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iPhone 6 sees illegal handset subsidies strike back in Korea

Retailers have been caught secretly offering the iPhone 6 to customers with illegally high subsidies and the Korean government has promised to take action.

The iPhone 6 can be purchased in South Korea at an illegal low price. CNET

South Korea's recently implemented phone subsidy reforms were rendered useless last weekend when a select number of retailers, online stores and private dealers secretly began offering instant rebates exceeding the legal limit on the iPhone 6, local news sources report.

On launch day in Korea last Friday, the 16GB iPhone 6 was released with a list price of 789,000 won ($730). The country's three network carriers, SK Telecom, KT and LG Uplus, each provided subsidies ranging from 120,000 to 190,000 won ($140 to $175) based on the payment plan customers signed up to. The lowest legal price for Apple's latest phone was 599,000 won ($555).

Just one day after the launch, however, first-hand accounts surfaced from customers claiming to have bought the iPhone 6 for much less up front, in defiance of the new regulations. The amount ranged from 100,000 won to 200,000 won ($92 to $185). As word spread, long queues of willing buyers started forming outside of phone shops in the middle of the night, the Korea Times reported.

The involved retailers allegedly used elaborate methods for letting customers know that they were selling the iPhone 6 on the cheap, sending coded SMS messages to customers at dawn and putting up advertisements on forums and deleting them in a matter of minutes to avoid leaving a trace.

Now, carriers and government regulators are facing complaints from customers who had paid full price as well as those who had paid the higher subsidized rate.

The purpose of the recent legislation is to maintain a fair playing field in the local phone market -- subsidies, while common in the US and other Western countries, were seen in Korea as disproportionately favoring large phone makers and carriers to the exclusion of smaller competitors.

The Korea Communications Commission has already summoned top executives from Korea's three network carriers to issue a "stern warning." The government watchdog released a statement promising to "impose fines and penalties to retailers and pursue criminal prosecution for accountable senior executives upon further investigation."

While retailers for all three Korean carriers seem to be involved in flouting the latest directives, public statements made by the companies blame extreme competition and retailers acting independently.

"The competition resulting from increased iPhone 6 distribution may have caused the market to overheat," KT said in a press release. The company said it "regrets that a select few retailers failed to respond appropriately to competition and created commotion in the handset market."

This guerrilla pricing episode, dubbed the "iPhone 6 crisis" by local media, comes a month after the Mobile Device Distribution Improvement Act set a 345,000 won (or $325) cap on subsidies and mandated heavier penalties for carriers and retailers caught exceeding this limit.