2011 is proving to be a significant year in the South Korean telecoms market. SK Telecom (SKT) and LG Uplus launched LTE services in July, and Korea Telecom (KT) is due to launch its LTE services later this year. In addition, the first MVNO launched operations in July. Most importantly, three bands of spectrum are under auction in August: 800MHz, 2100MHz and 2300MHz. The first auction has now concluded, in which LG Uplus won the 20MHz on offer in the 2100MHz band.
Levelling the playing-field in the South Korean market
The South Korean mobile market is effectively a duopoly: SKT holds a 51% share of active subscribers, while KT has a 31% share. In response to this concentration of market power, the regulator, the Korea Communications Commission (KCC), has adopted an active approach to opening up the market, with recent regulatory actions including:
- legislation to support the licensing of MVNOs in 2010: 11 have now been licensed, and one is already operational
- restrictions on dominant players bidding for spectrum in the 2100MHz band (discussed below)
- limits on spectrum awards in the current round of auctions: the KCC has stated no operator may win more than one block of spectrum in the 2011 auction.
The KCC precluded SKT and KT from bidding for spectrum in the 2100MHz band, in order to create a more level playing-field.
Result of the 2100MHz auction
The barring of bids from the two dominant players meant that the 2100MHz spectrum auction appeared to present a potentially attractive opportunity for new entrants into the mobile market. In the event, LG Uplus was the sole bidder for the 2100MHz spectrum, and won the auction at a price equal to the KCC’s floor price of KRW445.5 billion (USD412 million). There are several possible reasons for the 2100MHz auction failing to attract participation from potential newcomers:
- the heavy cost (and time delay) of rolling out network infrastructure
- the introduction of the opportunity to enter the market as an MVNO
- the prospect of continually falling ARPU, in a market that will only become more competitive and where flat-rate mobile data plans have become the norm
- the need to compete in the auction with LG Uplus.
For LG Uplus, the situation is different: it has an operational LTE network in the 2100MHz band, and can use its new spectrum award immediately to improve its 4G offering. A more robust network – with the greater capacity supported by the new spectrum – will help it to offer more-reliable, more-data-intensive services to consumers. (LG Uplus suffered a high-profile, nine-hour data network blackout on 2 August 2011 – not long after its market entry in 2010.) This should help LG Uplus to maximise ARPUs, which are typically falling in South Korea.
Price analysis
As the sole bidder, LG Uplus paid the reserve price for the spectrum, which equates to a price of USD0.42 per MHz per capita of population. To put this figure into context, Figure 1 presents international benchmarks of the price that operators have paid for spectrum in this band in recent years. The price paid for spectrum in this band is highly dependent on the conditions surrounding the auction.
Figure 1: Price per MHz per capita of population achieved in 2100MHz spectrum auctions, 2010–2011 [Source: Analysys Mason, 2011]
![Figure 1: Price per MHz per capita of population achieved in 2100MHz spectrum auctions, 2010–2011 [Source: Analysys Mason, 2011]](/PageFiles/18944/Figure1_web.png)
The reserve price paid by LG Uplus is above the average price of USD0.37 per MHz per capita of population. It is somewhat higher than the price paid in the Belgium auction where, as in South Korea, the spectrum was sold at the reserve price. It is also significantly higher than the (unusually low) price paid for spectrum in this band in Germany’s ‘big bang’ auction in the second quarter of 2010. However, it is well below the price achieved in the French auction of June 2010, which commanded high prices because of competitive bidding. The prices paid in India’s May 2010 auction were below the average, but were well above the reserve prices set for the auction. This pricing uncertainty was a result of the relative immaturity of the mobile market in comparison with those in Western Europe and South Korea, and also of the lower ARPUs that operators in India can expect to command.
Market outlook
LG Uplus’s new 2100MHz spectrum award complements its previous licence holdings in this band. This will allow the operator to position itself to compete more actively with the two dominant operators, providing more capacity, which will help mitigate the risk of network downtime. Furthermore, it will provide more choice to MVNOs to secure favourable partnership agreements for LTE wholesale services and network access, and further aggressive pricing can be expected.
The results of this auction, as well as the 800MHz and 1800MHz auctions, will be discussed in more detail in a forthcoming Comment piece as part of Analysys Mason’s Asia–Pacific research programme.
1 In a ‘big-bang’ auction, licences are available in a variety of bands. This typically dampens the price for bands that are substitutable. For example, 800MHz and 2.6GHz are both suitable for mobile broadband, but the propagation characteristics of the 800MHz band will divert demand from the 2.6GHz licences.