[Market Analysis] ① Budget Phones Breaking the Iron Fortress... 'Securing Self-Sustainability' Remains a Challenge

14 Million Subscribers, Evaluated as 'Market Establishment'
Still a Long Way to Go, Need to Build a Healthy Ecosystem

The budget phone (Mobile Virtual Network Operator, MVNO) market has established itself as a significant segment within the mobile telecommunications market. The budget phone business model involves operators renting networks wholesale from Mobile Network Operators (MNOs) such as SK Telecom, KT, and LG Uplus, then creating their own brands to sell services directly to consumers. The introduction of budget phones aimed to stimulate competition in the oligopolistic mobile market, encouraging price competition and enhancing user benefits through diverse services. Currently, about 14 million people use budget phones, marking a successful rooting in the market. However, there is still a long way to go. Recent perspectives on the budget phone market are mixed with both expectations and concerns. Although quantitative growth has been achieved, experts diagnose that self-sustainability is still lacking. This article assesses the budget phone market and outlines the directions it should take moving forward.

Boom after 11 years, the fortress crumbles

According to statistics from the Ministry of Science and ICT, as of the end of April, budget phones hold a 17.6% share of the wireless communication market, closely trailing the third-largest operator LG Uplus (20.7%). The number of subscribers reached 13,892,173, an increase of 259,116 from the previous month. Subscriber numbers are growing by about 250,000 each month. If this trend continues, the number of budget phone subscribers could reach 14 million by the end of May and surpass 15 million within the year. Revenue has also grown at an average annual rate of 28%.

Since the COVID-19 pandemic, there has been a notable increase in users switching to budget phone plans from the three major carriers. Approximately 1 million users have switched to budget phone plans in the past year. This is a result of the rise in self-owned devices driven by non-face-to-face distribution channels and the spread of rational consumption culture amid high inflation. The combination of self-owned devices and budget phone plans has become popular among young people in their 20s and 30s. The average budget phone rates are about 65% for LTE and 72% for 5G compared to the three major carriers.

The success of budget phones has stirred the previously quiet domestic mobile market. The introduction of the budget phone "0-won plan" (six months of free communication fees) in April has energized the number portability market. Last month, 110,000 users switched from the three major carriers to budget phone plans, the highest since the service launch. The flame of competition, which had nearly disappeared in the telecom market, has started to reignite. As of the 20th, there are 31 "0-won plans" listed on the Budget Phone Hub, a budget phone information site operated by the Korea Information and Communication Promotion Association. Although this is fewer than the approximately 70 plans available last month due to reduced marketing expenses by the three major carriers, budget phone operators are still actively marketing to attract subscribers. A service has also been introduced that offers up to 50% cash compensation on the purchase price when buying self-owned devices. The entry of banks into the budget phone market has also acted as a catalyst for competition.

Compared to budget phone markets worldwide, the Korean market has achieved quantitative success. Korea ranks fourth among 37 countries in budget phone market share, following Germany, the Netherlands, and Australia. This statistic is based on 2018 data. A telecommunications industry insider explained, "Considering this year's market share, Korea's global ranking is likely to have risen further."

The increase in budget phone subscribers is shaking up the '4-2-2' market share structure in telecommunications. SK Telecom's market share fell below 40% for the first time since the three-carrier system was established in October 2001. KT and LG Uplus are also experiencing subscriber declines. The three major carriers are deliberating strategies to utilize budget phones. SK Telecom, which had been passive about expanding budget phone subscribers, has recently shifted its strategy. Due to a sense of crisis amid competition, SK Telecom has adopted a strategy to expand the wholesale market. In April, SK Telecom established a budget phone sales team and increased marketing expenses such as subsidies for budget phone operators using its network.

Creating a healthy ecosystem

However, structural problems in the budget phone market persist. Budget phone operators merely resell the products of the three major carriers. Price competition through low-cost plans and gift competitions, along with low entry barriers, have been criticized for producing many small-scale operators. Simple resellers can register by submitting a capital deposit of 300 million KRW and employing at least one technical expert such as an information and communication engineer or telecommunications equipment technician, along with user protection requirements to the Ministry of Science and ICT. Currently, there are about 90 budget phone operators in Korea (70 handset operators). Around 60 operators only maintain a minimal presence by creating websites to offer services. Among these, 22 have virtually 0% market share.

The three major carriers argue that to build a healthy budget phone ecosystem, operators relying on the wholesale provision obligation system must change their attitudes. They should not focus solely on low-priced plans but develop self-sustainability through service enhancement. Professor Jun-Sang Yeo of Dongguk University stated at a National Assembly forum earlier this month, "Small and medium-sized operators need to secure competitiveness through killer services."

In reality, small and medium-sized operators have hardly invested in customer service or infrastructure. Among budget phone operators, only one (Korea Cable Telecom) owns its own infrastructure, and even that is limited to location tracking equipment for mobile subscribers in a formal sense. User complaints due to insufficient investment in user services are increasing. The biggest complaint is that customer centers often do not answer calls. There are also many cases where criminals use budget phones as burner phones, exploiting the difficulty in identifying subscribers and tracking locations. Telecom companies and experts argue that to resolve these issues, the system should be improved to require a certain level of infrastructure investment and user protection-related investment.