SKT's Hanaro stake paves way for convergence services

Korea's no. 1 mobile operator SK Telecom(SKT) signed an agreement to buy 39% of Hanaro Telecom Inc (HTI), the second largest broadband provider, for W1.09 trillion ($1.18 billion) on December 3. As a result, SKT will become the largest stakeholder of HTI with a total share of 43.59% with management rights.

The rumour which had circulated for several years is now finally likely to become a reality, although the deal is subject to government approval. However, given that this move is in line with the direction of the government's policy, to improve user interests and promote innovative convergent telecom services, we don't see any particular reasons for the government to prohibit the purchase.

In fact, in July 2007, the government eased the bundling regulation, which imposed strict pricing control over bundled offerings from operators with significant market power (SMP) and hence hindered the proliferation of bundled offerings. With this change, operators with SMP, such as KT and SKT, can launch diverse bundling offerings without the government's intervention, as long as the range of price discount is within 10%. Also, the introduction of number portability for VoIP services is expected in early 2008.

Along with these changes to the regulatory framework, intensified competition due to market saturation has forced operators to focus on protection of their existing subscriber base, and bundled offers have become a priority for operators. SKT, which has not owned fixed infrastructure, tried to offer fixed-mobile bundled services in conjunction with cable operators.

However, by becoming the biggest shareholder of a broadband operator with 3.7 million subscribers, SKT is in a position to provide its 21 million subscribers with bundled products that are similar to those of broadband leader KT.

In particular, HTI has aggressively promoted its Hana TV, a non-linear IPTV service, and acquired over 600,000 subscribers. By combining its existing wireless home networking services with HTI's IP TV, the core service for home networking, SKT has gained a foothold in creating new revenue streams in the residential market. Also, from HTI's perspective, SKT is a good strategic buyer, which can make the most of the struggling altnet's assets. Nonetheless, it is not bad news to KT, either, as the purchase raises the prospect of the incumbent, KT, absorbing its mobile affiliate KTF, in which it currently has a 52% stake.

We believe that this transaction implies that the Korean telecommunications market is now entering a new phase, in which players compete with fully-fledged offerings and only a few players with sufficient scope and scale can survive. The greatest beneficiaries of this change will be consumers. We expect further consolidation to come.

Suran Seong, analyst at Ovum

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