Monday, June 29, 2015

South Korea Wants to Destabilize its Mobile Service Provider Market

In a change of policy dating to 2010, the South Korean government plans to allow issuance of a fourth mobile service provider license. Between 2010 and 2014, applicants have asked for permission to enter the market, and been rebuffed.

The licensing of a fourth mobile operator, by increasing competition, is likely to increase consumer benefit almost as certainly as it leads to revenue and margin pressure for SK Telecom Co., KT Corp. and LG Uplus Corp.

At the moment, the South Korean mobile operator market has an oligopolistic and relatively stable structure, with SK Telecom having about 51 percent share, Korea Telecom about 32 percent and LG Uplus about 17 percent. The three providers collectively have 100 percent market share.

As a general rule, mobile markets with four or five leading contestants are “unstable,” compared to markets with just three leaders.

The mobile business arguably trends over time towards an oligopolistic structure with three leading providers .

As a rule, such markets will tend to be stable when market shares follow a general pattern of 40 percent, 30 percent, 20 percent market shares held by three contestants.

Some might argue that relative stability occurs because, at about that pattern, all contestants might reasonably believe that launching destabilizing attacks will not lead to a significant change in market share, while ensuring lower gross revenues and profit margins.

In a typical oligopoly pattern, 90 percent of total market share is held by the three providers.
South Korea’s market is even more concentrated than that.

By way of comparison, the U.S. and U.K. markets arguably are “unstable.”

Up to this point, the U.K. mobile market has featured EE and O2, each with 29 percent market share, followed by Vodafone with 23 percent share, trailed by Hutchison’s 3 at 12 percent. That could change.

Hutchison is trying to acquire O2, which would create a new market leader with 41 percent share, followed by EE at 29 percent and Vodafone at 23 percent. That is quite close to the theoretical 40-30-20 pattern.

The U.K.’s present four-provider structure is roughly similar to the U.S. mobile market, where AT&T and Verizon each tend to have 30 percent share, while Sprint has about 17 percent and T-Mobile US has about 14 percent share.

If one assumes a stable oligopoly market structure has the leading provider with about 40 percent share; the number-two supplier with about 30 percent share and the third player a share of about 20 percent, the U.K. market would, with a Hutchison acquisition of O2, be functionally stable.

The South Korean government’s move to license a fourth mobile provider, in principle, transforms a stable market into an unstable market, and that is the outcome the government apparently prefers.

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