will mobile virtual network operators succeed in korea

Will mobile virtual network operatorssucceed in Korea?

Donghee Shin and Sungeun Chung

Abstract

Purpose This study aims to analyze how the mobile virtual network operator (MVNO) market in Koreawill evolve, the opportunities and/or threats of network operators and how the MVNO market will beforged in the future.

Design/methodology/approach This study provides competitive analysis, market evaluation andcurrent regulatory assessment of the Korean MVNO marketplace.

Findings While there are many positive prospects of MVNO in Korea, a series of complicatedtechno-economic issues arise.

Practical implications The current development of MVNO sheds light on the growing challenges ofthe dynamics of industry, regulation and technology.

Social implications While MVNOs continue to flourish in some markets, their diffusion in other regionsis often very limited and continues to drastically decrease.

Originality/value The results suggest a sustainable ecosystem of MVNO and propose an appropriatepolicy to promote MVNO diffusion.

Keywords Mobile virtual network operator, South Korea, Competition, Telecommunications policy,Competitive strategy, Telecommunication

Paper type Research paper

1. Introduction

On December 19, 2009, the mobile virtual network operator (MVNO) bill was approved by

the National Assembly of South Korea (hereafter Korea). This bill took effect in 2010 after it

had been passed by a full session of the National Assembly. The new law obliges the

existing mobile service providers to lend their network to newcomers. With the passage of

this bill, industries are actively preparing to provide the services. SK Telecom (SKT) is to

collaborate with financial firms to launch new MVNO services. Korea Telecom (KT) started to

work with local mobile content developers with a plan to collaborate on MVNO-related

services. SKT and KT hope that their massive subscriber pool and retail networks will allow

them to hit the gold trail of mobile financial services.

However, skepticism is mounting as to whether or not MVNOs will be able to erode the

dominance of the established firms as market maturity makes it hard for them to achieve

critical mass andmake profits. Adopting a new regulatory framework has also been delayed,

fueling uncertainty. With the increasing complexity, a rising question is whether the Korean

market is ready to accept MVNOs and if there is a sustainable business model that would

make the MVNOs viable in Korea, and thus makes positive effects on the economy and

society overall. Despite uncertainty, Korea has been pushing for MVNO adoption in its

telecom market since 2006 hoping to cut mobile tariffs and promote competition. There had

been a rising criticism that incumbent carriers had overcharged their subscribers for a long

time. The government had been struggling in figuring out a strategy to implement a system

that would allow MVNOs to lease capacity on the incumbent networks. This difficulty is

PAGE 48 j info j VOL. 14 NO. 3 2012, pp. 48-67, Q Emerald Group Publishing Limited, ISSN 1463-6697 DOI 10.1108/14636691211223229

Donghee Shin is Associate

Professor and Chair,

Department of Interaction

Science, Sungkyunkwan

University, Seoul, South

Korea. Sungeun Chung is

Assistant Professor,

Department of Mass

Communication and

Journalism, Sungkyunkwan

University, Seoul, South

Korea

Received: 4 October 2011Revised: 23 November 2011Accepted: 5 December 2011

This work was supported by theNational Research Foundationof Korea Grant funded by theKorean Government(NRF-2010-B00171;NRF-2011-330-B00225). Thisresearch was supported by theMinistry of KnowledgeEconomy, Korea under ITRCNIPA-2011-(C1090-1121-0008). This study wassupported by WCU(WorldClass University)program through the NationalResearch Foundation of Koreafunded by the Ministry ofEducation, Science andTechnology (Grant No.R31-2008-000-10062-0).

related to a series of related regulatory, economic and market factors in Korea. There has

been high tension between industry and regulators as well as inertia in the market, which are

related to incumbent carriers oligopoly (Kim and Seol, 2007). Moreover, there is a concern

about recent failures as exemplified by the total closure of Helio in the US market. Helio has

casted serious doubt on the viability of the business model of MVNO in Korea, as they shut

down their business in 2009 after two-years of unsuccessful operation in the US (Informa

Telecoms & Media, 2009).

Globally, MVNO has experienced ups and downs over the past decade. Even a few years

back, the emergence of MVNOs had been considered as the rollout of the next generation of

telecom services. It was predicted that MVNO had disruptive effects on the mobile industry

(Shin, 2010; Kim and Seol, 2007). MVNO was taking significant market share, altering the

supply chain of telecommunications and increasing churn and subscriber acquisition costs

in the mobile markets. It was believed that the MVNO market continued to expand,

contributing to the strong mobile industry growth. Recently, however, the MVNO business

model has proven to be an abject failure in some countries. The MVNOs, which buy airtime

from providers such as AT&T, Verizon and Bell Canada on a wholesale basis, have

disappeared from the North American wireless scene almost as quickly as these companies

appeared (MVNO Directory, 2009).

Against the background of the decreasing trend of MVNO, the rising questions are: why is

Korea enforcing the MVNO policy and adopting the MVNO model? What are the

consequences of adopting such policy? Specifically, which factors will, or will not, make

MVNOs work in the dynamic Korean mobile markets? These questions have become more

noteworthy with the MVNOs dismal records in the Asian market (MVNO Directory, 2009). For

example, Virgin Mobile, which was successful in Western markets, has retreated from its

operation from Singapore in early 2003 after only two-years of failing operation (Merry, 2005).

The Virgin Mobile exit from Singapore was ensured with other failures in Asian countries,

such as Taiwan, Hong Kong andMalaysia. As the Asian MVNOmarket development is not as

visible as in Western markets (Shin and Bartolacci, 2007), the Korean endeavor to adopt

MVNO raises an intriguing question as to whether or not MVNO would succeed in the Asian

market, and how MVNO will play out in the highly saturated and competitively concentrated

market. Against this backdrop, this study forecasts the MVNO diffusion in the Korean market

by assessing the impact of the introduction of MVNO on the market and on society. In light of

the introduction of MVNOs, it is important to study their impact on the competition and on

consumer welfare. This study investigates a set of factors influencing MVNO diffusion in

Korea in order to answer the following questions:

RQ1. What are the background and the future prospectus of the Korean MVNO?

RQ2. What factors will facilitate/inhibit the diffusion of MVNO in the Korean markets?

RQ3. What is a sustainable ecosystem for MVNOs in Korea?

The answers for these questions will produce interesting implications. Previous studies on

MVNOs have shown the factors that facilitate the diffusion of MVNO (Lee et al., 2008;

Shin, 2008; Kim and Seol, 2007; Shin and Bartolacci, 2007). As many studies have focused

on the MVNO phenomenon in western markets, especially developed markets (Dewenter

and Haucap, 2007; Banerjee and Dippon, 2009), the prospectus of MVNO has been

underdeveloped and under-researched in the Asian market (Yang et al., 2005). Thus, this

study will contribute to filling the gap in the ongoing MVNO studies.

This paper is organized as follows. First, the definition of MVNO is briefly introduced followed

by a description of MVNO evolution and of the research that has been done on MVNOs.

