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The January 21, 2003 Issue Provided by System Dynamics Inc.
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South Korea: Living Laboratory for Broadband: A Guest Article by Nancy Goguen

Note from the Editors: The following is the third in a series of guest articles by experts from across the broadband ecosystem. Nancy Goguen is responsible for Broadband Strategic Marketing at Texas Instruments. She is a frequent industry speaker, and serves on several advisory boards. Previously, she was Vice President, Marketing, Telogy Networks. Before joining Telogy Networks (acquired by TI in 1999), Nancy held several positions at Lucent Technologies including VP, GSM Offer and Business Management, Swindon, England.

Sandy is especially delighted to have Nancy as a contributor, since they share many things in common, including a degree in math and many years at AT&T.


South Korea has been a broadband success story, reaching 67% household broadband penetration in 2002 (more than 10 million broadband connections), outpacing other countries and providing a living laboratory for assessing the factors that lead to a successful broadband ecosystem.

While all the factors at play in South Korea aren’t present in other countries deploying broadband ecosystems, the critical mass of consumers using broadband provides the basis for a large number of experiments with broadband that can provide insights into what to plan for as broadband populations in other countries grow, and ideas on how to spur that growth.

I visited South Korea in November to meet with a number of companies in different parts of the ecosystem who are driving this explosive growth and to experience Korean broadband in person.

Setting the Stage

South Korea has a high population density, with almost half of the population living in the greater Seoul area. Apartment complexes house 47 percent of South Koreans. 93 percent of residences are within 4 kilometers of central offices.

Consumers have a choice of broadband service providers and switch them like Americans switch long distance service providers. One CPE device can work with multiple providers.

With the improvements in productivity, DSL service can be installed within 24 hours of an order, typically in a 15 minute session. A service provider field engineer can install up to 20 customers a day.

Broadband service is priced the same or less than narrowband, with prices ranging from $19 US per month (2 Mbps) to $33 US per month (8 Mbps). South Korea is tied with Japan and Hong Kong for lowest broadband price as a percent of per capita GDP in the world, but South Koreans get the highest speed (3 Mbps) at this price. In 2002, special promotions that lowered the introductory prices were introduced to continue the explosive growth, leading to the 10 million subscriber count.

Three major players provide broadband service: KT, the incumbent telecommunications supplier and the dominant broadband provider which uses ADSL and Ethernet; Hanaro Telecom, the second largest facilities-based broadband provider which uses ADSL and cable modem; and Thrunet, a broadband startup which uses cable modem. These three have over 90 percent of the market. Competition is fierce.

Broadband access is a key driver of KT’s growth, with an estimated 12 percent of KT’s revenue attributed to the Megapass broadband service. KT is profitable in broadband this year.

The Government Role

The government vision is that broadband will become a universal service like telephone service. It invested more than $1.2 billion US to build out a high-speed backbone and is providing more than $1 billion US in soft loans to operators from 1999 to 2005. These soft loans initially supported metropolitan build out and are now supporting deployment in less densely populated areas and rural areas.

It introduced the “Ten Million People Internet Education” program in June 2000. 4.1 million people were provided with basic internet skills in 2000. One program of note targeted housewives not in employment, recognizing that these women have a strong influence on household purchase decisions and are also very interested in the education of their children. The program provided internet education courses at an affordable price to an audience who had previously felt left behind.

The government promoted internet use in education, with 100 percent of primary and secondary schools connected to broadband. It also promoted e-government programs to ensure public services utilization of broadband.

The Evolution of Broadband Services

In the beginning, most people did not have high-speed internet access at home. Between 1998 and 2002, over 25,000 PC Bangs (PC Rooms) emerged, providing the public with early access to high capacity PCs and the benefits of broadband, with many open 24 hours a day. Similar to internet cafes, PC Bangs have been deemed fun and fashionable by young adults, the place to play and enjoy broadband, often with friends. The PC Bangs provide a meeting place, a community for customers with similar interests.

With the growth of PC Bangs, thousands of new users gained access to broadband, providing both a stimulus to residential broadband growth and a market for content developers. Applications like file sharing, email, music and video downloads, chatting and on-line games were made available, with the most popular being on-line games.

On-line games are very popular with South Koreans, especially massively multi-player on-line games. ‘Lineage’ is currently the most popular such game, a creation of NCsoft, the world’s largest independent on-line gaming company. Players gather at PC Bangs to develop strategies and to play other clans (teams). Players at a PC Bang pay an hourly fee ($0.79 US). Or, they can play from home with a monthly subscription fee ($23 US). As the capabilities of the games increase, and the quality of the graphics improves, players want to upgrade the capacity and speed of their broadband connection to ensure the best level of play.

