In May 2022, Yoon Suk-yeol of the People Power Party assumed office as the new president of South Korea. Yoon, who claims to have a mandate to reverse what he and supporters of the People Power Party view as the “anti-business” stance of his predecessor, Moon Jae-in of the Democratic Party, seeks to promote economic growth by funding new technological development and lightening regulatory hurdles for new businesses. Yoon’s “pro-business” stance is particularly likely to bring changes to the South Korean telecommunications market, which remains the third-largest market in the world by revenue despite being challenged by low economic and population growth.
Yet even as Yoon seeks to nudge the South Korean telecommunications sector toward a more high-tech, globally competitive future, the sector remains wary of both political changes and an uncertain economic outlook due to the COVID-19 pandemic. Government intervention – which has previously come in the form of regulatory penalties and ties between officials and senior executives at the sector’s three major companies – will remain a prominent risk. The following sections explore the dynamics of the sector, the regulatory environment, and the implications of the new administration for the telecommunications industry.
An Innovative Oligopoly
As in most economies, the telecommunications sector is highly regulated and difficult to break into, leaving a few big players to dominate the market. In South Korea, three publicly listed incumbents have captured the entire market: SK Telecom Co. Ltd., KT Corporation, and LG Uplus Corporation. SK Telecom is the leading provider with a 47.7% share of the market, and KT and LG Uplus have respective market shares of 28.3% and 24%.
While it is unlikely that a new firm will try to compete with the three major companies, we are likely to see a shift in business models in the telecom industry in the coming years. The three companies have recently expanded into new areas such as AI, the metaverse, and cloud services to lower their dependency on revenue from mobile services. Although revenue from mobile services reportedly still accounts for the largest portion of total sales at all three firms, it only grew by 3% in 2021, while revenue from non-mobile services grew 15% in the same year. Statistics provided by UK data provider Global Data PLC also show that 5G subscriptions in South Korea are expected to surpass 4G by 2025, with KT as the leading provider. As such, capturing the 5G market will be key for the three firms.
Localization Dilemmas and Growing Regulatory Pressure
The basic regulatory framework for the sector is set out in the Telecommunications Business Act (TBA) and the Radio Waves Act. The regulatory bodies responsible for administering these regulations are the Ministry of Science and ICT (MSIT) and the Korea Communications Commission. An amendment to the TBA introduced in 2019 divides telecommunications businesses into the two categories of core vs. value-added telecom services.
Regulation in the sector has focused on balancing localization and attracting foreign investment. Foreign ownership in core services is permitted up to 49%, but this restriction may not apply if the investor is from a country that has entered into a free trade agreement with South Korea. Under the amended TBA, offshore entities that meet certain thresholds and offer IT services in South Korea must designate a local agent for regulatory compliance purposes, appoint a chief information security officer, and register this person with the MSIT. Additionally, South Korea is known to apply partial data localization measures, which require consent from data providers and only allow data transfer to another country if the other country allows the cross-border transfer of personal information.
In recent years, the South Korean government has tightened laws surrounding the distribution of illegal content, putting pressure on the three major players to change their business practices. The regulatory tightening was catalyzed by the “Nth Room” scandal, which exposed a ring of individuals operating pay-to-view chatrooms that posted explicit videos, including those of sexually exploited minors, from 2019 to 2020. Cho Ju-bin, the ringleader behind Nth Room, was sentenced to 42 years in prison in March 2020, and later that year the TBA was significantly revised to add a greater degree of regulatory scrutiny for telecommunications providers. Under the revised laws, value-added providers such as Kakao and Naver must follow up on requests to delete or prevent access to illegally filmed content. If they fail to do so, they will be fined or their business activities suspended.
While the scandal did not result in immediate penalties for firms in the South Korean telecommunications industry, it also resulted in the South Korean government enacting a law that made watching and distributing child pornography subject to legal punishment. To reduce risks associated with violating the new law, the major telecommunications services providers have emerged as major clients of companies such as Plantynet Co. Ltd., a provider of website filtering services.
Yoon’s Focus on Technology
In March 2022, Yoon was elected the 20th president of South Korea and assumed office two months later. In his policy manifesto, Yoon included the following key goals for the country’s telecommunications sector:
- Strategically expand R&D into 4th Industrial Revolution technologies such as AI, big data, blockchain, and quantum computing, and develop expertise in private and academic spaces through incentives and tax benefits. Yoon pledged to invest USD 190 billion into strengthening data infrastructure, telecommunications networks, and AI capabilities.
- Set up a foundation to promote South Korean intellectual property in emerging technologies and actively seek cooperation with foreign governments and companies in these sectors.
- Modernize outdated legislation to keep up with technological shifts impacting the country, as well as provide appropriate regulation of emerging technologies.
- Cooperate with international partners over standards concerning use of emerging technologies.
Yoon’s policy manifesto suggests he is likely to support moves to implement newer telecommunications technologies. Yoon did not pledge to push for a price cut in telecom service fees, but rather argued for the need to support and bolster innovation in digital infrastructure. Yoon has cited technologies such as AI, cloud services, and 6G as key drivers of growth, and has pledged to invest heavily in these areas. Although Yoon did not provide many details on proposed policy changes or initiatives during his election campaign, we are likely to see more support given to private sector investment and R&D, deregulation, and tax cuts.
Government Intervention and Gridlock as Ongoing Risks
A major risk facing large firms in the telecommunications sector involves interference in their operations by government officials. For example, the same month Yoon was elected, South Korean prosecutors raided the offices of the Ministry of Trade, Industry, and Energy over allegations of abuse of power by former minister Paik Un-gyu in his relationships with major telecommunications firms. Paik was suspected of intervening in the appointment of new senior executives at these firms, and even pressuring their leaders to resign.
In addition, Yoon’s weak political mandate may prevent him from enacting policy changes, introducing further regulatory uncertainties for the telecommunications sector. Many of Yoon’s policies are expected to face stiff resistance in the National Assembly, where the Democratic Party and a coalition of center-left parties will maintain a majority at least until the April 2024 legislative elections. The Democratic Party currently holds 172 out of 300 seats in the National Assembly. This is the largest majority a party has held since South Korea’s democratization in 1987. At this stage, it will be impossible for Yoon to pass legislation without gaining support from the Democratic Party, and there are concerns that without making compromises and appointing industry experts to his cabinet, most of Yoon’s legislative agenda will be gridlocked.
As South Korea’s telecommunications giants face further regulatory tightening amid uncertainties in a new political environment led by Yoon, the silver lining for these firms may lie in Yoon’s policy manifesto, which promotes 4th Industrial Revolution technologies. While legislative and policy hurdles remain for the country’s telecommunications sector despite Yoon’s “pro-business” agenda, policy support for business expansion and diversification should encourage further local and foreign investment into emerging technologies in the coming years.