Section 3 discusses MVNOs in terms of a techno-economic analytical framework. Section 3

provides an overview of the technical aspects of MVNOs, their integration with the

underlying MNOs and a discussion of the various components of MVNO operations. Section

3 also details the regulatory issues as well as market structure and condition. The next

section discusses the challenges and drivers of MVNO in the Korean market. The final

VOL. 14 NO. 3 2012 j infoj PAGE 49

section draws the conclusions by outlining the findings and suggestions of MVNOs along

with the implications of future studies.

2. Literature review: current trend of MVNOs

MVNO is a mobile service operator that neither has its own licensed spectrum nor the

infrastructure to provide mobile services to its customers (Ulset, 2002). Instead, MVNOs

lease wireless capacity from pre-existing mobile service providers and establish their own

brand names that differ from those of the providers (Shin, 2008). The first commercially

successful MVNO was Virgin Mobile UK, launched in 1999, which now has over 4 million

customers in the UK (MVNO Directory, 2009). Virgin Mobile UK success was replicated in

the US, but ventures in Australia have not been so successful and failed in Singapore

(Informa Telecoms & Media, 2009). It is estimated that there are approximately 360

operational MVNOs worldwide with various models and concepts. The number of MVNOs

has drastically increased since 2006. According to the MVNO Directory (2009), there were

59 MVNOs in western Europe in 2002. That number has grown to 190 MVNOs in Europe in

2006. Western Europe is the largest market with 69 percent of total MVNOs and 65 percent of

total subscriptions, whereas non-western countries are just beginning to launch active

MVNO business models. While MVNOs have succeeded in growing their share of mature

markets, the growth trend is obscured when looking at the global picture. Worldwide

statistics show that the growth of MVNO subscribers has not kept pace with the overall

growth of wireless subscribers.

Back in the early days of MVNO, a group of researchers predicted that MVNOs were totally

poised to be the next big trend. Nowadays, some argue that the MVNO business model has

proven to be an abject failure (Clark et al., 2005). It appears as if 2008 was the year of turning

point for MVNOs as their market share started to decrease. Many people started to question

the viability of the MVNO model. Some critical industry experts argue that the MVNO model

has proven to be a difficult proposition in the hyper-competitive mobile market

(Anderson, 2009). Most MVNOs do not have what it takes to succeed in the telecom

market. New customer acquisition is a game of switchers from one carrier to the other.

MVNOs only fuel this problem and drive churn rates even higher. This will compound the

money necessary to acquire and retain customers. This escalates cash burn rates for

everyone. Pre-paid vehicles and hybrid offerings will only complicate the picture. In

particular, Helio cast further doubt on the viability of the businessmodel in Korea. Helio was a

joint venture between US internet service provider and SKT, but it closed its operation within

less than a two-year dismal record. Similarly, Virgin Mobile has shut down operations in

Australia and Singapore. Voce, Disney Mobile, ESPN Mobile and Ampd Mobile have

disappeared from the US market over the past 18 months. Only major independent MVNO,

Virgin Mobile Canada, has had modest success in Canada largely because of the support

Bell Canada that owns half the venture. Virgin Mobile has had great success largely because

of its knowledge of the UKmarket. Given the decreasing trend of MVNO, a lingering question

is will the MVNO model work or succeed in Asia, particularly in Korea?

Although there were extensive studies on MVNOs in the beginning (Varoutas et al., 2006;

Curwen, 2004; Shin, 2010; Shin and Bartolacci, 2007), few have attempted to evaluate

MVNO after its downturn since 2008. Most early studies on MVNO have predicted a

promising future, dominating the next generation of mobile networks. This study selects

Korea as a case study to make an objective assessment of MVNO, and thus to make an

objective prediction of the future of mobile virtual models. In particular, Korea offers an

excellent case study of such assessment of the MVNO business model in a dynamic

technology environment. Since Korea has been pioneering the development of mobile

technologies and the first country in the world to offer many mobile services, such as digital

multimedia broadcasting, wireless broadband and IPTV, Korea can be the best test-bed for

IT business model and future case studies on diffusing and adopting emerging

technologies. As MVNOs have shown failing record in the Asian market (Shin, 2008), it is

worthwhile to see how MVNOs will take place in Korea and how the country is moving

towards an even more advanced next generation of mobile networks. By evaluating MVNOs

PAGE 50 j infoj VOL. 14 NO. 3 2012

in Korea, this study can locate MVNOs in a wider context that would help demonstrate its

unique contribution to the ongoing policy debates. Thus, this study can be used as a

reference document for policy design and implementation.

3. A techno-economic analysis of MVNOs

Techno-economic analyses are typically used to evaluate the economic feasibility of new

technologies and services (Shin, 2008). Techno-economic methods combine forecasting,

network design and investment analysis methods. Smura et al. (2007) argue that a

techno-economic perspective is a robust framework for investigating the complex

interrelationships of technical and economic processes as the framework takes serious

consideration of technological and social details of telecom. The analysis has made a

number of contributions to our understanding of the interaction between the social and

technical artifacts (Lee et al., 2008). In particular, a techno-economic analysis has been

employed as an evaluation tool for MVNOs (Shin, 2008). With a techno-economic framework

as a theoretical lens for MVNOs, this study investigates the technical subsystem

(infrastructure, equipment, application and service), the social subsystem (market,

consumers, and industry) and the environment (regulation and policy).

3.1 Korean MVNO stakeholders

The emergence and proliferation of MVNOs is not simply a matter of sharing infrastructure

between mobile network operators (MNO) and MVNOs (Yang et al., 2005). This may involve

a more fundamental question of the market condition as the emergence of MVNOs has

revealed two main industry structures in the mobile telecommunications industry: a

horizontally layered (either diversified or consolidated), market-driven structure with a

modular product architecture, and a vertically integrated, walled-garden oligopoly with an

integrated product architecture (Shin, 2008). Thus, the introduction of MVNO is a

complicated technological, economic and political project (Kim and Seol, 2007). On the

industrial supply side, MVNO has three key stakeholders: MNO, MVNO and service/content

providers. On the demand side, consumers, business firms, and market can be important

stakeholders. In between the supply and demand sides, the mobile virtual network enablers

(MVNEs or mobile virtual network aggregators) play roles in coordinating between MNO and

MVNO; and between MVNO and customers. At the strategic political level, governments

establish policies and regulations regarding mobile services including MVNOs. These

stakeholders have different capabilities, demands, interests and positions, and thus play

different roles in the process. Their interactions determine the impact, diffusion and

penetration of MVNOs. The MVNO environment can be seen as an ecosystem, which has

interdependence among the participants and their co-evolution (Figure 1). In this study, four

stakeholders regulator, MNO, MVNO and service/content providers are closely

investigated.

3.1.1 Korea communication commission (KCC). KCC, a statutory independent body of the

government and the nations top telecom regulator, is in charge of telecommunications,

information and communication policies. KCC is responsible for enforcing communication

regulations and service policies. Since its birth at the start of new government

administration, KCC has been credited with establishing the unified regulatory

frameworks and guiding the commercial launch of next-generation services such as IPTV.

Since its inception, the KCCs consistent goal has been enhancing fair competition in

telecom markets and increasing public welfare. In 2010, KCC announced that KCCs top

policy focus this year is to loosen the rules of MVNO policy and to introduce new telecom

operators as consumer-friendly measures. Such schemes will help mobile users utilize

related services with further discounted prices as more players means more competition

(Korea Communication Commission, 2010).

