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Sales have fallen hard one month into Korea's phone subsidy reform

A government cap on carrier subsidies caused a steep decline in phone sales, although there are some signs of recovery as low-cost monthly plans and used phone sales are on the rise.

A SK Telecom shop in South Korea. Aloysius Low/CNET

An effort by the South Korean government to crack down on excessive phone subsidies -- and calm a fevered domestic market for one of the country's most prominent industries -- has resulted in a steep fall in sales. The effect may not have been as catastrophic as feared, however, as Koreans gradually adapt to the country's new subsidy regulations.

At the beginning of October, the Korean government enforced new regulations as part of its Mobile Device Distribution Improvement Act to battle illegal handset subsidies. The new regulations set a legal cap on subsidies at 345,000 won (around $325) and issued stricter penalties for carriers and retailers that exceeded this amount.

The reforms, however, backfired when network carriers and phone manufacturers uniformly decided to offer only a marginal amount of subsidization, making devices extraordinarily expensive and shifting consumer ire to the government. As a result, phone sales plummeted.

According to figures published by the Korea Communication Commission, the average number of new subscriptions per day in October stood at 50,700, a huge fall compared to 66,900 in September.

A closer look into the numbers shows that the first week was the most brutal, dropping off by 33.5 percent at 44,500 new subscribers per day. It should be noted that September was also a weak month in itself, as consumers were staving off buying new phones in anticipation of the new regulations and the release of the Galaxy Note 4 and iPhone 6 .

But end-of-the-month numbers are looking more positive. The average for the last week increased back up to 53,900 subscribers per day. While encouraging, this number included customers who bought used handsets and those who subscribed to mid- to low-tier subscription plans (costing between 25,000 and 45,000 won or $23 to $42 per month). Compared to September, used handsets sales increased by 93.1 percent and mid- to low-tier subscribers increased by 19.4 percent.

One of the biggest draws for buying used phones right now is the instant 12 percent rebate you can receive on your monthly bill for a new subscription if you provide your own unlocked device. Ironically, the demand for more affordable second-hand phones has grown so much that it has driven up their prices.

It remains to be seen whether or not Korean carriers will push heavier subsidization to stabilize the domestic handset market. Many consumers and especially struggling retail shop owners have protested current pricing levels and are looking to revoke the new regulations altogether.

The Korean government has asked consumers to be patient and issued an ultimatum to top executives from Korea's network carriers and handset manufacturers. Yang Hee Choi from the Ministry of Science, ICT and Planning was quoted saying, "If the companies continue to chase profits contrary to the intentions of the new regulations, the government will be forced to take special measures to protect consumers."

Meanwhile, the iPhone 6 is set to be released on October 31 with an expected price of 780,000 won ($740). Korean carriers have yet to announce how heavily they will subsidise Apple's latest device, but competitive pricing relative to Samsung's high-end phones could be enough to spark Korea's handset market.