KOREA: SK Telecom seeks new growth through globalization

SK Telecom moves beyond cellphones to concentrate on providing information technology services with foreign partners

The Korea Herald
Wednesday, June 29, 2005

By Kim Tong-hyung 
 
Seoul -- SK Telecom Co., Korea's biggest mobile-phone operator, is facing the challenge of keeping growth alive in a country where three out of four people already own a mobile phone. Now the company is looking overseas for new opportunities.

In January, SK Telecom joined forces with U.S. Internet service provider Earthlink Inc. in a $440 million joint venture, named SK Earthlink, to offer mobile services in the United States.

The company plans to start commercial services early next year and hopes to attract 3 million subscribers, or about 2 percent of the U.S. mobile market, by 2009. If it reaches these targets, it would generate about $2 billion in annual revenues.

"With the Korean telecom market approaching saturation, successful expansion to foreign markets is now critical," said SK Telecom CEO Kim Shin-bae.

"The Korean telecom industry is advanced in code-division multiple access technology and is also leading the way in developing added-value services, data platforms and deploying new marketing strategies. The country's advanced broadband infrastructure and tech-savvy consumers also gives Korean companies a better read of the trends," he said.

The venture is the first by Korean telecom company to enter the U.S. market. SK Earthlink plans on bringing the sophisticated wireless services now common in Korea--including music, games and television--to the more voice-oriented U.S. market. SK Telecom and Earthlink will contribute $220 million to the 50-50 joint venture over the next three years.

SK Earthlink will work as a mobile virtual network operator (MVNO), leasing capacity from network operators such as Sprint and Verizon Wireless. The company hopes to break even in three to four years' time.

The Atlanta-based Earthlink has more than 5 million subscribers to its Internet services. The company, which currently provides voice-over-Internet protocol (VoIP) services, has recently been attempting to diversify its product lineup.

"The wireless business is all about speed and timing and we are two or three years ahead of other operators elsewhere. Foreign telecom companies that that work with SK Telecom could proceed faster than its local rivals," said Kim.

"Expanding to foreign telecommunications markets is a tricky business considering the regulatory risks. Finding the right local partner is the key to success."

Despite the government efforts to renew competition in the marketplace, such as adopting number portability in the telephone market and handing out new licenses for Internet services, Korea's major telecom companies are reporting lower profits after enjoying years of strong revenue growth.

SK Telecom has more than 19 million customers, which is about 51.2 percent of Korean mobile-phone users. However, with Korea's wireless penetration rate approaching 75 percent, the company has been struggling to sustain growth.

Last year, SK Telecom saw its net income drop 23 percent year-on-year at 1.49 trillion won, with fewer customers and cuts to interconnection rates. The company's operating profit of 2.35 trillion won last year was also a 23 percent drop from a year earlier. Revenue increased 2 percent year-on-year at 9.7 trillion won. The report marks the first full-year slide in profit for SK Telecom since 1997.

SK Telecom's first-quarter net income this year dropped 18.6 percent year-on-year to 368.4 billion won, the fourth consecutive quarter that the company saw profit dip.

Firmly established as a global trendsetter in telecommunications, Korean companies are now looking outside the matured domestic market to revive growth. Before the recent move to advance on the U.S., SK Telecom tapped the markets of developing countries in Asia.

SK Telecom first advanced on Vietnam in 2000 through SLD Telecom, a joint venture it established in Singapore with LG Electronics Inc. and Dong-A Elecom Co., and has been providing code-division multiple access wireless services in major cities such as Ho Chi Minh City and Hanoi since July 2003. Under a business cooperation contract with Vietnamese operator SPT, SLD Telecom provides wireless services under the name of its local unit S-Telecom.

The wireless services have attracted more than 250,000 subscribers. SK Telecom predicts S-Telecom will gather 500,000 subscribers by the year's end and 1 million subscribers in 2006. SK Telecom plans to invest $70 million this year to increase the number of base stations and expects to have nationwide coverage by next year.

Vietnam is among the world's fastest growing mobile markets, although wireless penetration barely exceeds 7 percent now. Analysts believe the number of Vietnamese mobile-phone users will exceed 10 million over the next five years, compared to 2.7 million counted at the end of 2003.

"The success of CDMA services in Vietnam has great significance for our company's business strategy, as we are attempting to build a CDMA belt across Southeast Asia. We expect to have 2 million subscribers in Vietnam in 2007 and 5 million subscribers by 2009," said Kim Sung-bong, head of SK Telecom's Vietnam Regional Business Division.

"We believe that the Vietnamese telecom market is on the brink of significant expansion, showing a high-level of growth over a short period."

China is also considered an important growth market for SK Telecom. Last year, the company established a $6 million joint venture, named UNISK, with China's second-largest mobile-phone carrier China Unicom to deliver wireless data services. SK Telecom predicts UNISK's customer pool to grow to 500,000 by the end of the year and generate $2.5 million in revenue.

SK Telecom's Internet affiliate, SK Communications Co., also recently launched a Chinese-language version of its popular Cyworld weblog services (www.cyworld.com.cn), hoping to generate revenue in the world's fastest-growing Internet market.

SK Communications, which plans to release a mobile-phone version of Cyworld in China during July, hopes to attract around 25 million customers by 2007.

SK Telecom acquired Chinese Internet portal ViaTech for $6 million last year, hoping to leverage the portal's 11 million customers and create synergy with UniSK, a wireless Internet portal it jointly operates with China Unicom. ViaTech will oversee the Cyworld services in China.

"China will be the starting point of our efforts to advance ourselves as a regional brand that covers Asian countries," said SK Communications Chief Executive Yoo Hyun-oh.

China's Internet population increased 18.2 percent year-on-year to reach 94 million in 2004, according statistics from the China Internet Network Information Center.

A number of Korean Internet companies, mostly online game developers, have been successfully advancing on the Chinese market over the past few years, with their server-based business models freeing them from piracy and inventory worries, two factors that have haunted other foreign businesses in China.

SK Communications hopes its revenue model, which provides basic services for free and charges for additional features and items, could translate to success in the Chinese market where most Internet companies gather fees collected from pre-paid billing cards.

Date Posted: 6/29/2005