A Hefty Price Tag for Each Mobile Operator
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
Frequency allocation to take place in 2021—related costs sized at W500bn (at minimum)~W1.7tn (at maximum) per company
We note that for the right to use government-allotted frequency bands for a fixed period of time, Telcos pay a set amount of money. Such frequency allocations took place in 2011, 2013, 2016, and 2018, and as the current contract periods for most 2G~4G spectrums are set to expire in 2021, telcos need to obtain the right to use these spectrums at a frequency auction next year. By company, contracts for 95MHz spectrum bands will expire for both SKT and for KT, and those for 120MHz will come to an end for LG U+. We estimate that 2021 frequency auction cost (5-yr usage basis) could range between W500bn at minimum and W1.7tn at maximum per company, and any cost above W1tn-level will pose a serious financial burden.
The Ministry of Science and ICT recently announced that it will set the price of next year’s frequency re-allotment at W5.5tn in total (310MHz up for auction, 5-yr contract basis). That said, considering the government’s Digital New Deal policy, the government is well aware of the importance of telecom networks (including 5G) as a backbone infrastructure for a country’s mid/long-term economic development. In this regard, instead of hiking the allotment price sharply, we expect the government to set the price at a reasonable level to encourage telcos’ investment in networks.
Best-case scenario
Our best-case scenario for the frequency auction is that each telco will be re-allotted 100MHz of spectrum at a price of about W500bn (5yr contract). We note that at 2018’s 5G frequency auction the winning price for a 100MHz bloc of 5G 3.5GHz band (10yr contract) ranged from W968.0bn to W1.22tn.
Worst-case scenario
Meanwhile, our worst-case scenario assumes that frequency re-allotment cost per company will exceed W1.7tn, a level in line with the price range recently offered by the government. Of note, there have been four rounds of frequency auction in Korea (2011, 2013, 2016, and 2018), and the one-year usage fees for 1MHz in 2011 and 2013 auctions was at about W3.4bn. If such high usage fees are applied at the 2021 auction, the related cost burden (obtaining 100MHz bloc) could soar to W1.7tn per telco (5-yr contract basis). That said, given that: 1) the one-year usage fee for 1MHz fell to W2.49bn in 2016 and down to W1.09bn in 2018; and 2) the 2021 auction is for re-allotment of already-in-use frequency bands, we believe the government is unlikely to demand usage fees as high as the level seen back in 2011 and 2013.