firmly in place has been confirmed through an abundance of historical evidence.
The nature of the mobile phone subsidies
The mobile phone subsidy regulation policy came into effect May 2000, banning the subsidies through alteration of the terms of mobile phone subscription contracts. It was aimed at the prevention of the public's overspending on handsets, business environment deterioration for the service providers, and abuse of the market dominance by the dominant companies, and at pursuing equality among consumers. In Dec. 2002 the electricity and communication law was amended to impose a temporal 3-year ban on subsidizing of mobile phones, effective from the date of implementation. Another amendment bill on the regulation has been proposed in the National Assembly to be passed by Feb. 2006. If it is not passed, the outcome will be an over-all lifting of the ban, liberalizing all subsidies from the 27th of Mar. 2006.
Recently, as the government and ruling party have come to an agreement to pass the bill, adhering to the original government draft on extending the law restricting the mobile phone subsidies, another public uproar on the issue seems unavoidable. The Information and Communication Ministry, under the cause to block activities detrimental to fair competition, has announced a reform draft confirming the prolongation of the subsidy restriction for another 2 years. To look in more detail into the reformed law, while maintaining the restriction policy, exceptional cases will be expanded that now customers who have subscribed to one service provider more than 2 years consistently will be eligible to buy subsidized phones, once for the 2years.
There are differing views among the mobile phone service providers over the bill. One operator argues that it is unreasonable to allow subsidies for cases where customers switch companies after staying with one for 2 years while not giving any benefit to loyal customers because their subscription period has not yet reached the 2-year mark. Another company emphasizes that customer fairness can be achieved only when the benefit of the subsidy is given according to the customer contribution. These views of the service providers held as ways to serve the consumer interest do not basically spring from the real interest of the consumer. In fact, their views are based on the company interest, which is closely related to that of competing operators in the market. In this aspect, the operators' arguments are rather hollow.
In principle, for the sake of the consumer interest as well as the free and fair market competition, the restriction on the subsidy on mobile handsets needs to be abolished now. Most other nations, including the US, Japan, China, Russia and Europe do not ban subsidies for handset sales. The price floor set for the companies dominant in the market by the Information and Communication Ministry is supporting the call rate from going down. No competitive activity of the normal sense to reduce the rate can take place as competitors are marking their prices only slightly below that price. The same goes with the restriction of the mobile phone subsidies. In the sense that it puts the cap on competition and goes against the consumer interest, the subsidy restriction tends to provide a legal condition for price fixing among the operators.
As the government puts restriction on the markets --- by banning subsidies for handsets in the mobile communication market, limiting distribution of free papers in the newspaper market or of gifts by department stores --- it tries to justify its action by recourse to various reasons such as the 'special condition of the market'. However, as far as differentiation is made in terms of quality of goods and services, and competition is undertaken in various ways of marketing strategy, those markets do not essentially differ in a great degree from other 'non- specialized' markets. Therefore, there is hardly any reason for the government to introduce restrictions designed for certain industries. As those restrictions will result in preventing reduction in the consumer price, they may be directly adverse to the consumer interest. Provision of subsidies for handsets, free newspapers and gifts are carried out as a means of the price competition; they are part of sales strategies whose practice is entitled to each company in the market. In the process of marketing, it is natural for those without price competitiveness to be competed out of the market as it is in other markets. Of course, actions such as taking recourse to predatory pricing financed by the overflowing company coffer in order to exclude other companies from the market should be checked.
While explaining its plan to extend 2 more years of the subsidy restriction to the Regulatory Reform Committee, the Information and Communication Ministry presented the restriction as contributive to effective competition. However, the handset subsidy regulation was introduced to foster the business stability of the newcomers to the market and it hardly was a tool to maintain the effective competition. Also, according to the ministry, increase in the welfare of mobile phone users has been achieved due to the policy implementation during the past 3 years. However, this argument is baseless because the reduction in the call rate is brought about by various factors such as advancement in technology, business innovation and so on. A subsidy on handsets is just a factor in the sales cost; one should not be tempted to make an expansive interpretation out of it.
The number of breaches of the subsidy regulation reached thousands and the amount of penalties imposed accumulated to tens of billions of won as result of the few investigations taken place each year by the Korea Communications Commission. The scale of the illicit subsidies provided by the service providers is estimated to be as large as one trillion won, and the scale itself proves how ineffective the policy is as a regulation. Following the new regulation, those whose subscription with one company has lasted more than 2 years are allowed to purchase the once-for-2-years-phone for their contribution; there still will be 18 million customers who will be left out of the subsidy benefit as their subscription has not reached the 2 year mark. However, what is more important to the customer and company than the length of the subscription period is the real contribution measured in accordance with how much communication service the customer has purchased. It is a matter for the service provider to take into the account about each customer, not a job for the government.
According to the government plan, all types of customer cases have to be considered; including that of the new phone owner, account option changes, handset changes, company switches, types of subsidy benefit received last 2 years, new technology handsets and so on. It is simply difficult to conceive that this complex regulation would be workable in the real market. The chances are low for every detail of the regulation to operate properly when the reality is that illicit subsidy policies are being widely practiced. The Ministry of Communication and Information once claimed that the purpose of the bill was to maintain effective competition in the market, and now it is the consumer welfare. None of the two purposes may be achieved through the present government law reform. The consumer welfare and effectiveness in competition, in their nature, can only be derived from hot competition of businesses within fair rules and cold judgment among the consumers.
In Kwon Lee (Senior Research Fellow, Korea Economic Research Institute, iklee@keri.org)