KCC has considered the MVNO option to reduce consumers telecomm expenditure.

MVNOs have been considered as one compelling tool to achieve this goal. Under

government protection, three incumbent carriers have dominated the mobile arena for

decades, but the new government administration seems determined to lower entry barriers


into the market in a bid to fuel competition and price cuts. The government plans to force

incumbent carriers to lease their networks to new entrants that offer telecom services without

the need for owning spectrum license or infrastructure. In this background, KCCs goal to

introduce MVNOs is to stimulate market competition and to generate new revenue streams

through the expansion of data-based services in the industrys transition to 3G or 4G. To

encourage competitiveness to improve the content market structure, the KCC revamps the

open mobile Internet network and galvanizes the wireless resale and MVNO marketplace.

The state-run Korean Information Strategy Development Institute (KISDI) and the Electronic

TelecomResearch Institute (ETRI) began a joint research project to discuss the direction and

phasing of MVNO. KISDI submitted its final White Paper to KCC in November of 2006.

3.1.2 Three incumbent carriers (MNO). The Korean mobile market is served by three

incumbent operators: SKT, KT and LG Telecom (LGT). SKT is the largest mobile service

provider in Korea, with more than 24 million subscribers, which accounts for more than 50.5

percent market share as of 2009. Since its establishment in 1984, SKTwas the first to launch

and commercialize CDMA, CDMA 2001x, CDMA EV-DO and HSDPA networks, and it

currently provides cellular, wireless internet, mobile media and global roaming services. KT

is the second largest provider accounting for 32.2 percent market share and it has

developed extensive overseas operations. KT has more than 1.85 million fixed-line

telephone subscribers and about 1.42 million mobile customers. Both carriers, SKTand KT,

are considered significant market players (SMP). LGT has less than 10 percent market share

and offers a variety of mobile services. In July 2006, the Korean government has cancelled

LGTs business license for a W-CDMA system after the company opted to not develop the

technology. As the smallest of three carriers in Korea, LGT has showed the typical

characteristics of a large-sized MVNO player as LGT has not invested in networks and has

solely focused on signing up new customers. For this reason, LGT has showed a different

approach toward MVNO from those taken by SKT and KT.

The growth of the three carriers has slowed over the past few years because the domestic

mobile market has reached its saturation point with 41 million people, out of a total

population of 49 million, are carrying phones. With a penetration rate of 83.2 percent, the

Korean mobile market has been stagnant (growing on average less than 5 percent per

annum in the last four years). In addition, all three carriers have been suffering uphill

struggles against the demands to dramatically reduce the rates of mobile services. Such

movements have always plagued the carriers over the past several years. Recently, they

have been facing intermodal competitors, such as wireline, broadcasters or cable networks,

Figure 1 Interdependencies in the Korean MVNO ecosystem


and emerging convergent services. The carriers had been struggling to find a new revenue

stream in the mobile market.

Being faced by challenges and pressures, the three carriers have expanded their overseas

business operations; however, all their efforts have ended up with no success. SKT and KT

have avidly tapped foreign countries such as the US, Vietnam and China rather than

dwelling on the saturated domestic market. One of the biggest blows was SKTs Helio in the

US market that turned into a complete shutdown. SKT invested more than $400 million in

Helio in 2006. However, SKTonly got $39 million for Helio when it was sold to Virgin Mobile.

SKT spent $1 billion to buy a 6.6 percent stake of China Unicom in 2007, hoping for a large

slice of Chinas growing mobile market. However, China Unicom has since merged with

China Netcom, with SKTs stake reduced to 3.8 percent. The most recent failure is that SKT

gave up the S-Fone project (global roaming project) in Vietnam wasting a huge financial

resource. The communist Vietnamese government prevented SKT from owning stakes in

local telecom operators and instead only allowed them to work under limited business

cooperation contracts.

In addition, MVNOs preliminary test in the domestic market had been unsuccessful. In

March 2005, KCC licensed three operators (SKT, KTand Hanaro Telecom) to provide Wibro

services. As part of this concession, KCC stipulated that these MNOs must provide

wholesale access to MVNOs for three years after the launch of their Wibro service or until the

total number of Wibro subscribers has exceeded five million subscribers. When either

occurs, the MNOs would be obliged to provide 30 percent of their network capacity to

MVNOs. The goal of this policy was to boost the overall use of the networks and to provide a

wider variety of data-based services in the industrys transition to third-generation mobile

telephony. Several parties expressed an interest in becoming an MVNO, including Kookmin

Bank and long-distance, fixed-line operator Onse Telecom; none of them was successful.

With failures in the international and domestic markets, the three carriers are well aware of

the potentials, limitations and uncertainty that lie ahead for MVNOs in Korea.

The strategies of SKT and KT towards MVNOs differ based on the customers they target.

Their plans can be predicted as in the following four scenarios:

1. Launch or joint-venture an MVNO to target a specific customer niche where the brand of

the MNO is weak (e.g. SKT-credit card firms, games and comics).

2. Acquire MVNOs in the domestic market to gain access to a customer segment to which

the MNO brand was not appealing (e.g. KT-mobile content developers and Kyobo book

stores).

3. Avoid competition on the basis of price by competing in terms of customer service or

offering value added services that MVNOs will struggle to replicate (e.g. LG, large-sized

MVNO player, LGT-Interpark and online retailers).

4. Respond to the threat of new competition by cutting prices based on knowing that the

MVNOs are constrained in their ability to compete for price by the terms of their wholesale

deal (e.g. BankOn and MusicOn).

3.1.3 Non-telecom firms. Multiple companies of different sectors, ranging from banks, credit

card firms and retailers to cable television networks, are interested in offering some sort of

mobile services in time for the debut of MVNOs. Potential MVNOs will ideally engage with

MNO in the hope of creating competition for their wholesale business that should result in a

better deal. The Korean mobile resale market has drawn keen interest from numerous

companies, especially banks and retailers that have wide sales channels. Among them, four

companies and associations have so far expressed serious interests Korea Federation of

Banks, Korea Cable Telecom, Onse Telecom and a consortium of small- and medium-sized

telecom service resellers and retailers. In selecting the potential network partner, the MVNO

should choose a host network with whom it is most likely to be able to establish a win-win

agreement.

Shinhan Card, the countrys biggest credit card firm, is considering providing mobile-phone

services as a MVNO. Also, BC Card is seeking to become an MVNO as they look to hit the


gold trail in mobile payment, while retailers such as Shinsegae are also reviewing whether or

not MVNOs could be an effective way to squeeze more profit from their nationwide networks.

Fixed-line operator Onse Telecom advances into the MVNO market with specialized content

and lower prices. Another interesting MVNO candidate is Hyundai Motors, the countrys

largest carmaker, as it could opt for developing its Mozen telematics services that integrate

computing and mobile communications in automotive navigation systems into an MVNO.

Banks will be classified as full MVNOs, enhanced service providers or service providers,

depending on the trademark rights and proprietorship they hold. Launching the service is

estimated to cost each bank from $212 million up to $600 million. Kookmin Bank, now

running a profitable mobile-banking service, has recently put together its own research team

to explore the companys business potential with full MVNOs. The credit card firms

aspirations of KTand SKTare reflective of the strengthening trend of convergence between

the telecommunications and financial services industries. BC Card and Hana Group

combine for about 50 million credit card customers, while also providing a massive sales

network. MVNOs buy traffic, or wholesale minutes, texts and data from KT and SKT, and

resell it to their customers under their own mobile service brand.

