Abolition Of Tariff System Positive For Korea Telecom Sector, But Debate Over Netflix Issue Continues

Summary

• Deregulatory signal is good for the Korean telecom sector.
• Abolition of tariff approval system positive.
• Debate over network neutrality continues over Netflix issue.

Abolition of tariff approval system positive

The Korean parliament passed an amendment to the Telecommunications Business Act to replace the current ex-ante telecom tariff approval system (with a notification system with reservation) which has been in effect since 1991. The notification system with reservation gives the government a 15-day review period when telcos report their cell plans to the authority, so that the government can reject tariffs if it believes they harm consumers or undermine fair competition. As a result, SK Telecom (SKM), the nation's leading mobile carrier, is now able to report its tariffs instead of having to obtain government approval prior to introducing a new cell plan.

We find the abolition of the tariff approval system positive as it eases regulations. Fundamentally, the removal of the ex-ante approval system provides carriers the right to set their own prices and encourages free competition. In a practical sense, it helps carriers save time when they introduce new cell plans.

However, we do not expect its impact on the overall telecom industry of South Korea to be huge because: 1) although the procedure to obtain permission has been removed, it was replaced by a notification with reservation, which justifies government intervention if it finds a cell plan increase excessive; 2) since the telecom sector basically offers the same types of services, it is unlikely that the three big telcos' cell plans will differ much; and 3) inexpensive cell plans are already available from MVNOs.

Debate over network neutrality continues over Netflix issue

The Telecommunications Business Act was also revised to introduce the so-called Netflix (NFLX) Freeloader Prevention Law. This clarifies the obligation of not only telecom service providers but value-added telecom service providers such as content providers (CPs) to maintain network quality. The revised act also stipulates that overseas CPs must have a Korean proxy to ensure the protection of Korean consumers.

The revised act provides grounds for the argument that CPs such as OTTs and Internet platform service providers have to pay network fees. It also backs up the argument that overseas CPs have to pay network fees, just like their Korean counterparts do. Until now, Netflix has argued that network neutrality means that its users are already paying for the network, so it does not need to pay Internet service providers again, even if CPs use excessive bandwidth.

The debate over network neutrality depends on policy decisions, and telcos and CPs have starkly different views on: 1) who is to pay network usage fees; and 2) who is responsible for maintaining network quality. As such, we need to see what laws are implemented going forward or whether there are similar examples to determine whether telcos can demand network fees on the basis of network stability alone.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Hyundai Motor Company is a passive shareholder in our bank.