South Korea: High-Speed Profits Ahead

KT is about to prove there's black ink in broadband

Don't tell Lee Sang Chul broadband's future is cloudy. The CEO of KT Corp., South Korea's largest phone company, believes the fun is just starting. After pouring $1.3 billion into high-speed Web-surfing technology since 1999, KT's broadband service is poised to break even next month--making it the world's first such operation to do so. KT will spend $380 million more this year to widen its reach in Net-crazed Korea, where people use broadband for everything from online stock trading to gaming. KT expects to recoup its investment by early 2004. Says Lee: "Our broadband network is a key money-spinner."

Fourteen months after taking over South Korea's former phone monopoly, Lee, 54, has caught the attention of the global telecom industry. The former engineer, who once worked on the MX missile in the U.S., has reorganized the rigidly bureaucratic institution, shifting its voice-oriented focus toward data and the Internet. He also has sold much of the state's once-controlling stake and persuaded KT's combative union to back total privatization. In December, he got a vote of confidence from none other than Microsoft Corp., which bought a 3% stake for $500 million. Microsoft and KT will jointly develop home-networking systems, e-schooling, and other broadband initiatives.

KT, formerly Korea Telecom, is not simply a local exception--it's an international one. Even as such telecom giants as AT&T, BT Group, and NTT battle the global downdraft, KT is making money and growing at a decent clip. Last year, it posted a 54% jump in operating profit, to $1.1 billion, on sales of $8.7 billion. While 40% of its revenues still come from fixed-line services, KT's income from nonvoice sources reached 35% of revenues last year. "We used to benchmark BT, NTT, and AT&T for the phone business," says Lee. "Now, we have nobody to benchmark against."

Koreans' penchant for all things digital has helped fuel KT's phenomenal growth. A government push to wire schools and urban centers didn't hurt, either. Yet most of KT's success is attributable to Lee, who has a PhD in electrical engineering from Duke University. At first, he encountered stiff resistance, including a monthlong sit-in last year by employees who feared losing their jobs. While Lee did lay off 1,850 of 44,250 workers, he focused on retraining people, a strategy that won him union support.

More crucially, he overhauled KT's broadband business model. When he took over, Lee says, "the more subscribers we attracted to our broadband services, the bigger losses we had." The main reason: the cost of the modems. For a while, KT rented the devices to subscribers for $3.80 a month, even though each cost the company $330.

To reduce the cost, Lee sought bids from six suppliers, promising to buy 610,000 modems from the winner. The auction cut the price of the modems to $124 each. KT passed on some of the savings to its customers--cutting the monthly rental fee by 40%--and used the rest to recoup its investment in 15 months rather than 38. Since then, modem costs have fallen across the board, reducing KT's advantage. In fact, KT's closest rival, Hanaro Telecom Inc., which controls 26.4% of the broadband market, expects to break even this year. Still, catching KT won't be easy. Last year, it doubled the number of broadband subscribers, to 3.9 million, giving KT nearly half the Korean market.

To further boost revenues, Lee is introducing a system that will allow Koreans to access KT's broadband pipes wirelessly with laptops or personal digital assistants. KT is setting up antennas at 10,000 crowded spots--hotels, universities, subways, airports--that will allow people to shop, play games, and swap video clips or data by tuning their wireless devices to the signal of these local area networks. For $26.50 a month, subscribers will get a faster, more stable connection than is available with regular cell-phone service. KT also is teaming up with makers of home-networking systems, including Samsung Electronics and LG Electronics, to find ways to allow subscribers to control their home appliances remotely.

Another step in KT's transformation occurs in June when the company is scheduled to complete its privatization. KT was 59% state-owned when Lee arrived, a figure he has ratcheted down. In December, KT sold an 8.8% stake to foreign investors in the form of convertible bonds worth $1.32 billion, reducing state ownership to 28.3%. Seoul, hoping to maintain local control of a strategic asset, is keen to have Korean conglomerates buy the rest of KT. To facilitate this, policymakers plan to raise from 5% to 15% the maximum stake one investor can hold. Whoever ends up in control of KT's shares, one asset they will want to keep is CEO Lee.

By Moon Ihlwan in Seoul

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