South Korea Cable Faces Growing IPTV Threat

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Although it may be one of the most cabled places on the planet, South Korea is the latest country where IPTV is swiftly emerging as a serious threat to cable's traditional dominance of the pay TV business.

Following in the footsteps of Hong Kong far to the south, South Korea is undergoing a dramatic shift in its pay TV market dynamics, thanks to a confluence of regulatory, competitive, cost, technology and other factors. Despite cable's tight control of the multi-channel video market until recently, three of Korea's biggest fixed and wireless telecom operators—Korea Telecom (KT), SK Broadband (formerly Hanaro Telecom) and LG Dacom—are now making sharp inroads with the rollout of cheaper, more advanced IPTV service throughout the nation. In just the past year alone, the number of IPTV households has jumped from about 1 million at the end of 2007 to at least 1.6 million at the close of 2008, according to various analyst estimates.

As a result, South Korea already has the second most IPTV subscribers in Asia, putting this nation of 49 million people, or 18 million households, right behind the much larger China and ahead of Japan and Hong Kong. In a recent feature on the top 10 telecom markets in Asia, Light Reading reported that Korea already enjoys the second highest IPTV penetration rate in Asia, trailing only IPTV pioneer Hong Kong.

"Obviously, the competitive dynamics have changed," says Mike Paxton, a principal analyst for In-Stat. "The majority of [pay TV] homes in Korea are still cable homes. But they're feeling the pressures."

What's more, industry analysts believe that IPTV service providers are still gathering momentum for a larger assault on cable's still dominant market position in South Korea. In fact, some analysts predict that the IPTV players will sign up as many as 7 million subscribers by the end of 2012, largely by luring away customers from cable in the highly saturated pay TV market.

"It's a real threat," says Ben Reneker, a senior analyst for SNL Kagan. "IPTV is on track to take a quarter of the market, up from less than 10% today."

Long a cable bastion and one of the largest pay TV markets in Asia, South Korea boasts one of the highest cable penetration rates in the world, with somewhere between 13.5 million and 15 million cable homes, depending on whose estimates you use. Toss in another 2 million to 2.5 million subscribers for SkyLife, the national satellite TV service, and you can see that more than 83% of Korean households have at least one kind of pay TV subscription.

Yet, even with the cable and satellite TV two industries so well-entrenched, IPTV has taken off in Korea over the past two years. Industry analysts give credit to the aggressive deregulatory policies of President Lee Myung-bak, who took office in February 2008. In the name of efficiency, his government has merged the Ministry of Information and Communication (the country's former telecom regulatory agency) with the Korean Broadcasting Commission (the old broadcasting regulator) to form a new superagency, the Korean Communications Commission (KCC).

In turn, the KCC has made convergence of video, data, voice and mobile services its top priority. Sweeping aside the objections of the old KBC, the KCC quickly set about eliminating the bureaucratic restrictions that prevented telecom operators from fully entering the IPTV business. The BCC also approved mobile operator SK Telecom's purchase of Korea's second biggest fixed operator, Hanaro Telecom, clearing the way for greater convergence between fixed and wireless phone services.

Over the last two years, a landmark new IPTV law has also taken effect, striking down the old rules that limited telecom operators to airing TV programs hours after their original airing. Instead of just being able to deliver IP VOD services after the programs originally aired, telecom firms gained the right to run all TV shows in real time, making them the regulatory equal of other video providers.

In addition, analysts credit South Korea's unusually high broadband penetration rate, which also ranks among the world's highest. Roughly two-thirds of Korean households now subscribe to some type of broadband delivery system, whether it be cable modems, DSL or fiber-to-the-premises (FTTP). In particular, fiber network delivery is growing exponentially, thanks to a concerted broadband push by the national government over the past decade.

"They are very large pipes subsidized by the government," Paxton says. "They're huge fire hose pipes. They built the infrastructure and now they're pushing the solutions that use it."

Seeking to counter the rise of IPTV, South Korean cable operators are scrambling to digitize their largely antiquated analog operations and introduce such appealing offerings as digital programming tiers, video-on-demand (VOD) services, high-definition TV (HDTV) channels and interactive TV applications. Cable providers are hoping that this digital drive will keep most of their customers from defecting to IPTV while also boosting their per-subscriber revenues, which now amount to about $9 per month, according to SNL Kagan.

Cable operators are also going digital as part of their preparation for South Korea's upcoming shift to all-digital broadcasting. Under the national government's mandate, that shift is supposed to take place by the end of 2012.

With this push, the number of digital cable homes has roughly doubled over the past year, rising from about 1 million at the end of 2007 to about 2 million at the close of 2008, according to Pyramid Research. As a result, Pyramid figures, Korea's digital cable penetration rate has slightly more than doubled from about 6% to 13%. Despite the economic downturn, that surge is continuing this year, with cable providers adding an estimated 60,000 new digital subs in February alone.

