffic, the FCC will not allow operators to block mobile VoIP. In contrast, UK regulator Ofcom will allow the blocking of mobile VoIP, provided that all mobile VoIP services are blocked. The KCC has found a middle course between these two decisions by allowing operators to price data differently depending on whether VoIP is blocked or not.

So far, the KCC intervention has been an expression of moral rather than material support as no new VoIP-busting tariffs have been approved. However, the fact that the KCC needs to contemplate such support shows that South Korean mobile operators have failed to develop commercial responses to the threat posed by OTT providers. One option is for mobile operators to offer their own or a partner’s IP-based voice service.

However, South Korean operators have been slow to develop these alternatives, with KT and SKT preferring to stop OTT providers from accessing their networks. In contrast, LGU’s strategy of allowing mobile VoIP on its network may drive traffic onto its new LTE network, but there is no guarantee that LGU can monetize this traffic, meaning that the risks are significant.

The fixed network dilemma

Net neutrality is also a significant issue for fixed networks in South Korea. In February 2012, KT announced that it would block the use of applications on Samsung Internet TVs, which it claimed were driving excessive traffic on its network.

Samsung was singled out after it failed to respond to KT’s request to meet with South Korean TV manufacturers. Although Samsung provided the pretext for this confrontation, its activities are no different to those of many other device manufacturers. KT’s action could just as easily been taken against Apple or Google.

The underlying motivation for this confrontation lies in the financial situation of the South Korean fixed broadband market, which has poor profitability and an ARPU that is among the lowest in the developed world. 

In the report “NGA Strategies in South Korea”, we warned that the industry’s ability to invest in new broadband capacity was limited by its poor profitability. As the number of Internet TVs has rapidly increased, KT and the other broadband providers are understandably apprehensive about the impact that this might have on their networks.

Pricing reform will be gradual

The basic problem is that fixed and mobile retail price structures bear little relation to traffic costs. At the user end, most fixed broadband providers offer flat-rate, “all you can eat” tariffs that are differentiated only by speed. However, costs rise with traffic volumes, not speed. In the mobile market, as voice and data services impact differently on total revenues and costs, meaning that voice decline affects profitability disproportionately. To make matters worse, South Korean operators recently made unlimited data plans available on their 3G networks. At the content provider end, tariffs do not reflect the amount of wholesale traffic being generated. Until these divergences are addressed, tensions between network operators and OTT providers will continue.

While every market faces similar pricing challenges, the KCC’s dilemma is also a result of the political economy of South Korea’s telecommunications industry. After years of working with the industry to promote network investment, the government is closely implicated in the industry’s fortunes. The KCC does not want to eliminate the consumer benefits of OTT services, but the only alternative would lead to the erosion of operators’ voice revenues and a major rebalancing of pricing towards data. This would threaten both the investment framework and service affordability.

A major one-time price rebalancing to bring the price of IP voice and data in line with costs would see data prices increase significantly to offset voice/messaging revenue erosion. While this would address the problem at its root, it would generate a serious political backlash that could derail the project.

We expect the KCC to take a pragmatic approach, encouraging operators to reach negotiated pricing arrangements with OTT providers, recover costs from users through gradual retail pricing changes, and launch their own IP-based services. While this lacks the glamour of reform, it is a more practical course of action.