While financial service and retail industries are interested in data and non-phone services,

cable television operators are looking to compete with the existing carriers in the voice

market. Major cable system operators, such as CJ HelloVision, T-Broad, HCN and CNM, are

under discussion to chart their strategies for possible mobile telephony services and to also

form a unified front against telecommunications companies to improve their conditions for

entry into voice services.

These proactive movements reflect a growing interest among non-wireless companies to

leverage their brands to offer wireless services to specific consumer segments. However,

the complexities and costs of starting a wireless business strictly limit the number of brands

that have the resources and scale.

3.1.4 Content developers and service providers. Mobile content developers want to provide

games and comics to mobile carriers. Content developers want to focus on specialized

services and competitive pricing plans in order to be competitive in providing MVNOs. For

example, e-books seem to be driving the MVNO debut. Kyobo Book Store, Koreas largest

book retailer, is in talks with KT to introduce a wireless service allowing subscribers to

download books, magazines and newspapers via e-book readers. Entaz, mobile content

developer, became an MVNO in 2010. Entaz has signed a memorandum of understanding

with KT, which will collaborate with Enatz on MVNO-related issues. Interpark, an online

retailer, is talking with LGTover the possibilities of launching an e-book MVNO. BankOn and

MusicOn are moving into MVNO business. BankOn is one of the most popular Mobile

banking services in Korea, and MusicOn is an on-line music store. The countrys first- and

second-ranked conglomerates Samsung Group and Hyundai Group are also eyeing the

resale business that gives companies a foothold in mobile markets.

Small- and mid-sized telecommunications companies, such as Enex and Onse Telecom,

plan to provide specialized voice services as MVNOs. The smaller telecommunication firms

believe they can find their niche by targeting specific groups of customers. Specialized

wireless services for underage students, senior citizens or expatriates are likely to debut.

These firms plan to better protect customer data and provide a more stable service through

their mobile banking services directly administered by the operating banks. Cable operators

are looking hard into ways to profit from the telecommunications market as MVNOs. Such a

move allows companies to borrow the networks of telephony operators and to provide their

own services. The cable television sector was pressing the KCC to adopt the MVNO policy,

seeking to advance into wireless voice and data services.

In addition to domestic entrants, the adoption of MVNO is expected to pave the way for

foreign operators to enter the Korean market without their own infrastructure and allocated

radio frequencies. With the introduction of MVNO, Korea will become the ideal venue for

meeting the needs of foreign companies to test cutting edge technologies and services

without triggering high start-up costs.


3.2 Technical considerations of MVNOs

There are no technical considerations of MVNOs as they are feasible on any network or

network technology. Nevertheless, there are some technical issues that might impact the

MVNOs service management, the availability of handsets and other devices and its service

offerings. MVNO service management comprises customer enabling, customer service

variation, customer assistance and billing (Smura et al., 2007). In practice, MVNOs can do

as much or as little of these as they wish, subject to the willingness of the underlying operator

to provide control access to these functions. In selecting a host MNO, MVNOs will consider

both the accessibility of the host MNOs service management system, as well as the MNOs

reputation in this area (Dippon and Banerjee, 2006). A significant selling point of mobile

services is the range and type of handsets offered. Thus, MVNOs might want to consider

selecting a host network technology that is generally supported in the country where it

wishes to operate. For instance, GSM dominates much of the European markets, and thus

may be the prudent of choice for a European MVNO. In Korea, on the other hand, CDMA

handsets are widely available and can offer an additional technical alternative to MVNOs in

the country. Finally, considering the various technical aspects, MVNOs must carefully select

the desired network technology. Depending on the type of service offered and the level of

competition in the market place, MVNOs may want to select a GSM, CDMA or another

network. For instance, if push-to-talk is of importance to the MVNOs strategy, then GSMmay

be the preferred network. Alternatively, if one technology is least represented in the Korean

market, then MVNOs may be able to negotiate more favorable wholesale access deals.

3.2.1 MVNO technological components. As Figure 2 shows, the main operational

components of the MVNO model consist of the access network, the core network, the

service platform, pricing and billing, customer care, and marketing and sales. The access

network consists of the base stations and transceiver equipment that provides access to the

spectrum. MVNOs are required to use the access network of at least one MNO because they

do not have spectrum licenses. Typically, MVNOs have access network agreements with one

or two MNOs. The core network consists of switching and transmission, home location

registers, intelligent network platforms, and so on. The service platform covers the activities

and equipment used in the design and provision of services, while billing and pricing

implement the pricing policies and billing options. Customer care encompasses all activities

related to after-sale customer care, and marketing and sales include product and service

marketing activities, sales operation, and customer acquisition activities.

3.3 Regulatory issues: Korean competition policy

Since the introduction of competition into the Korean telecommunications market in the

1990s, the entry of several mobile and fixed network operators is a main driver of rapid

development of the telecommunications industry, such as mobile telecommunications and

Internet industry (Kim and Seol, 2007). However, until recently, competition has been based

on investment in telecommunication network facilities such as radio frequency, base station,

Figure 2 The MVNO structure


switching system, etc. Such facility-based competition policy has made the carriers

concentrate more on marketing strategies such as gigantic advertisement, excess cellular

phone subsidy as well as investments to enlarge their networks, rather than competing for

price and service quality. While the facility-based competition was effective and useful for

early mobile market fast growth, competition for price and service quality is more important

in the maturity stage of the Korean mobile market. Korea has attempted to increase

competition in the mobile market in order to enhance service quality and to decrease prices

using service-based competition policies such as MVNO and indirect access services. The

government believes that MVNO would enable carriers to provide various converged

products that customers can certainly benefit from at lower prices, so that the competition in

the Korean telecom market can lead to providing cheaper but high-quality services to

customers.

Against this background, KCC had sought ways to use the advancement of networks and

technologies to lower the entry barrier for new companies looking to scale the

telecommunications industry since 2004. The KCCs policy to encourage competition,

ensure level playing field and maintain technology neutral stance has had a significant

contribution to the success story of the telecom sector. To maintain such exponential growth,

the challenge is to optimally utilize the available resources while still ensuring competition

and availability of services at affordable prices. KCC requested its policy research arm, the

KISDI, to investigate the possibility of the MVNO model in the Korean market. In 2005, the

KISDI report suggested that KCC should require incumbent operators to improve the

openness of their fixed-line and wireless networks and to introduce MVNO policies. In line

with this initiative, KTF and LGT asked the government to allow them access to the 800

megahertz band as a MVNO, which means that they could buy airtime from SKT and resell

services, should the government adopt the system. In response to this request, the first

official attempt of MVNO came out when Wibro was developed in 2006. Wibro was a

portable Internet service that allows different operators to offer various mobile services to

subscribers. KT, SKTand Hanaro Telecom were selected as the Wibro providers. In order to

enhance the competition, KCC prepared and finalized basic guidelines for introducing

MVNO to the country using the Wibro market. According to the guidelines, MNOs would be

required to provide 30 percent of their capacity to MVNOs. Cable operators were interested

in getting a slice of the telecom market and they preferred providing wireless services as

MVNOs. Naturally, KTand SKTwere not in favor of the idea because the model could reduce

their presence in the mobile market, although it may eventually increase the number of

mobile-data customers. KT and SKT argued that allowing other firms to provide the Wibro

service would deter the development of Wibro into 3G services. KTand SKT together argued

that the government should limit itself in securing fair market competition, rather than

adopting the MVNOmodel or forcing the separation between network operators and service

providers. KT and SKT also requested the KCC to provide incentives to the operators

investing in Wibro and in other mobile networks in order to reduce their risk. This plan ended

up in smoke without further action due to fierce opposition from MNOs.

