By V. Phani Kumar
Smart phones are setting the stage for the next wave of growth for South Korean mobile operators, boosting household spending on communications and easing fears that intense competition will eat into any upside to their profits, analysts say.
Robust demand for Apple Inc.'s (AAPL) iPhone 4, as well as smart phones from other handset makers such as Samsung Electronics Co. and LG Electronics Inc., helped boost South Korean households' monthly telecom bills to a record high in the second quarter, the Korea Times reported this week, citing official data.
At the same time, Korean mobile operators' average revenue per user, or ARPU, from smart-phone users is significantly higher than their ARPU from other cell-phone users, analysts say. As more people replace their cell phones with smart phones, some expect improved growth prospects for the carriers in coming months.
"We have a bright outlook for smart phones, despite market skepticism over limited penetration, the sustainability of high-priced rate plans and profitability," Korea Investment & Securities Co. analysts wrote in a recent report.
"We believe smart phones can be a catalyst to push up the top and bottom lines," they said, estimating that a 10% increase in smart-phone subscribers would boost ARPU and net profit for South Korean mobile operators by 6.9% and 19.9%, respectively.
Shares of mobile operators were trading higher Thursday in Seoul, with KT Corp. (KT) rising 0.9% and SK Telecom Co. (SKM) gaining 0.9%, while handset maker Samsung Electronics (SSNLF) rose 1.2%. Shares of LG Uplus Corp. were flat. LG Electronics (LGEAF) fell 0.5%.
The advance came a day after KT Corp. said that the company received nearly 130,000 people signed up for the Apple iPhone 4, hours after the company began taking such orders. KT, the exclusive provider of the iPhone in South Korea, is expected to launch the iPhone 4 next month, the Korea Herald reported.
"In our view, smart-phone growth in Korea is not a zero-sum game. Due to the low starting point, all operators can grow," analysts at HSBC wrote in a recent report. "Near-term negative sentiment regarding competition and high marketing costs is misplaced, in our view."
Earlier this year, the South Korean government barred mobile carriers from spending more than 22% of the previous year's revenues on advertising and marketing, amid intense competition and aggressive efforts to acquire new customers.
HSBC said in its report that KT's smart-phone ARPU has risen to 54,000 Korean won ($48.30) from 52,000 won, compared with an average ARPU of 32,000 won across its entire subscriber base.
"Given that smart phones represent just 8% of KT's total subscriber base, the potential to sustain overall growth in ARPU is strong in our view," the broker said.
More needs to be done
Moody's Investors Service said Thursday that the Korea Communication Commission's March guidelines, which capped marketing spend, have helped reduce such expenditure and improved their profitability, but added that they need to do more for a sustained growth in profits and for their credit ratings to improve.
However, Laura Acres, Moody's vice president and senior credit officer, said that competitive pressures may "shift from direct-marketing costs into more subjective areas, such as tariff reductions, particularly for data-heavy smart-phone users."
She said that despite the boost to revenues from wireless data services, South Korean carriers may not experience "positive rating pressures" until they realize returns on their investments and restore their profit margins.
"In our view, this will not happen over the next 12-18 months, as operators will remain locked into the current spiral of rising marketing spending and [capital expenditures] to attract and retain customers," Acres said.
In wider market trading Thursday, the benchmark Kospi rose 0.9%. Elsewhere in the region, Japan's Nikkei Stock Average gained 1.2%, Australia's S&P/ASX 200 fell 0.4%, China's Shanghai Composite rose 0.4%, Hong Kong's Hang Seng Index advanced 1.2% and Taiwan's Taiex climbed 0.2%.