"The government [recently] announced that it will stick to the 2012 [DTV] deadline despite delays in other markets," says Tae-Hyung Kim, an analyst for Pyramid Research. "So I'm expecting the pace to pick up going forward." Indeed, such large MSOs as Cable & Multimedia (C&M) and CJ CableNet reportedly aim to convert 30% of their subscribers to digital by the end of this year.

But, four years after the first cable operator launched digital video service and seven years after the country officially adopted CableLabs' OpenCable specifications for two-way digital service, South Korea is still largely an analog cable market and will likely remain so for some time to come. Even though cable operators are striving to go digital quickly, this effort will undoubtedly be delayed, if not totally sidetracked, by the deepening global recession and credit crunch.

"It will take several years for the majority [of systems or subscribers] to go digital," Reneker notes. "The operators are going to need a lot of capital over the next few years."

Besides upgrading their analog systems to digital, some of the more aggressive South Korean cable operators are seeking to improve their competitive positioning by bulking up. That's especially true of the country's three largest MSOs—TBroad (part of the Taekwang Group), C&M and CJ CableNet—which collectively boast more than 6 million cable subscribers, mainly in the Seoul area and the other big metro regions.

In one recent sign of greater cable consolidation, Australia's Macquarie Group and private equity firm MBK Partners completed a joint $2 billion takeover of C&M Co., South Korea's second largest MSO, early last year. That move could lead to C&M scooping up smaller cable operators, prodding the other two big MSOs to act accordingly.

In another sign of consolidation, industry experts say, 79 of South Korea's 102 cable providers have now become part of larger MSOs. Consequently, they can move faster to digitize their cable networks and headends and acquire VOD and other digital video programming.

But other industry analysts note that numerous cable providers still remain small regional players, leaving the industry too fragmented to compete as effectively against the large national telcos. "The consolidation movement hasn't penetrated South Korea much yet," Paxton says. "A lot of cable operators may have 2,000 or 3,000 or 20,000 subscribers."

Industry analysts say each side holds several key advantages in the growing multichannel video wars. Not surprisingly, cable's biggest advantage is its status as the incumbent video provider, with the size and heft to wear out its rivals.

"The telcos have a lot of momentum," Reneker says. "They've been able to transition well from IP VOD to IPTV. But cable still has over 90% market share. It's on them to keep their customers."

The cable industry also retains the content edge, thanks to its decades of video programming experience. Like their counterparts around the world, Korean cable operators know how to strike deals with programming networks, produce their own TV shows and present, package and promote video offerings.

"A lot of telcos are less experienced with content," says Grace Shaw, research associate for SNL Kagan. "It'll be interesting to see how they'll handle bringing in content."

Indeed, industry experts generally see a lack of content as the telcos' great Achilles heel. KT, SK Broadband and LG Dacom have still not swung IPTV carriage deals with a number of the nation's leading broadcasters and other programming providers.

"Content is a huge problem for IPTV," Kim says. "Cable operators have a strong relationship with content providers and content providers don't want to ruin that relationship."

On the other hand, the IPTV providers are generally bigger national players with regulatory momentum on their side. With cable operators having just started offering VOIP service in September 2007, Korean government officials clearly see the giant telecom firms as more likely to deliver triple-play and quadruple-play bundles to consumers.

Unlike their cable rivals, South Korean IPTV providers can also offer all-digital video service right off the bat. Plus, similar to their counterparts in Hong Kong, they may also be able to roll out IPTV for lower fees than digital cable prices because they're using broadband connections. Analysts expect to see bundling discounts of up to 20%, depending upon the regulatory constraints faced by each company.

"IPTV is a lot cheaper," Shaw says. "That could be a near-term driver." However others disagree with that statement, noting that IPTV providers in Korea have had to invest heavily in upgrading their networks to accommodate IPTV and Internet access. They note that the IPTV providers will have trouble paying for this increase in capital expense because it is difficult to raise the average revenue per user.

Moreover, IPTV operators are starting to make inroads with content developers. In a prime example, KT has bought such local content providers as Sidus FHN as part of its recent $130 million investment in fresh video programming. KT has also expanded programming deals with such major Hollywood studios as Disney, Warner Brothers, Sony and Fox.

"The most popular content is from national broadcasters SBS, KBS and MBC, and IPTV recently won the airing rights of these programs," Kim notes. "So IPTV is winning bit by bit."

The big question, then, is not whether IPTV will grow but how fast it will grow. Industry analysts vary greatly in their forecasts. While more cautious research firms like SNL Kagan see IPTV capturing 4.3 million subscribers by the end of 2012, Pyramid Research believes the number could climb as high as 7.4 million by then.

But, in one good sign for the cable industry, there's general consensus that satellite TV won't be a disruptive factor as well. Even though SkyLife is partly owned by KT, analysts don't expect it to take any more market share away from cable.

"It'll be a viable product," Reneker says. "But the momentum isn't there. It's not the same as IPTV."