Local mobile operators have been infuriated by the arrival of OTT mVoIP players

The decision by the Korean Communications Commission to allow mobile operators to charge subscribers for accessing mobile voice-over-Internet-Protocol (VoIP) services from “over the top” providers, such as Kakao Talk, is a defining moment in the country’s net-neutrality debate.

Local mobile operators SK Telecom (SKT) and Korea Telecom (KT) have been infuriated by the arrival of OTT mVoIP players and have piled significant pressure on the KCC to take action. Kakao Talk has built up a user base of about 37 million for its mobile messenger service and in late May launched its Voice Talk mVoIP service, to the fury of SKT and KT.

After lengthy deliberations, the KCC came out on June 26 with a decision allowing operators to charge subs for access to these OTT mVoIP services, provoking an immediate strong backlash from subscribers and Net Neutrality advocates.

Many subscribers claimed that the KCC and mobile operators were colluding to charge subscribers for OTT mVoIP services in order to protect the status quo in the mobile market.

They said that although the operators want to charge subs for OTT mVoIP services for commercial reasons, the KCC is simply taking the easy way out by allowing this rather than seeing the operators forced to take unpopular alternative measures, such as increasing their voice prices or ending unlimited calling plans in order to recoup revenues lost to mVoIP services.

The KCC has strongly denied such claims and has said that its main reason for placing restrictions on mVoIP access is to protect the wider telecoms market from the potential revenue losses caused by OTT mVoIP services, including those offered by US giants such as Apple, Skype and Google.

Mobile operators have not been so shy in defending the KCC’s ruling, saying it is impossible for them to proceed with their extensive investments in LTE networks if OTT mVoIP operators are given a free ride on their networks.

“It is deeply regrettable that no one is considering the billions of won that mobile carriers have invested on building networks that content providers use,” a high-level official from mobile market leader SK Telecom told the Korea Times. “We have to see the larger picture of the greater good of the current ecosystem in the long term, instead of these short-sighted outbursts from other parties that only consider the immediate benefits.”

LGU+ runs its own race
Interestingly, third-ranked mobile operator LGU+ has not joined the SKT-KT campaign against Kakao Talk and has instead embraced the service as a key differentiator that will bring subscribers to its LTE platform. Although the smallest operator in the market, LGU+ was the first to launch LTE services and had 2.4 million LTE subscribers at end-May, representing a 37 per cent share of the market – nearly double its share of the overall mobile market.

LGU+ announced on June 7 that it would allow its subscribers to access the Kakao Talk service as part of their existing data subscription plans – with no usage limitations and no additional charges – a stance that infuriated SKT and KT which will offer separately charged mVoIP packages to subscribers.

LGU+ had itself originally planned to charge for access to Kakao Talk’s mVoIP services, but after seeing the huge subscriber opposition to such a move and sensing a potential commercial and public-relations coup, it performed a swift U-turn and opened its gates to the service.

As the smallest operator in the market, and one that does not have to protect a WCDMA/HSPA network investment, LGU+ is less exposed to mVoIP services than its rivals and can therefore afford to take a more conciliatory line.

Will short-term gain bring long-term pain?
With its embrace of mVoIP, LGU+ might have given itself a genuine opportunity to win some market share from rival operators, but it needs to be wary of the loads it is placing on its network and its overall business model.

In an era in which all mobile operators ever really seem to talk about is data, it is easy to forget that they are still generating the vast majority of their revenues from voice services.

In 1Q12 LGU+ generated KRW597bn ($522m) in voice-related revenues, representing 67 per cent of its total revenues, while mobile market leader SKT relies even more on voice, with voice calls making up 80 per cent of its revenues in 1Q12.

Therefore, LGU+ is taking a huge risk by effectively opening itself up to Kakao Talk and other OTT mVoIP players as a “dumb pipe” provider, and the company is arguably opting for short-term gain over some far more potentially serious long-term pain.

South Korea’s high mobile voice rates have generated strong market demand for cut-price mVoIP services, but by trying to capitalize on this demand LGU+ is putting itself in a risky position of significantly accelerating the decline of its own voice revenues.

Moreover, if new subscribers sign up for LGU+’s LTE services on the basis of getting all-you-can-eat OTT content, including ultra cheap mVoIP calls, they are going to expect the company to provide these services on a ubiquitous basis – and that could get very expensive for LGU+.

By embracing mVoIP and other OTT services, LGU+ might easily have to fork out extensive capital expenditure to support the resulting data explosion – with little prospect of recouping its investment solely from the additional market share it might win by becoming so OTT-friendly.

It is widely agreed in the mobile industry that in the LTE era operators should try to extract the greatest possible revenue yield from their extensive investments in spectrum and infrastructure. And yet, with its new embrace of mVoIP, LGU+ seems to be taking exactly the opposite approach.

Although there is a strong argument that operators do themselves no favours by blocking or charging for OTT content – in the way that SKT and KT are doing for mVoIP – there is significant danger in a cash-strapped operator like LGU+ in opening the gate so warmly to mVoIP with no real sign of how they will generate new revenues by doing so.

The KCC protects its environment
On the broader issue of net neutrality, it can only be described as hopelessly naive or ridiculously optimistic for Kakao Talk and its fellow mVoIP players to expect the KCC to have ever considered granting them unfettered access to the country’s mobile networks.

The KCC has been historically influenced by the rulings of the Federal Communications Commission in the US, and the FCC’s guidelines on net neutrality draw a strong distinction between mobile and fixed broadband networks, with operators given far more latitude to restrict traffic on mobile networks.

Over the last two decades the Korean government has worked very closely with network operators and hardware manufacturers to provide a technology eco-system with few rivals on the global stage and are clearly determined that their very successful model will not be disrupted by OTT players wrecking operator revenue models.

As a result, one did not need to be Nostradamus to predict the KCC’s positioning on this issue – though plenty were taken by surprise by LGU+’s road-to-Damascus conversion to the OTT cause, a conversion that might prove painful in the long run.

LTE Asia will take place in Singapore, on the 18-19th September 2012.

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