Telecom 3 Giants Surpass 1 Trillion Won Operating Profit Again... But Reasons for Growing Concerns Deepen

Operating Profit Exceeds 1 Trillion Won for 6 Consecutive Quarters
Profitability Declines Amid Government Regulatory Pressure
Challenges in Brand Differentiation and AI Service Provision

The combined operating profit of the three mobile carriers has exceeded 1 trillion won for six consecutive quarters. This is the result supported by the steady growth of both wired and wireless businesses. However, the government’s pressure to reduce communication fees continues, and the cost-effective MVNO market is also growing. New non-telecom businesses such as artificial intelligence (AI) and cloud services are currently money sinks. While they may turn into golden geese in the future, for now, they are troublesome issues that consume profits. Although the three mobile carriers have achieved their best performance, they face significant concerns when thinking about the future.

'No. 1 Operator' SKT Also Cannot Smile

In the second quarter of this year, the combined operating profit of the three mobile carriers surpassed 1 trillion won. SK Telecom recorded 463.4 billion won, KT 576.1 billion won, and LG Uplus 288 billion won, totaling 1.32 trillion won. This marks six consecutive quarters of combined operating profits exceeding 1 trillion won.

However, the reason the carriers cannot smile is that profitability has been declining year by year. For example, SKT’s operating profit margin in 2001 was over 35%. In contrast, the operating profit margin in the second quarter of this year was 10.8%. KT recorded 8.8%, and LG Uplus 9.9%, all single-digit operating profit margins. Compared to major overseas carriers like Verizon in the U.S., which have margins in the 20% range, this is significantly low.

The carriers cite excessive government regulation as the cause of deteriorating profitability. Since last year, the government has ordered the establishment of a mid-tier 5G plan and introduced measures to promote competition among carriers last month. Pressure to reduce communication fees due to rising inflation is intensifying. To lower communication fees, infrastructure and new business investments must be reduced. Still, they cannot avoid pursuing non-telecom and new businesses for the future.

Among the carriers, SKT’s current situation in promoting non-telecom businesses can be compared to 'clear skies.' SKT recently officially launched the 'Global Telco AI Alliance' together with global mobile carriers to collaborate on developing large-scale AI. Building large-scale AI requires massive investment and time, but if major global carriers join forces to build a shared platform, it can shorten the time needed to develop AI services.

[Image source=Yonhap News]

'Bion Dwi Gaem' KT, Requires Time for Organizational Restructuring

KT’s second-quarter revenue increased by 3.7% year-on-year to 6.5475 trillion won, and operating profit rose by 25.5% to 576.1 billion won. It recorded an 'earnings surprise' exceeding market expectations. Although the B2B (business-to-business) platform sector, where core new businesses are concentrated, avoided negative growth, real estate revenue increased by 13.4% compared to last year, while AI and new business sales, key new businesses, decreased by 8.4%.

Since the end of last year, when former CEO Ku Hyeon-mo’s term was ending, KT’s personnel and organizational restructuring have been paralyzed. While competitors accelerate new business efforts, KT has been unable to make major decisions for the future, such as significant new business investments and mergers and acquisitions (M&A). Former LG CNS CEO Kim Young-seop was nominated as the final CEO candidate but still faces the shareholder meeting hurdle. Even after appointment, considerable time is needed for organizational restructuring. The ongoing prosecution investigation into former executives has unsettled the internal atmosphere. To keep pace with rapidly growing global companies, KT faces the challenge of minimizing political risks.

There is hope for the launch of KT’s core new business, the large-scale AI 'Mideum,' scheduled for October. The goal is to expand AI applications into robotics, healthcare, and education, aiming to achieve AI-related sales of 1.3 trillion won by 2025.

[Image source=Yonhap News]

LG Uplus Must Present a Vision for Non-Telecom Businesses

As telecommunication quality has become standardized, brand differentiation has weakened, and preference for cost-effective MVNOs has increased. According to LG Uplus’s second-quarter earnings announcement, the number of 5G subscribers with high profitability increased by 24.3% year-on-year, while MVNO subscribers nearly doubled, increasing by 47.2% during the same period.

In this context, the total number of MVNO subscribers in Korea has surpassed 13 million. Previously, consumers chose carriers based on corporate image and brand, but now they select carriers based on discounts and benefits. According to the 'Mobile Number Portability Status' announced by the Ministry of Science and ICT on the 7th, about 1.425 million subscribers switched to MVNOs in the first half of this year, exceeding the 1.244 million number portability moves among the three major carriers. This is analyzed as consumers flocking to MVNOs to reduce communication costs amid a high inflation environment.

This situation has influenced LG Uplus’s non-telecom strategy. In the second quarter, corporate infrastructure revenue increased by 1.1% year-on-year to 409.4 billion won. In particular, Internet Data Center (IDC) business revenue grew by 15.5% year-on-year to 79.8 billion won, showing the highest growth among corporate infrastructure businesses. However, LG Uplus’s non-telecom revenue ratio is still in the 20% range, lower than its competitors. LG Uplus plans to increase smart factory business revenue to 100 billion won by 2026 and make it a core new business. The non-telecom revenue ratio is expected to expand to 30% by 2025 and 40% by 2027.