After Wibro, establishing MVNOs in Korea has been extensively discussed since July of

2006 when KCC announced the revised electrical communications business laws. The views

of regulators towards MVNOs had varied significantly during the period from 2004 to 2006.

There were conflicting views even within KCC. KCC was considering whether or not (and if

so to what extent) regulatory intervention, including regulating access price and conditions,

is necessary. There had been arguments both for and against regulating MVNO. Those in

favor of the regulation argued that the MNOs control the available mobile spectrum, and this

control is a bottleneck facility and an entry barrier for the new mobile network operators.

Moreover, mobile network operators are less likely to provide MVNO access, unless it is a

regulatory requirement. They maintain that regulating the mobile market is failing, which is

another reason why MVNO regulation maybe a good idea. Mobile operators have very high

profit margins of 25 percent, in some cases significantly over costs. The current regulation,

as interpreted by some national regulatory authorities, already gives mobile operators the

power to enforce an access obligation on existing operators. On the other hand, arguments

against regulatory intervention are based on the fact that the benefits of MVNOs have not yet


been unproven, and that there is inadequate evidence that market failure has occurred. The

mobile market is competitive by nature and therefore does not require regulation. There is no

industry consensus that MVNO access is necessary, and the bleak possibility that MVNOs

could even discourage investment in 3G mobile networks. Anti-regulatory intervention

stances also argue that regulatory measures such as indirect access or 3G networks will

improve the competitive situation. The arguments were suddenly closed in MVNOs favor in

2008 when the new government came to office because the new governments key agenda

was to revitalize the economy by enhancing industry competition.

Conforming to the governments policy, KCC announced the revised electrical

communications business laws. The revision enabled businesses without any

frequencies to provide the same form of services as mobile communications companies,

and this provided a foundation for the establishment of MVNOs. The revision is aimed at

revitalizing the reselling services of the landline and wireless telecomm industries. A market

reshuffle is expected in the mobile industry after the banks, which have over 7,000 local

branches across the country, take a bite of the reselling service market share. This revision

also signified the possibility of establishing MVNOs that can perform reselling, as well as

provide charged and additional services. Subsequently, the discussion on establishing

MVNOs has been actively taking place in many industrial groups. The wired

communications companies, Onse Telecom, the Korean Cable TV Association, the

Federation of Small and Medium Communications Companies and the Korean Federation

of Banks have all directly and indirectly let their intention of establishing an MVNO be known.

In particular, Onse Telecom has been the most proactive by lobbying the National Assembly

to pass the law obliging incumbents to open their networks. In addition, wired Internet

portals, content providers and companies related to automotives, medicine and insurance

are discussed as future participants in the Korean MVNO market.

At first, the KCCs plan for MVNO faced severe resistance from SKTand KT. Since the plan is

targeting the significant market players that possess 50 percent or more of the

communication market, this MVNO policy directly targets SKT and KT. SKT currently takes

up more than 50 percent of the mobile communication market and KT takes up 90 percent of

the broadband market as the most powerful broadband provider. With the plan, customers

would be able to sign up for wireless telephony services provided by MVNOs at very low

monthly rates. Of course, other firms who plan to access the networks welcomed the plan. All

three incumbent carriers (SKT, KT and, to a lesser extent, LGT) have very little incentive to

host MVNOs because MVNOs would facilitate additional competition, cannibalizing their

own customer base.

SKT was the most skeptical about the entrance of MVNO arguing that the model was

successful abroad mainly because there were two or three players and the average revenue

per user (ARPU) was high, so they could still make margins. Later KCC offered to host an

MVNO as the host MNO gains all of the wholesale revenue, but bares none or only some of

the pain of additional competition. Once SKTand KTrecognized that all other operators have

an incentive to host MVNOs, it became rational for them to host an MVNO as well.

Amid hot debates and severe oppositions, KCC and KISDI plan to jointly hold several public

hearings to help find better options regarding mobile charges. Civil groups and the

government called for lower mobile phone charges and for investments in telecom-related

infrastructure. The Chairman of KCC has asked the mobile operators to lower call charges as

the country has one of the worlds most expensive mobile charges. Despite the series of

public hearings, the telecom carriers would not follow through with the KCC plan due to

worries over profits. The carriers argued that the chances of success are very low in Korea

because the telecom market is almost fully saturated and concentrated. Even if MVNO is

allowed in the market, government intervention is unnecessary because the market is

already competitive. Non-telecom firms counter-argued that the market is concentrated

because of oligopoly of the mobile market. Despite oppositions from the incumbent carriers,

KCC submitted a revision of the communications business bill in January 2007 that would

oblige dominant telecom firms to open up their networks to latecomers. SKT was finally


forced to agree to interconnection and to announce its access tariffs after KCC requested

arbitration as interconnection negotiations failed to make satisfactory progress.

After almost three years of debates and assessment, on December 13, 2009, the National

Assemblys committee on broadcasting and communications voted to pass the bill of a

revised telecommunications law that included provisions on the introduction of MVNOs. On

December 19, 2009, the MVNO bill was officially approved by the National Assembly of

Korea after long battles. The bill obliges the three existing mobile service providers to lend

their network to newcomers. SKTand KTwould be subject to the law as they are considered

significant market players.

3.4 Market and consumers

The Korean telecom market is at the forefront of shaping disruptive digital media-related

technology as evidenced by recent digital technologies, such as broadband, Wibro, DMB,

IPTV and high-speed downlink packet access. The Korean telecom market has great

potential as consumers are less resistant to new IT products and they are highly receptive to

new ITservices. Large parts of the population are considered as early adopters to high-tech

innovations (Korea Communication Commission, 2010). Korea has already come far, being

one of the worlds leading countries in IT with one of the highest levels of broadband

penetration (International Telecomunication Union, 2007). Wireless technology has rapidly

been advanced from 3G to 3.5G in Korea. While new and better technologies were

emerging, wireless companies were merging with one another to form larger and larger

companies. Korea aims at becoming one of the worlds best telecom nations and at

providing the highest-quality, cutting-edge services anytime, anywhere, with any devices.