Tied in to on-line games are other internet activities including fan sites for the latest news, virtual products for use in the games for sale on on-line auction sites, contests for game players, and TV shows linked to the games. This is one example of the power of broadband in a community context: providing consumers with shared interests a variety of services that help them do things that matter to them, increasing the value of broadband to them.

Multi-media chatting is another popular application. Consumers can enter animated video or digital camera images into the chat using an image gallery to select from. Nominal fees are charged for the use of the multi-media images.

Streaming services like time-shifted TV that allows viewing of old episodes of soap operas is another popular service. A service registration fee can be charged, with a fee of $0.25 - $0.40 US for each episode; this small charge leads to impulse purchases. Streaming content can be viewed on either the PC or the TV. Through the broadband connection, many of the time-shifted programs are viewed on the PC. If an individual has missed an episode, watching on a PC is a good way to catch up. Group/family viewing is watched on the TV.

Providing episodes from a back catalog allows content providers who own the intellectual property rights to generate a new revenue stream while providing increased satisfaction to their customers. Each of these applications – on-line games and associated services, multi-media chatting, and time-shifted TV – increases the ARPU (revenue per consumer) through the premium charges associated with them.

Real-time stock trading is also a popular service, with 70 percent of transactions now being processed this way. While broadband is not a requirement for stock trading, the user experience can be enhanced with speedier data and with improved graphics. Continuing this direction, on-line purchase of financial services like banking, lending, and insurance is expected to triple in the next 5 years.

Payments for Services

Tied in with these services are micropayment systems, including the purchase of cybermoney by consumers. Prepayment in bulk provides convenience when making a purchase; the amount is debited against the prepay. Cybermoney can be purchased using a variety of payment methods including credit card, mobile phone bill charge, and auto payment using the landline phone bill. The mobile phone bill is the most popular payment method. Having all these alternatives makes it easy for consumers to make purchases.

These value-added services all have charges associated with them and use subscription, pay-per-use, or a combination of the two as the payment model. Many of the providers of these services have seen sustained profitability achieved in short time frames. When services provide clear benefits, and enhance the consumer life style, consumers will pay for them. And, with a critical mass of broadband subscribers, content providers can profitably provide services.

How Broadband Changes Consumer Behavior

Broadband users in South Korea spent an average of 19 hours 20 minutes on-line versus 10 hours and 19 minutes in the U.S. in the same period. South Korea is ranked first in the ratio of streaming media content, with 74 percent of users doing music/video downloads on streaming compared with 29 percent in the U.S. 54 percent of South Korean broadband consumers use networked games, compared with 6 percent in the U.S. Per capita TV viewing in South Korea dropped 8.6 percent in 2001.

What’s Next

South Korea’s information ministry has set forth an Internet initiative to allow users to gain access to the Internet “anywhere, anytime” through mobile handsets, PDAs, and notebook PCs through wireless and fixed-line Internet infrastructure. WLAN service will also be available in public places.

South Korea’s broadband service providers are putting in place the infrastructure for the next wave of services. 2003 will see the introduction of VDSL service (10 Mbps) in South Korea by both KT and Hanaro. This is in line with a government target of 20 Mbps by 2006 and lays the foundation for sophisticated VOD services and the next generation of home networking services. New apartment buildings are being built with Ethernet networking, providing for high capacity home networking solutions.

KT provides “hot spot” WLAN services under the NESPOT brand and offers a combined ADSL/WLAN service called Megapass NESPOT. Wireless access is gaining momentum as PDAs, notebook PCs, and home devices support 802.11.

KT also recently launched the HomeMedia service, which allows consumers to watch broadband content on the TV. Subscribers can watch full frame feature movies using a VOD service. A wireless transceiver in the converter box makes it possible for consumers to get images and sound from desktops.

Hanaro launched, its content-based web portal including digital movies, in July of 2002. Hanaro announced it is looking to partner to provide a home networking business.

What’s Working

While some factors in South Korea are unique, several keys to success seem to apply globally:

  • Price of broadband compared with narrowband - Broadband must be priced close to narrowband. This appears to be the key factor in encouraging consumers to adopt broadband.
  • Consumer choice - Customers have different needs. Service providers need to provide service packages that fit different market segments.
  • Profitable service providers and content providers - When services have clear benefits, customers will pay for them, creating a virtuous circle with providers. Making it easy to pay encourages impulse purchases.
  • Critical mass matters - Providing a suite of services to communities of interest (for example, on-line gamers) can increase the value to the customer.