It was no surprise that the state telecom watchdog on Monday handed business suspension penalties to the country’s three mobile carriers following their release of massive subsidies for smartphone purchases.

The move had been widely expected as the subsidy war escalated in the latter half of this year, which left many early LTE handset buyers, who paid full price, complaining about the price fluctuations.

The shipping prices of many LTE smartphones, which run on the fourth-generation communications networks, are as high as 1 million won ($930). 

However, the telecoms’ move to grab more feature phone users and smartphone owners completing their two-year mobile contracts triggered what was called the “subsidy war” between SK Telecom, KT and LG Uplus.

And surprisingly, the three firms were given both business suspension as well as fines for the first time in history.

KCC’s investigation

The on-site investigation conducted by the Korea Communications Commission, which began on Sept. 13, showed that the average violation rate of giving excessive subsidies was 43.9 percent for the nation’s three telecoms.

While analyzing the data of 474,000 smartphone users out of a total of 10.62 million, LG Uplus came up with the highest violation rate of 45.5 percent, followed by SKT and KT with 43.9 percent and 42.9 percent, respectively.

Although the average amount of subsidies given to customers was found to be 283,000 won for the telecoms, about one-fourth of the customers of all three firms were offered subsidies anywhere between 300,000 won to more than 1 million won, according to the research.

The maximum subsidy permitted by law is 270,000 won.

As an exemplary case, the price of Samsung Electronics’ Galaxy S3, which is shipped at 994,400 won, fell to as low as 170,000 won in September due to the telecoms’ intensified competition to lure a greater number of customers.

Some other customers had to wait for days to switch their mobile carriers due to a data network overload that also resulted from the contest.

Consequently, the five commissioners at the KCC agreed on business suspension of all three mobile carriers ― LG Uplus for 24 days, SKT for 22 days and KT for 20 days ― prohibiting them from taking on new customers switching from feature phones as well as those who had been using services of other companies.

The three firms were also fined up to 11.89 billion won in total. SKT was slammed with the largest fine of 6.89 billion won, KT with 2.85 billion won and LG Uplus with 2.15 billion won.

This marks the first time ever that business suspensions and fines were handed together to the country’s telecoms.

“Strong penalties should be granted considering that the subsidy war staged between the mobile carriers not only discriminates against its customers but also that the firms did not take the two previously warnings given by the commission seriously,” said KCC chairman Lee Kye-cheol.

The business suspension begins on Jan. 7 of next year. It will first be applied on LG Uplus’ outlets nationwide for 24 days from Jan. 7-30, then to SKT’s stores from Jan. 31-Feb. 21 and to KT from Feb. 22-March 13.

Market’s response

“Based on the fact that at least 20 days are needed for market stabilization, the business suspension dates were agreed upon, aspects like how much the market was impacted by the violation of each company among others,” said a KCC official.

The KCC’s actions show that the subsidy war was seen as serious illegal activity by the government on the basis of customer discrimination, market confusion and excessive spending on marketing fees for the mobile carriers.

The telecoms acknowledged that their activities were illegal, though claimed the impact will be huge since the first three months is the peak season for business, when many younger customers visit the stores to change phones before going back to school.

“Almost a month-long business suspension means we may go out of business once and for all,” said an owner of a mobile phone outlet in downtown Seoul, which only handles products of a single telecom.

Some market insiders also said the outlets may play the system, adopting aggressive marketing tactics to secure a larger group of new customers ahead of the business suspension period.

Telecoms, in the meantime, said they are currently in the process of devising their own marketing schemes for the upcoming business suspension period.

“We will be unable to collect new subscribers but we plan to devise measures that appeal to the superiority of our LTE networks and services during the term,” said an LG Uplus official.

By Cho Ji-hyun (sharon@heraldcorp.com)