However, as the Korean telecom market has been extremely saturated, telecom operators

are struggling to find a new way of providing customers with more appealing services that

are in line with the global trend of fixed-mobile convergence (Kim and Seol, 2007). The

crowded Korean telecom market provides thin profit margins with a number of service

providers competing head-to-head. More than 14 million out of the overall 15.9 million

households are currently connected to the high-speed Internet, the worlds best penetration

rate. The number of fixed-line telephone subscribers stands at over 23 million, outnumbering

that of households. Approximately 42 million, among a total population of 49 million, carry

mobile handsets, and this means that there is hardly any more room for new sign-ups. In this

climate, the growth rates of telecom companies, which once enjoyed impressive gains in

both sales and profits, have slowed over the past few years (International Telecomunication

Union, 2007).

The expansion of traditional market segments was restricted by the limited availability of the

wireless spectrum. Moreover, MNOs were under pressure to recover the high costs of rolling

out 3G services. As wireless service providers offered increasingly larger coverage areas,

competition among them also increased. On the regulatory side, KCC introduced the mobile

number portability that has lowered competition barriers and, together with the recent

convergence of communications technologies, greatly expanded customer alternatives to

traditional voice services by enabling intermodal competition to cable, wireless, Internet and

broadband providers.

Facing the harsh reality of the domestic market, the carriers have been going all-out to make

inroads into foreign countries as the domestic market shows clear signs of reaching a point

of saturation. SKT had been the most aggressive in tapping into foreign destinations. KT is

more cautious in wading overseas with their international endeavors, and it involves smaller

investments than SKT. Both carriers very well understood that new cash cows have to be

discovered outside the national borders in the new era of globalization, rather than just

locally expanding their business horizons. Although all carriers have showed different

approaches in seeking global opportunities, they shared a sense of urgency about

international operations. However, their efforts of reaching offshore markets have all ended

up being failures after a few years of struggle. One of the reasons may be that the carriers

have ignored different market conditions of the domestic market, which is represented by

the uniquely strong favor of new technologies and services. The Korean telecom market has


been characterized as being a very unique market and a highly technology-receptive

market.

Along with its market, the Korean consumer embodies unique characteristics as well.

According to Korea Communication Commission (2010), the majority of the telecom

consumers are young: almost 19 percent are fourteen years old and younger. The median

age 33 years today is expected to climb to 43 by 2030, but currently over 60 percent of

the population is under 27, and displaying all the characteristics of young consumers. The

Korean consumer has never been better off in terms of purchasing power. Koreans are

among the worlds most computer and telecommunications literate consumers. While in

2009 there were more than 28.5 million landline telephones, there were also more than 39.5

million mobile cellular phones. In the same year, there were almost 45 million Internet users,

representing 72 percent of Korean households (72 percent by 2006), and being served by

more than 5.4 million Internet server sites (Chua, 2008).

The number of mobile connections in Korea reached 44.27m at the end of March 2008,

which is hitting a 90 percent penetration rate. In one respect, competition has increased in

the Korean market: both SKTand KT recorded their highest ever monthly churn rates, while

LGTsaw its highest rate since January of 2007 (Figure 3). KTs March 09 rate of 5.2 percent

was 2.1 percent higher than that of March 08, while LGT was up by 0.6 percent, to

4.5 percent, and SKTup 0.4 percent, to 3.6 percent. These churn rates may be related to the

mobile number portability that the Korean government has enforced since 2007. Both SKT

and KTF saw gross monthly additions top 0.9m and gross monthly disconnections top 0.8m

for the first time ever, while LGTsaw its highest ever figure for gross monthly disconnections

(0.35m) and its second highest for gross monthly additions (0.40m). Given these figures,

Korean mobile customers are clearly becoming more and more fastidious as they switch

between operators at unprecedented levels.

3.5 Economic indicators

There has been a number of studies on the factors contributing to the diffusion of MVNO. For

example, Shin (2008) researched the correlations of market structure and MVNO diffusion.

He selected a set of indicators that characterized market structures that include: the degree

of vertical integration, the degree of liberalization, the degree of concentration and the

degree of competition and ARPU. Applying this set of factors to the Korean market and

comparing them with the ones of other MVNO markets can yield important implications.

Table I shows each figure of the latter factors in Korea, which are compared to the figures of

the EU and the US.

Figure 3 The Korean monthly churn rate, 9 January-9 November


The degree of concentration in the wireless telecommunications industry, as measured by

the Herfindahl-Hirschman Index (HHI), shows that the Korean market is highly concentrated,

and this negatively influences the diffusion of MVNOs. On the other hand, carriers

performance, which is measured by ARPU, shows that the Korean carriers have been

performing quite well compared to those of the US. The Korean market is more vertically

integrated, but less segmented than those of the EU and the US. The Korean market shows

lower competition rate and lower liberalization than those of the EU and the US. The factors

of such figures generally imply bleak prospects of the MVNO in the Korean market. Although

the full model of market structure is not explained here, individual factors show that the

Korean market is not yet mature for MVNOs.

It may be useful to simulate Korean MVNO by comparing to similar market structure and

market statistics. While Shin (2008) uses six indicators of market structure (above), Lee et al.

(2008) use indicators of competition, mobile penetration, 3G mobile penetration, and mobile

growth rate. Combining the Shins (2008) indicators and Lee et al.s (2008), groups of

markets can be identified based on the indicators by using cluster analysis (Figure 4).

Based on these indicators, Korean market can be similarly profiled along with Japan, Italy,

Ireland, Czech Republic, Finland, Italy, Denmark, and Switzerland in terms of market

structure and performance defined by Shin (2008) and Lee et al. (2008). These markets

status of MVNO and MNOs are shown in Table II. Figure 5 shows the longitudinal changes of

MVNO subscribers in the selected countries and Korean subscribers are estimated based

on the indicators.

The selected seven countries are ranged from 0.5 million to 3.2 million. In prediction, future

Korean MVNO market can be projected around average figures of Italy and Finland. Based

on the figures, the number of Korean MVNO subscribers can be roughly expected to be

Table I Factors related to MVNO diffusion

HHI Vertical integration Liberalization Segmentation ARPU (%) Competition

Korea 3,186 0.42 0.54 0.56 42.54 0.53EU average 2,482 0.23 0.86 0.93 49.91 0.73The USA 1,337 0.29 0.74 0.84 48.4 0.81

Sources: Shin (2008); International Telecomunication Union (2007)

Figure 4 Results of cluster analysis


about 2 million from 2011 to 2012, although this number cannot be mathematically proven.

Given the trends of other market though, Korean MVNO performance will not likely much

different.

4. Challenges and drivers of MVNO

Introducing the MVNO to the Korean telecom market sheds light on more dynamic

challenges than it did in other countries. The case analysis exemplifies some of the more

adverse effects of the introduction, and it implies that deploying an MVNO involves multiple

streams of fast-moving, complex and inter-dependent activities. Figure 6 shows their

dynamic interactions, including technology, service, market, regulation and consumers.

MVNO in Korea has been pursued in a hasty fashion, leaving many other important issues

either completely untouched or underdeveloped.

Although the government has high hopes that MVNOs will provide further impetus to the

countrys economic growth, it seems that market and consumers demand has not been

compelling enough to meet these expectations. The government and industry took several

years to design a plan for MVNOs in Korea, but the mobile market has failed to live up to

expectations. Despite several initiatives, there is currently no overarching policy on MVNOs.

