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SK Telecom net profit plummets, vows to diversify revenue

The South Korean telecommunications operator cited losses resulting from its stake in affiliate SK Hynix, and looks to expand as a media platform business to generate profit.
Written by Philip Iglauer, Contributor

SK Telecom, South Korea's largest mobile carrier, reported on Tuesday that net profit dropped 15.8 percent for 2015, mostly because of losses from an equity investment in affiliate SK Hynix.

The telecom's annual net profit was 1.516 trillion won ($1.24 billion) for 2015, down 192 billion won from the company's net profit of 1.708 trillion won ($14.16 billion) in 2014.

SK said the cause of the net profit drop was losses resulting from its 22-percent stake in affiliate SK Hynix, South Korea's second-largest semiconductor manufacturer.

SK Telecom's revenue was 17.137 trillion won ($14.20 billion), edging down 0.2 of a percentage point on account of a number of cost-saving measures to customers, such as eliminating sign-up fees, decreasing interconnections fees, and an uptick in subscribers earning contract-based mobile fee discounts, the company said.

SK's operating income was 1.708 trillion won ($14.16 billion), down 6.4 percent from 2014, as a result of one-off labour costs stemming from a special retirement plan implemented last year.

SK Telecom tried to balance its dour net profit announcement by reminding investors of its recent bold moves to develop new businesses and sources of revenue.

Budget phones and cable TV

SK also said it plans to release more low-end smartphones for the South Korean market like the Luna, launched last year, and the Sol, launched in late January. SK surprised local market watchers by selling 150,000 Luna phones and more than 10,000 units of the Sol in just one week.

SK shook up the domestic telco sector when it acquired cable TV service provider CJ Hellovision for 1.5 trillion won ($1.25 billion) last year in November, becoming the country's second-largest provider of pay-TV broadcasting and internet-based, over-the-top (OTT) video.

With the acquisition SK showed it is serious about generating new profit sources as a media platform operator, but the M&A also came at a time of transition for local telcos as they search for new sources of revenue and adjust to regulatory reform.

Expansion into the media platform business appears to be central to the strategy of SK Telecom CEO Jang Dong-hyun, who took the helm in early 2015.

SK needs to increase the number of mobile and fixed line subscribers, according to Tuesday's report by KDB Daewoo Securities. That will serve as a base from which SK can deliver IoT services. First it has to pass regulatory muster.

But competing telecoms KT and LGU Plus have cried foul over the M&A, saying it amounts to monopolistic behavior. The Ministry of Science, ICT and Future Planning (MSIP) -- the government agency with authority to either block or approve the deal -- even held a panel discussion on the deal in Seoul on Wednesday.

SK joins KT in effectively creating a pay-TV duopoly in South Korea. The two companies tried to prepare for what the local media called the inevitable "doomsday scenario", that is US-based Netflix entering the South Korean market.

Enter Netflix

That is exactly what has happened. Netflix announced entry into South Korea along with about an additional 130 countries around the world last month at the Consumer Electronics Show in Las Vegas. But the Netflix effect in South Korea remains unclear.

"I think the popularity of Netflix could be limited in Korea. But as you know there are fans for American drama series in Korea," said Moon Ji-hyun, an analyst for KDB Securities.

"No one knows the future, but the Korean viewer behaviour is really different from the people in the States. Koreans are more familiar with the free downloading and viewing short clips rather than the long duration drama series on the internet."

SK Telecom merged with CJ Hellovision to boost its bid as an all-round media platform operator. SK Broadband, its cable and internet TV service affiliate, has not been so profitable in the recent past with the number of subscribers lagging far behind that of its rival KT Corp.

After the CJ Hellovision acquisition and the expected merger with subsidiary SK Broadband, SK Telecom will have annual revenues of 4 trillion won and a pay-TV subscriber base of 7.5 million.

KT is South Korea's biggest telecom with a subscriber base of 8.5 million, including about 2 million from its KT Skylife satellite broadcasting service. It makes sense for Netflix to partner with a large South Korean telco like SK or KT, but whether Netflix is even interested in a partnership is unknown. It would have to work out a profit sharing agreement with any potential partner.

Netflix was reportedly in talks with all three carriers in South Korea -- KT, SK, and LGU Plus -- to sell its media content via internet TVs operated by local carriers, but the discussions stalled regarding profit sharing.

Netflix stuck to its usual 90:10 contract and demanded the carriers extend free use of Internet Data Centers (IDCs), according to local media reports. Internet TV service providers in South Korea contract with content providers on a 35:65 profit sharing agreement and carriers charge additional payments for using IDCs.

"That [subscriber base] could be relied upon as content users. There should be some strategic partnership with some local telcos or media platform operators. You can see a similar example in Japan. Already Netflix went to Japan in September. Partnership ties [in South Korea] would be similar to Japan," the analyst said.

But SK and KT are no friends, with just 1 million subscribers separating the crosstown rivals for the top position in South Korea's pay-TV market.

Source: ZDNet.co.kr

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