[보도] Korean mobile sector needs deregulation

After the Information and Communication Ministry allowed a discount to the tariffs charged on calls between subscribers signing up to the same service provider, local mobile carriers rushed to cut their rates. SK Telecom has recently announced two new pricing packages, including a 50 percent tariff cut to on-net calls (SKT to SKT subscriber calls) with an additional monthly basic fee of 2,500 won ($2.70). SK Telecom had so far charged 20 won per a second for a voice call.

LG Telecom followed suit by offering 1,200-minute on-net calling free of charge if a subscriber with the Standard Plus package pays 2,500 won additionally, on top of the 13,000 won basic monthly fee.

KTF announced a similar discount package in close footsteps. The nation's second-largest mobile carrier offered a 30 percent discount to all voice and video mobile calls with an addition of 2,500 won to the monthly bill. It also launched a "50 percent discount for KT Family" package, halving rates for all voice and video calls between KTF subscribers as well as between mobile and wired phones. The tariffs for calls using KT Powertel's radio transmission service were also subject to the 50-percent discount plan.

The pricing competition was not confined to the wireless market segment. KT Corp, which sells a fixed-line telephone call service, a direct substitute for wireless calls, announced three new discount pricing packages, including a blanket rate for both local and long-distance calls at an additional 2,000 won per month.

All of these billing cuts are apparently translating into larger benefits to consumers. The Fair Trade Commission, however, warned that "generally speaking, discounts on intra-network calls can prompt mobile phone users to switch to the biggest operator, which should lead to cementing its market dominance."

"Across-the-board discounts are deemed more desirable in the view of fair competition and benefits for customers," it insisted.

Competition not guaranteed

The Fair Trade Commission seemingly believes that if a loser is forced to exit due to the price-cutting war, then only two players are left in the market and this reinforces the monopoly. The underlying assumption is that the larger the number of enterprises, the more competitive the market and the more benefit to the consumers. However, this perception only reveals the ignorance about economy.

If we follow the FTC's logic, then the best way to make the market more competitive would be to increase the number of enterprises. Let's allow 10 or 20 enterprises to do the job that only one can do. And make it illegal for them to seek for innovation to cut costs and expand their presence through the streamlining efforts.

This is like saying that an efficient enterprise should be prohibited and only a number of small and inefficient players be allowed to lead the economy. No corporate profits earned through cost reductions should be allowed to be shared with consumers and the scarce resources must be prevented from flowing into the area where they can be used in the most efficient way. This serves only incompetent enterprises, with consumer interests totally ignored.

The U.S. experienced a similar mistake about a century ago due to the ignorance of economics. The federal government stigmatized Standard Oil as a monopoly just because of its dominant market share in the refinery industry and ordered a split-up.

After Standard Oil was split up, the prices of refined oil products surged suddenly to outpace the pre-split price levels, undercutting consumer welfare. Against this backdrop, Korea's antitrust body is still living with a knowledge system of 100 years ago.

Whether an industry is competitive or not is determined by the existence of an entry barrier, rather than the number of enterprises. The industry is not competitive when the law inhibits a newcomer. On the contrary, if the market is wide open to anybody with little regulations, then it is a competitive industry.

Therefore we cannot blame a company for being a monopoly because its market share is high if there is no entry barrier imposed by the government. A high market share is a meaningful indicator of monopoly power in an industry with entry barriers. But a dominant market share is not a threat if there is no entry barrier. Rather, it can be a good indicator of consumer satisfaction.

In this context, the Fair Trade Commission, if they are worried about a monopoly power in the wireless telecom sector, should stop scrutinizing new clients signing up to the dominant operator one by one. It should remove the entry barriers and make the market a level playing field.

Abolish price controls and entry barriers

The Fair Trade Commission has argued the across-the-board tariff cut is more desirable but the concept itself is obscure. If it is referring to production costs, then it will be as absurd as the disclosure of construction costs for apartment buildings. Rather it would imply a broad-based price, including both intra-network and inter-network call rates. If so, the across-the-board tariff cut would better serve consumer interests than the on-net tariff discount.

But such a blanket rate cut is in essence impossible under the current business circumstances as the government controls mobile rates. SK Telecom, classified as a market dominating enterprise with more than 50 percent market share, requires government approval for any tariff cuts, unlike its minor rivals. Therefore, SK Telecom cannot undertake a comprehensive tariff cut even if it has the will and capability.

The latest on-net tariff discount was given the government's consent. With the tight price controls in place, insisting that a blanket rate cut is more desirable than on-net rate discounts is nothing different from urging a person with legs tied to win a race. If the government really wants to improve consumer welfare through a comprehensive mobile rate cut, then it should first abolish the price controls. Mobile carriers would then do the rest in a free market.

Due to the regulations, local mobile carriers have been involved in irregular practices by paying huge subsidies to new subscribers. Only a few consumers enjoyed the benefit of the subsidy whereas the majority had to face exorbitant phone bills. Koreans pay far higher mobile bills than subscribers in Hong Kong and Europe, where there are no price controls.

It is more urgent to tear down any existing entry barriers and make the market a level playing field. The government must have learned from the recent example of the prompt responses by industry to its approval of on-net tariff discounts that deregulation tends to inspire industry competition, which in turn leads to lower prices for the benefit of consumers. Competition among mobile carriers tends to escalate to the peak when an entry barrier is removed to allow anyone to start the business. Therefore, removing the entry barriers on the wireless industry is most critical to the promotion of competition.

Once the barriers are abolished, then industry competition will gain further momentum, triggering off price cuts and quality improvement for the benefit of consumers. Then enterprises will devote their energies to increasing management efficiency and seeking ways to cut costs while heavily investing in technology development to boost productivity in order to make profits and survive the cutthroat competition. This should render larger gains to the entire society.

The government defends itself on the grounds that the regulations are intended to protect both consumers and industry. However, the reality is that the regulations only serve to bail out incompetent and inefficient enterprises while transferring the cost to consumers. The price controls and the entry barriers in the wireless industry are not an exception. They are simply keeping the weak and poorly managed players barely afloat.

The approval of the on-net tariff discount is provoking fierce competition among the three mobile carriers but this is only "limited" competition. In order to precipitate real competition and better serve the interests of consumers, the government should eliminate all the entry barriers and pricing regulations and let the market set the rules independently. This is the most desirable way to enhance consumer welfare.

By An Jae-wook

This article is reprinted with permission from Center for Free Enterprise (http://eng.cfe.org). - Ed.