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Did SK Telecom pay too much in the South Korean Spectrum Auction?

The rules of South Korea's recent spectrum auction dictated that no MNO could acquire spectrum in more than one band. Accordingly, Korea Telecom (KT), SK Telecom (SKT) and LG Uplus each won licences in separate bands. The results were:

  • Korea Telecom (KT) won 10MHz in the 800MHz band for KRW261 billion (USD245 million)
  • SK Telecom (SKT) won 20MHz in the 1800MHz band for KRW995 billion (USD933 million)
  • LG Uplus won 20MHz in the 2100MHz band for KRW445.5 billion (USD412 million).

SKT’s winning bid in the 1800MHz band is particularly noteworthy on account of the unusually high price paid for this spectrum. The auction of this band was notable for its high initial reserve price and fiercely competitive bidding over eighty-three rounds between SKT and KT. A number of explanations can be put forward to explain the high price paid by SKT for the spectrum:

  • The two dominant MNOs could were barred from compete for spectrum in the 800MHz and 1800MHz band for competitive reasons. Furthermore, to realise maximum speeds offered by LTE, 20MHz blocks of spectrum are required, and this was only available in the 1800MHz band.
  • The 1800MHz band has a higher capacity than the 800MHz band and also provides decent coverage. South Korea is one of the world’s most densely populated countries, and cell sites are heavily burdened with subscribers.
  • Many countries are refarming 20MHz GSM spectrum in the 1800MHz band for LTE services and there are already six operational LTE networks using this band globally, with many more planned This will result in economies of scale for chipsets, devices, and network infrastructure designed for this band, allowing SKT to tap into an attractive ecosystem.

Spectrum in the 800MHz and 2100MHz bands were picked up at the reserve prices. Spectrum in the 2100MHz band was picked up by LG Uplus, as SKT and KT were barred from competing in this band, on competitive grounds. KT picked up the 10MHz available in the 800MHz spectrum, almost by default, due to the absence of a new-entrant which could have competed for the spectrum.

The key question arising from the recent South Korean auction process is whether the high price paid by SKT in the 1800MHz auction will pay off for the operator. SKT must achieve payback in the face of a number of challenges in the South Korean mobile market:

  • Mobile ARPU is falling. This is a result of several factors, including MNOs offering competitively priced mobile services to data-hungry consumers, and recent mobile tariff reductions imposed by the government to curb consumer price inflation.
  • KT and LG UPlus will be able to compete with SKT by investing in, and offering, value-added services. Notably, during the spectrum bidding process, SKT denied rumours that it would bid for the US-based VOD provider Hulu. Its competitors, KT and LG UPlus are now better placed to take advantage of offering such propositions because they will have a greater pool of spare capital for investment relative to SKT following this auction.
  • Spectrum will be freed up when the analogue television switch-off occurs in South Korea on the 31 December 2012. The switchover will result in a digital dividend of spectrum in the 698–806MHz frequency band. Much of this spectrum can be expected to be reallocated for mobile communications. KT and LG Uplus may be better positioned than SKT to acquire spectrum in the relatively near future, as SKT’s board may be reluctant to authorise the further release of huge sums to acquire spectrum licences. KT and LG Uplus may be better able to convince their boards to authorise large capital expenditure after picking up licences in this round of auctions at the reserve prices. Nevertheless, in a future digital dividend auction,the Korean regulator (KCC) may lay down spectrum cap rules to prevent any operator from acquiring relatively inequitable spectrum holdings.