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Korean phone subsidy regulations could hurt Galaxy Note 4 sales

New regulations from October 1 draw outcry from consumers, carriers and manufacturers as they come into force, making high-end phones far more expensive than in the past.

Samsung's flagship Note 4 will cost over $800 up front on any plan under South Korea's new subsidy laws. CNET

October 1, 2014, marked the beginning of a new era for the sale of mobile devices in South Korea. The Ministry of Science, ICT and Future Planning (MSIP) and Korea Communication Commission (KCC) enforced regulations pertaining to the Mobile Device Distribution Improvement (MDDI) Act, a much-debated set of laws designed to combat excessive subsidies on handsets.

Subsidies have been a long-standing issue in Korea. Sparked by a handset market nearing saturation, network carriers have had to subsidize handsets beyond the legal cap set by the government to survive the intense competition for new customers. Ultimately, despite risking substantial fines and suspensions if caught by government officials, carriers were providing excessive subsidies at a loss, and had no other option to stay afloat.

With the new regulations, the maximum subsidy amount stands at 345,000 won ($324), a substantial increase from the previous ceiling at 270,000 won ($254), but a far cry from the actual level of subsidies that were given to customers before. If caught subsidizing more than the allowed amount, both the carrier and its retailer can be penalized up to 3% of their annual revenue.

Transparency is also key to the MDDI Act. All online and offline retailers are now legally required to detail a handset's list price, the subsidy amount and the final retail price. In doing so, consumers can be assured they are being offered the same price as everyone else, whereas before, retailers would provide different subsidies depending on the customer's age, place of residence, carrier and subscription plan.

Just two days in, the changes have drawn complaints from customers. The new subsidies are much lower than expected, making phones unaffordable. For example, the recently released Galaxy Note 4 will be subsidized by 111,000 won ($104) at the most, leaving a final bill of over $800 for the customer.

Manufacturers like Samsung are not happy either. Sales for Samsung's flagship models will no doubt suffer, as customers shy away from expensive, high-end phones.

Retailers are already experiencing consequences from the new regulations. The number of new subscriptions are reportedly one-fifth what they were this time last year. One retail store owner has said "barely any customers will come to subscribe to new plans at this rate. I might as well close down my shop until they raise subsidy levels."

Carriers, on the other hand, are taking a wait-and-see approach to the new changes. "We expect the current situation to continue for at least one month. The most we can provide is an additional 10,000 or 20,000 won in subsidies and we don't expect that amount to sway customers. We don't have any plans to raise subsidy levels right now," said one carrier spokesperson.

Meanwhile, Sung-Joon Choi, Director of the KCC, is confident that "while the subsidies may be lower than expected, it is only the beginning, and in two or three weeks, competition between carriers will raise subsidy levels."

Analysts have pointed out that one thing is for sure, carriers will now be forced to compete by focusing on providing superior products and services, rather than extreme subsidies and marketing schemes.