This developmental process leaves much to consider. The market and consumer aspects, in

particular, have been neglected in the policy making process. Consumers, who may be the

most important stakeholders in the telecom market, are left out of the loop, which raises a

significant problem. Mobile users can expect a sharp fall in tariffs and access to a range of

Table II Status of MVNOs and MNOs in the selected markets of similar to Korean market

MVNO subscribers (million)Country No. of MVNOs No of MNOs Ratio of MVNO to MNO 04 06 08

Japan 4 5 0.8:1 0.8 0.7 0.8Italy 4 6 0.6:1 1.9 1.8 1.8Ireland 10 4 2.5:1 2.8 2.9 2.7Czech Republic 4 3 1.3:1 1.2 1.2 1.1Finland 8 4 2:1 2.2 2.1 2.0Italy 5 5 1:1 1.9 1.6 1.9Denmark 4 4 1:1 3.1 3.0 3.0Switzerland 3 4 0.75:1 2.8 2.6 2.5

Source: Informa Telecoms & Media (2009)

Figure 5 MVNO subscribers in selected countries comparable to Korea


sophisticated services with MVNOs. The main reason for the MVNO model, according to

industry players, has been to generate new revenue sources and increase profits for the

industry. It is unclear whether or not MVNO will significantly increase competition and lower

telecom costs, and thus improve public benefits. To achieve these goals, there seem to be

more barriers than positive factors.

The fundamental weakness of the underlying MVNO is its business model: it only works for

niches where the network operators are not prepared to venture in a particular moment of

time. This will be a significant difficulty for the upcoming MVNOs in Korea as the market is

highly penetrated or saturated, and thus the lack of economies of scale when compared to

large MNOs. Long-term survival in these circumstances crucially depends on a value

proposition that starts with being able to identify or develop the most profitable niche

markets. Only then can MVNOs expect to produce sufficient revenues to remain in business

until they achieve economies of scale. Realistically, developing specific niche is very difficult

in the Korean market, which is assumed to be competitive, and mobile subscription

penetrations are already at a mature level of 93 percent, growing 2 percent annually.

Therefore, the majority of the MVNOs customers are assumed to be acquired from other

operators.

MVNOs could focus on data services, such as location-based services, but this can be also

challenging given the experiences of western markets. In Korea, not all MVNOs get fair

negotiations with MNOs, and this raises significant entry barriers for small MVNOs aiming to

Figure 6 Dynamics of Korean MVNO market


offer complex value-added services. MVNOs will face an increasing threat of competition

from new MVNOs and large carriers. Even worse, the MVNO model is self-destructive: the

more successful a MVNO becomes, the more appealing the niche becomes to the network

operator to target. Any network operator has a huge cost advantage over any MVNO, and

therefore will ultimately win. This concern is more true to the Korean telecom market where

the influence of network operators is so dominant.

4.1 Specific barriers to the Korean MVNOs

The advantages of MVNOs, in theory, were supposed to outweigh the competitive threat.

The recent cases in other global markets show that MVNOs have fallen far short of success

for the most part (Informa Telecoms & Media, 2009). Korean cases do not seem to be an

exception to this trail for a number of reasons:

B The cost of a voice minute has sharply dropped, making it harder for MVNOs to resell the

minutes or make the resold minutes profitable. There is doubt about consumer demand

for a data-centric MVNO in Korea. Theremay be a day whenMVNOs can build a business

based on offering data service. Data may very well eventually overtake voice in terms of

money spent, but Korea is nowhere near that point in time. Data use and uptake is slowed

by numerous issues, including the availability of quality content. Capitalizing on MVNOs

brand reputations from outside telecom to identify or develop profitable niche-market

segments with telecom can be challenging.

B The operational costs are high and margins are slim. MVNOs have to buy content from

providers, paying fees to a carrier. All MVNOs are middlemen with slim margins, a

problem compounded by the fact that MVNOs have small addressable markets. The

Korean MNOs are aggressively targeting first-time subscribers to drive growth, and these

circles exhibit signs of highly competitive markets. In such a scenario, the existing MNOs

in Korea, who have dominated the market for so long, are very unlikely to pull back from

the retail market or from specific customer segments and adopt a wholesale model.

MVNOs introduce new and innovative services in order to differentiate themselves from

their competitors, including the large, national MNOs. To do this, they must develop

innovative business models and service offerings that target specific demographic

groups and underserved consumer segments. However, as niche services become

mainstream, and as the early advantages of product differentiation are dissipated,

MVNOsmust continually introduce new features and services in order to stay ahead of the

game.

B The market is not mature enough to adopt the MVNO, which is a mature market

phenomenon catering to the unmet needs of customers in highly penetrated and

concentrated markets. To date, MVNOs have only had significant presence in the

developed markets of North America and Western Europe. It seems that the Korean

market is not yet ready to see a full launch of MVNOs. As mobile markets mature, there will

be an opportunity for several companies with strong brands and loyal customers and

those with extensive distribution infrastructure to offer their own brands of mobile

communication services. However, most of these companies neither have the wireless

expertise nor the risk appetite to make significant capital outlays for the wireless

business. This challenge is related to long-term dependency on, and relationship with,

MNOs. Securing, negotiating and maintaining wholesale contracts that are consistent

with financial viability may not be easy. Even after negotiating such contracts, it can be

challenging for MVNOs to capture and retain enough market share if their host MNOs or

other MVNOs decide to focus on the same market segment as they do. To facilitate a

cost-effective and rapid deployment of such services, a class of MVNE that acts as

intermediaries between multiple MNOs, handset providers and back-end platform

providers on one hand, and potential MVNOs on the other, may emerge. MVNEs could

dramatically reduce time to market and lower the risk profile of launching an MVNO.

Unfortunately, MVNEs will not be likely to rise and survive in the immature Korean mobile

market.


B Related to the above issue, the industry and market structure is not aligned with MVNOs.

According to Shin (2008), the MVNO diffusion and penetration are closely related to the

horizontal and vertical market structure. Shin (2008) showed in his study that the diffusion

of MVNOs has revealed two main industry structures in the mobile industry: a horizontally

layered, market-driven structure with a modular product architecture, and a vertically

integrated, walled-garden oligopoly with an integrated product architecture. As

historically shown, MVNO services are much more successful in western countries than

they are in Asian countries (Shin and Bartolacci, 2007). A horizontally layered structure

seems to be more inviting because of the complexity of MVNOs. The ability of MVNOs to

offer services will be severely constrained if MNOs are in a position to charge

monopoly/oligopoly prices for their services. Because MNOs are in Korea vertically

integrated into the competitive telecom markets, they have incentives to limit access to

the facilities required by competitors through the imposition of prices, which make it

unprofitable for MVNOs to enter the market and to effectively compete for customers.

While the Korean market may exhibit some of the characteristics shared by markets with

MVNOs, it would be premature to conclude that MVNOs can enter and operate profitably

in these circles in the near future.

B Another survival challenge for MVNOs in Korea and a source of new opportunities as

well is the ongoing drastic process of convergence and intermodal competition in the

expanded communications industry. The ability to offer a combination of voice, video and

data over any one of several alternative platforms has become the aspiration of traditional

networks and service providers and even MVNOs. With convergence in Korea, MVNOs

are likely to face stiff competition from outside the mobile sector as well, particularly from

cable and fixed providers that offer converged services. However, convergence can also

work to the advantage of MVNOs in certain strategic relationships. As similar converged

services are introduced to the communications markets, fixed- and cable service

providers will themselves likely seek opportunities to become MVNOs in order to further

increase the demand for such services.

