Smartphone market in Korea wakes up
The abolition of some restrictive technical rules for handsets has resulted in an iPhone-led smartphone boom in Korea. However, there are still major regulatory barriers to smartphone growth that must be addressed. Even if these barriers are removed, global handset vendors will need to build brand awareness and new partnerships with operators in order to benefit.
Until recently, Korean handset vendors and mobile operators showed little enthusiasm for the smartphone market, asserting that Korean consumers would not use such complicated handsets and that any enterprise device would not fit in with Korean business culture.
However, the Korean smartphone market has grown rapidly in recent months, and vendors and mobile operators are now pushing hard to increase their smartphone product line-ups. The iPhone was the breakthrough product. By the end of February 2010, the iPhone alone had recorded 400,000 sales in three months after launch, out of a total of 1 million smartphones in the same period. According to current trends, approximately 3 million smartphones will sell in Korea this year, out of a total of 20 million handsets. Growth is slowing, but still healthy.
Although the early iPhone rush is abating, Korean consumers have opened their eyes to smartphones. Enterprises are also recognizing that smartphones could increase their productivity.
Regulation inhibits growth
The use of mobile Internet services is common in Korea. However, various Internet services are hindered by intrusive regulation, which inhibits expansion of the smartphone base. For example:
Google has blocked the posting of YouTube videos from Korean accounts because it refuses to accept the requirement for real-name verification. As a result, any uploading to YouTube from smartphones is blocked. iPhone users can avoid this by changing their region setting, but the Korea Communications Commission (KCC) does not sanction this. In addition, game censorship rules require the registration of all games, discouraging content innovation and investment to meet the mandated digital certificate rules, users must install Active-X plugins, forcing them to install Internet Explorer if they wish to use m-commerce and e-commerce services. As a result, market share for Internet Explorer in the Korean Internet browser market is approximately 98%.
Foreign vendors must invest in local presence
The three Korean mobile network operators spent W8.6 trillion on marketing last year, 24.5% of total wireless revenues, mainly due to handset subsidies. They are providing much higher subsidies on smartphones than on feature phones.
It was once expected that subsidization would disappear since the KCC limits the marketing expense of mobile network operators to 22% of revenues. In fact, free smartphones are becoming more prevalent because MNOs are shifting their strategic focus from feature phones to smartphones. Korean mobile operators believe that the additional marketing cost will be balanced by higher ARPU because most smartphone subscribers are using expensive flat-rate tariff plans for data. We now expect that higher subsidies for smartphones will remain, whereas subsidies for feature phones will reduce.
This sounds like an opportunity for global smartphone vendors. However, the Korean smartphone market is still small, and technical customization is still needed. And since Korean handset users have been isolated from global brands, these vendors need to focus on their branding and image campaigns in Korea. As a reference, RIM has relatively robust brand power in the smartphone market, but recorded just 30,000 unit sales in 2009, despite the launch of the Bold 9000. Korean mobile operators are also not promoting global brands, with the exception of the iPhone, which has exceptional brand strength.
However, as the use of smartphones by Korean consumers and companies grows and diversifies, foreign vendors may miss an opportunity if they do not strengthen their position in the Korean market. Global vendors should be lobbying for regulatory barriers to be removed. In addition, they need to invest in their marketing and strategy towards operators, and explain how their devices can help the operators’ spending effectiveness, sales management, and customer acquisition and retention.