The Korea Communications Commission (KCC) has announced plans to limit telcos’ marketing spending to less than 20% of sales by 2011.
“With the new policy, the Korean government is hoping telcos [make]…higher investments [in]…IT and the content industry to help create additional jobs as well as boost overall domestic economy,” said Credit Suisse.
For 2008 and 2009, market leader SK Telecom’s marketing cost to service revenue ratio was 26.2% and 26.9%, respectively.
“If the company lowers the ratio down to 22% in 2010 and 20% in 2011, SKT’s ebitda will show year on year increases of 18% and 24%, whilst net profit will increase 44% and 54%, respectively,” forecasts Credit Suisse.
It expects both KT and LG Telecom to show a “more or less” similar earnings impact.
But there is an expected trade-off for the higher profit.
“As a result of lower marketing costs, we are expecting all telcos to face KCC’s pressure to cut telecom tariffs,” said Credit Suisse.
Despite sweeping mobile price cuts in 4Q09, senior government officials are pushing for lower prices for new smartphone packages.
In particular, with provincial elections scheduled for June 2010, Credit Suisse expects all mobile operators to introduce new smartphone plans as early as April or May.
It believes that these cheaper plans will “neutralize much of [the] cost savings from the marketing cost reduction.”
KCC chairman Choi See-joong told at the Mobile World Congress last month that the consumer-conscious commission was pushing operators to lower smartphone tariff burdens.
In late-February, the Korea Times also reported that KT was gearing up to offer its first Android-enabled device for free.
A potential handset subsidy war has analysts concerned.
“The tariff side doesn’t concern me that much as ARPU has not been affected much over the years, but a subsidy war like we have seen in previous years is a risk,” an analyst told telecomasia.net.