The author is an analyst for NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com -- Ed.
Mobile Device Distribution Improvement Act abolished 10 years after implementation
On Jan 22, the Korean government announced its decision to abolish three regulations closely related to public livelihood, including the Mobile Device Distribution Improvement Act, following discussions with the public.
The Mobile Device Distribution Improvement Act (enacted in 2014) was devised to: 1) improve the domestic mobile device distribution market—at the time, consumers were unhappy about the wide price differences relating to the location of mobile device purchase; and 2) induce IT industry growth by relieving the substantial burden of handset subsidies on telecom operators, in turn freeing up capacity for future investment.
Recently, however, consumers are increasingly purchasing mobile devices at brand road shops (eg, Samsung Store, Apple Store) or e-commerce websites (eg, NAVER, Coupang, 11st). At the same time, handset replacement demand has decreased alongside upgrades in the average handset’s specifications, which has helped considerably to stabilize marketing expenses at telecom players.
Combined marketing expense at the three telcos has stabilized from 2019 (W7.71tn, +13.2% y-y), when expense ramped up on competition for early 5G subscriber attraction, to W7.81tn (+1.3% y-y) in 2020, W7.95tn (+1.8% y-y) in 2021, and W7.75tn (-2.5% y-y) in 2022. We forecast 2023 marketing expense of W7.63tn (-1.6% y-y).
We note that although a 2021 revision of the Mobile Device Distribution Improvement Act raised the additional subsidy rate from 15% to 30%, marketing expenses have remained stable at the three telcos.
Chances limited for significant cost increase at telcos
Although this deregulation may push up marketing costs at the three telcos to some extent, the impact is unlikely to be meaningful. Competition in the mobile device market has stabilized, the penetration of 5G is close to 70%, and subscriber departure to MVNO services is larger than the number of subscribers switching between the three telcos. Given the current landscape, we see limited chances of full-scale competition among the three telecom players.
While marketing costs may rise before/after the launch of some flagship devices, impacts on OP should be limited, as overall marketing costs are forecast to remain stable.