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Where 3G Is First-Rate

By Moon Ihlwan In most of the world, the huge financial problems faced by slumping telecommunications companies threaten to delay the rollout of new mobile telecom technology. But in one oasis, things seem to be progressing apace: South Korea.

The country's three mobile operators -- KT Freetel, SK Telecom, and LG TeleCom -- are rapidly implementing so-called 3G (third generation) systems. Although 3G in Europe has been plagued by delays and huge licensing costs, the Korean companies believe 3G will pay off at home. "Koreans are crazy about anything new," points out Stan Jung, telecom analyst at LG Investment & Securities. "With a lot of on-the-ground tests going on here, you are talking about a new paradigm."

What makes Korea an exception? While consumers elsewhere are slow to upgrade their phones, Koreans have been aggressive in embracing new gadgets enabling them to surf the Net at high speed while on the move. Indeed, South Korea is one of the world's most wired nations: Some 64% of its 47.5 million people carry mobile phones, and half of all households have broadband access to the Internet.

AN INSULAR MARKET. Also helping is Korea's robust economy, expected to expand by more than 6% this year, double 2001's pace. And Korean companies, unlike their European peers, benefit from relatively benign local regulators, who required only about $500 million in cash for a 3G license, vs. billions in Europe. After a five-year grace period, another $500 million will be paid over five years.

The Korean industry has consolidated into a stable -- but highly competitive -- oligopoly since the merger last year of KT Freetel and rival Market leader SK Telecom has always been the dominant player, and more so since acquiring smaller Shinsegi last year. Scrappy KT Freetel, Korea's No. 2 mobile-phone company, with 10 million subscribers, has emerged as its main rival. LG TeleCom is a distant third.

Many analysts prefer SK Telecom, which has 16.3 million subscribers and controls 53% of the local market, vs. just 33% for KT Freetel. SK Telecom's average revenue per user is 6.2% higher, at $35 a month. However, KT Freetel may have the most potential among the emerging Korean mobile-telecom powerhouses.

SUNNY PROJECTIONS. Far from cutting back, KT Freetel is continuing to invest heavily in networks and R&D. As Europe's phone giants struggle to stay afloat, the company in May rolled out 3G telecom services. And it's pouring $160 million into the network this year to offer mobile Internet in Korea at broadband speeds.

KT Freetel's financial performance last year was strong enough to earn it the No. 4 ranking in BusinessWeek's IT 100, the magazine's annual list of the world's top tech companies, and it continues to grow like gangbusters. In the first quarter, KT Freetel's operating profit jumped 57%, to $190 million, and it projects 2002 net profits of $492 million, up 39%, on sales of $4.75 billion, up 29%. Many analysts expect even better performance, predicting that net profits will rise 53%, to $545 million. "The company has entered a cycle where it will reap from previous investments," says Jung of LG Investment.

Little wonder, then, that many brokerage houses have a buy or accumulate recommendation on KT Freetel. "From an investor's point of view, KT Freetel looks more attractive than SK, at least in the short term," says Sean Lee, HSBC Securities telecom analyst Seoul. "SK's leadership has already been factored into its [share] price." With a healthy return on equity of 32% in the first quarter, up sharply from 15% a year earlier, KT Freetel also outperformed the telecom sector on a global basis.

SEARCHING FOR KILLER APS. Now, KT Freetel is exploring new sources of revenue. It's offering video clips for movie previews, sports highlights, and karaoke services, allowing a user to practice singing. With such services making the mobile Internet more attractive to consumers, KT Freetel expects its subscriber base to rise 15% by yearend, to 11.5 million, with 6.1 million using high-speed Internet.

The big doubt about 3G is whether content providers will be able to roll out enough attractive new applications to keep consumers happy. "Unless killer applications emerge, data can't be a mobile growth driver," says Lee.

Earlier this year, KT Freetel, which is relying on product innovation to maintain its momentum, came up with a cell phone that doubles as a credit card. Instead of magnetic strips for verification, its phones use infrared technology to send out credit and verification data. Consumers will pay for purchases by entering a personal identification number on their phones, sending out an infrared ray from their handsets to a small infrared board located by a store's cashier. The ray will transmit credit-card information to the store, and the user will be billed.

COOKIN' AT HOME. Similar transactions are possible for subway rides, bus rides, and vending-machine purchases. And, since 70% of all stock trades in Korea are done online, KT Freetel is offering an option to trade shares through mobile phones, as well as providing online banking and money-transfer services. The company hopes to earn $20 million this year in commissions from the "M-commerce" services, rising to $160 million in 2005.

For now, Korea's mobile companies are mainly sticking to their home market. SK Telecom is doing some cautious expansion in Asia: It has stakes in service providers in Mongolia and Russia, and it has agreed to form a joint venture in Vietnam. KT Freetel, though, has done little outside Korea, believing that other competitive markets are too costly while it is spending so heavily at home.

Still, if Korean telecoms can pull off their ambitious plans at home, they could well shift the paradigm in mobile communications. Ihlwan is a senior correspondent in BusinessWeek's Seoul bureau

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