Korean phone subsidies: Comical, chaotic and often illegal

As the Korean cellular market draws closer to saturation point, the drive to win customers through cheap phone deals has gone off the rails.

Sa Youn Hwang
Sa Youn Hwang
Sa Youn(Sy) loves technology. He still remembers his high school science fair entry, where his poorly designed robot caught fire in front of hundreds of people. Since then, he has been honing his proficiency in all things tech-related since with a flammable vengeance. Currently a graduate student at Seoul National University, Sy likes to spend his spare time reading tech blogs, tweaking audio equipment, and writing music.
3 min read

A typical mobile phone shop in Seoul. Hwang Sa Youn/CNET

South Korea is going through a crisis. One that you may never have heard of because it's unique to the country. Mobile phone prices are falling at comical rates due to excessive subsidies, and it has caused wild frenzies of consumers lining up outside of stores in the middle of the night to buy the latest handsets at a fraction of their actual market price.

The issue is, aside from the fact that they surpass the legal cap on subsidies (270,000 won or approximately $265) set by the government, these bargains are not uniform in time, place or amount. All three of Korea's major mobile carriers, SK Telecom, Korea Telecom, and LG Uplus, have exploited these guerilla sales techniques at sporadic times (like 3 AM) and announcing them through unofficial channels like internet forums, blogs and social media accounts, in the hope that they would go unnoticed by government officials. In some cases, customers can purchase "minusphones," handsets with subsidies that exceed their retail price, offering instant cash-back to customers.

Despite these backdoor efforts, the government has caught all three carriers providing illegal subsidies and has handed them heavy fines and suspensions. Most recently in April, the Korea Communications Commission (KCC) enforced 45-day suspensions of all retail activity to each carrier. Disciplinary action however, has proved ineffective as illegal subsidies continue to this day.

A subsidy, in its simplest form, is a one-time payment used as a discount on a handset provided at the time of purchase on the condition of subscribing to a new contract. Most countries in North America and Europe prescribe to this form of subsidy. Countries like Japan and Australia use reverse subsidies, where the discount is divided into monthly instalments through the life of the new contract. In Korea, on the other hand, carriers combine both types of subsidization and also can include an additional grant provided by either the manufacturer or carrier.

Historically, subsidies were used as means of speeding up adoption of new technology in Korea. For example, when CDMA was transitioning to LTE technology, carriers would provide massive subsidies to have customers subscribe to newer, more data-driven expensive LTE packages. This has ultimately helped the adoption and development of faster mobile standards.

The real issue is that all three carriers cannot afford to stop relying on these tactics. Korea's mobile carrier market is unique in that is the only market in the world that has shown significant signs of stagnation, possibly becoming the first market to reach saturation.

With growth in the industry plateauing, carriers can only resort to luring customers away from each other. And it's relatively easy to switch from one carrier to another in Korea, as early contract termination fees are relatively minimal. So these days, an average user will end up switching phones and carriers every 11 months. Carriers also sometime offer to pay off the early termination fees to entice customers to switch from a rival network.

In response to this abundance of illegal activity, the KCC has suggested stronger and more comprehensive regulation, with the objective of passing a new bill that details these reforms in October. The government body has opened up the discussion to some of the key stakeholders in the mobile market. Last week, Korea's top three handset manufacturers, Samsung, LG and Pantech, stepped up to the podium in a KCC-sponsored debate last week.

Considering the price points of their most popular models, it came as no surprise that Samsung wanted to raise the legal subsidy ceiling, while LG wanted to keep it unchanged and Pantech (domestic company that manufactures budget-level handsets) asked for it to be decreased.

It's worth pointing out that the legal ceiling of 270,000 won was passed long before smartphones began gaining popularity in Korea, and is considerably outdated. Representatives of the carriers, on the other hand, offered that the better solution would be to reduce the factory price of the handsets. It remains to be seen whether or not changing the value of the ceiling will be effective in reducing excessive subsidization.