B Amongst other factors, the regulatory policies governing the entry and operations of

MVNOs could have the highest impact on the economic viability of MVNOs in Korea. A

crucial factor in the development of MVNOs in Korea is the regulators position on

potential MVNO entrants and their MNO hosts, that is, how to find an optimum regulatory

point between mandatory open access and strict prohibition. Resolving several

regulatory issues and open questions would be the essential first steps towards the

introduction of MVNOs in Korea. Several regulatory issues could directly impact the

launch timing, scale and scope of MVNOs in Korea. The regulatory challenges

surrounding MVNOs in Korea are considerable, and they will require concerted actions

by several key stakeholders. The Korean telecom industry has unique characteristics that

add complexity to the regulatory task. The absence of a clearly defined regulatory

framework acts as a significant impediment. Current regulation of MVNOs has not yet

been established.

The MVNO development in Korea can be seen as a part of ongoing telecom innovation

among diverse players with different interests. MVNO development so far seems to be the

outcome of stakeholders conflicting interests. The findings of this study shed light on a

practical and important implication: telecom service is as much a concerns for social and

political dynamics as it is for technological and economic development. The MVNO case

clearly illustrates the implication that telecom innovation is differently viewed by different

stakeholders. The meaning of telecom innovation in Korea constantly evolves and

transforms, with inherent uncertainty and interests among different actors. Innovation is

in-making as it traverses the actor network, acquiring different strategies and being

transformed as new actors enter into the network. The MVNO development in Korea shows

dynamic technological, political and economic interactions among the actors in the network,

newly created by various actors who are trying to have more hegemony over convergence

services. Notably, the Korean case shows that the barriers to achieving full competition and

public welfare through MVNO are not merely a function of the perceptual flaws in regulatory


measures or the shortcomings of the industries involved, but they are due to political

circumstances of reaching compromise.

5. Conclusion and future work

This study examined the Korean context of adopting MVNO, including technology

innovation, application development, operators strategies and regulatory influences. This

study also assessed the technological feasibility, profiled the market and consumers and

surveyed the telecom regulatory environment by analyzing the profiles of key regulatory

agencies and by summarizing the current issues and conflicts. The analyses confirmed

previous claims made by other studies that the MVNO innovation will require close

cooperation and understanding among stakeholders, including the government, telecom

carriers, manufacturers, service/content providers and consumers (Banerjee and Dippon,

2009; Smura et al., 2007; Shin, 2008; Kim and Seol, 2007). To take full advantage of MVNOs,

considerable amounts of well-concerted coordination are necessary among the network

owners, the delivery medium operators, mobile content providers, handset manufacturers

and governments. This study further identified a series of newly emerging conflicts as the

MVNO continues to progress; forecasted conflicts that might arise in the near future; and

devised an effective resolution mechanism through conflict management. As MVNOs have

introduced new high-quality niche services, complex and multi-faceted conflicts among

stakeholders have surfaced. Against this background, a key challenge is to develop

reasonable policy based on stakeholders participation.

Techno-economic analyses imply that MVNO will likely continue to be economically elastic,

technologically complex and socially and politically sensitive. Economically, MVNOs involve

numerous firms, legal entities, industries and consumer groups about issues like ensuring a

more efficient use of spectrum. Technologically, MVNOs accelerate cognate technologies of

infrastructure, applications and services evolving toward the next generation of mobile

technology. Techno-economically, the advancement of MVNO defies the current regulatory

structure, destructs the current markets and gradually introduces new structures to the

market, industry and regulation. Socio-politically, MVNO creates social and political issues

like universal services/access and consumers rights relating to telecom networks and

services (such as mobile number portability). Given these complexities, the reality of the

situation does not suggest an optimistic picture for the full success of MVNO despite the

over-hyped forecasts and prospects. Because of the absence of strategic integration

among regulators, telecom carriers, manufactures, service providers and the market, the

prospects for the success of MVNOs have been somewhat overestimated, and the potential

disruptions and uncertainty have largely been sidelined. Many hyped expectations and

inflated projections such as when it will succeed, what impact it will have and how large will

be the revitalizing economic effects be through increased competition all depend on the

dynamics of techno-economic system components. The Korean telecom policy process, in

particular that of MVNOs, requires more careful strategic regulation and detailed action

plans.

The findings from the techno-economic analyses imply that the further development of

MVNOs in Korea is likely to comprise multiple stages, predicated by several significant

events, including the deployment of telecom infrastructure, the resolution of content issues,

the stabilization of standards and the introduction of new regulatory frameworks. Given

these challenges and potentials, it is critical for players to establish the proper technological

evolutionary path and to forge relationships with the right services, applications and content.

Just as with other telecom technologies, MVNOs may not be successful as stand-alone

technological services, business models or autonomous entity.

Apart from some of the traditional rationales of government intervention, this study argues

that governments should intervene on the basis of regulatory and economic goals. It is

reasonable to expect that the development of MVNO will be primarily driven by market

forces. However, there are general reasons why the development of MVNO requires

government intervention, given the unique circumstance of the Korean market. As the

diffusion of MVNO involves a more fundamental question of complex techno-economic


innovation, the development process can be market-driven, but at the same time, the

coordination among players is essential, and clear public-policy action to coordinate players

is desirable when such coordination or negotiation is not going well. Regulators may

maintain a watchdog position; that is, they carefully continue to monitor the interactions

between MNOs and MVNOs. Another proactive approach to MVNOs and their operating

framework in Korea could help address additional issues raised by expected trends. This

study suggests the following guidelines to make the MVNO in Korea successful and more

effective:

1. Ensure that the policy interventions carried out to secure and accelerate MVNO are

transparent, justified, proportionate and non-discriminatory.

2. Clearly lay down defined policy objectives to ensure the deepest possible penetration.

3. Consider an asymmetric regulation or a segmented approach in MVNO.

4. Ensure market transparency to structure all available offers from MVNOs and MNOs on

the market with objective price comparisons.

5. Given the SMP status, the leading mobile operators may be obliged not only to open their

networks up to interconnection with MVNOs, but to also to openly publish their tariffs for

doing so.

In the long run, MVNOs, along with MVNEs and other new forms of network players, are likely

to rise and decline in popularity as uncertain markets and industries change. One clear thing

is that regardless of whether MVNOs prevail or fail, their impact will be significant throughout

the telecom industry. Finally, this study calls for further research that traces the actual

diffusion of MVNO in new markets with a focus on the different strategies taken by

stakeholders. In particular, a future studymay look at how to give incentives to MNOs to open

their infrastructure to MVNO or MVNE. Or a future study may focus on the type of model that

would be appropriate to enforce such mechanism, such as guideline, directives or

regulations or laissez-faire approach. The topic of the degree to which the Korean regulators

should mandate or regulate theMVNOmarket entry can also be worthwhile. These questions

should be meaningful for the discussions of network neutrality or to the open access nature

of the next generation networks.

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Corresponding author

Donghee Shin can be contacted at: [email protected]


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