SK Telecom set to strengthen digital content business

With the domestic mobile-phone market approaching saturation and heading for slower growth, Korean telecom companies are struggling to find new revenue streams that can be blended with their communication networks.

For market leader SK Telecom Co., the answer seems to be creating added-value services through digital content.

To that aim, SK Telecom, which controls more than half of Korea`s mobile market, has been increasing its investment in the entertainment sector over the past few months, particularly in music, movies and games.

"It is the reality of the Korean IT industry that we have devices and networks to deliver quality content but don`t have the content itself," said Suh Sung-won, vice president of SK Telecom`s new business department.

"We plan to create a market environment where good-quality content could be produced and then deliver this content through our wireless network, which we believe is a win-win strategy for both sides," Suh said.

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Over the past year, SK Telecom proved such determination by acquiring a series of content providers and launching new digital content businesses on its own.

In May, the mobile operator acquired 60 percent of YBM Seoul Records Inc., Korea`s largest record company, in a 29.2 billion won ($29.2 million) deal. The acquisition highlighted SK Telecom`s determination to diversify its portfolio in the entertainment industry amid stagnant growth in the mobile-phone market, analysts said.

"For an immediate impact, the acquisition of YBM Seoul Records will give us a larger content pool to sell through our Melon digital music services," said Choi Jin of SK Telecom`s digital content development team.

"It will also give us an established distribution channel for our music services and help us expand to other markets," he said.

YBM Seoul Records is involved in producing and distributing Korean music and releasing licensed international music in the local market, holding rights to sell products from Sony Music, Jave Entertainment and Victor Entertainment.

The takeover is viewed as a further boost to SK Telecom`s Melon digital music service, which was launched in November last year and has since attracted about 2 million subscribers.

Melon allows subscribers to download music on their MP3 player-equipped mobile phones, personal computers and portable music players.

For a monthly fixed-rate of 5,000 won, SK Telecom customers have unlimited access to the 700,000 songs on Melon`s database to play on their electronic devices for a month. Under the company`s digital rights management system, Melon users are required to renew their song list every month.

"Our business model based on fixed-rate charges is proving to be a success. We are the only company in Korea that is providing a music service that is truly ubiquitous," said Ahn Seung-yoon of SK Telecom`s content business division.

"The billing system provides us to take advantage of the increasing market for digital music here and frees customers from storage limitations on their portable devices by providing an online database through our website," Ahn said.

With MP3 features becoming de rigeur on the latest handset models, mobile operators have been competing to gain an early edge in the nascent market by strengthening their networks to accommodate online music distribution.

According to industry figures, about 80 percent of the mobile-phone models marketed in Korea have built-in music players.

Korean mobile carriers sold 3.1 million MP3 player-equipped phones during the first year since the handsets were introduced to the market in March 2004. This accounted for 10 percent of handsets in use.

And by the end of 2005, about 10 million people, or 30 percent of Korea`s mobile population, are expected to have MP3 player-equipped phones, industry data showed.

The move into the music recording business followed SK Telecom`s investment in IHQ Inc., an entertainment management firm.

In February, the company spent 14 billion won to acquire 21.7 percent of IHQ, becoming its second-largest shareholder.

Because the entertainment label owns Korea`s biggest star management unit and a leading movie production company under its wings, SK Telecom believes with this investment, it will be able to produce high-quality dramas and movies and deliver them through mobile devices. This will provide SK Telecom with a crucial new source of revenue, officials said.

"SK Telecom depends a quarter of its business on data services, among which 70 percent is digital content," said SK Telecom CEO Kim Shin-bae. "We have acquired entertainment firms and invested in movie and music funds to strengthen our digital content business."

SK Telecom has more than 19 million customers, which is about 51.2 percent of Korean mobile-phone users. However, with Korea`s wireless penetration rate approaching 75 percent, the company has been struggling to sustain growth.

SK Telecom`s first-quarter net income this year dropped 18.6 percent year-on-year to 368.4 billion won, the fourth consecutive quarter that the company saw profit dip.

"This provides us with a daunting task of finding new killer applications, and we are aiming to secure the three main contents of movies, games and music as consumption of entertainment content is increasing sharply," the company said in a statement.

Regarding the game sector, SK Telecom is racing to deliver video games to handsets, allowing users to play games with realistic three-dimensional graphics that rival those on computers and consoles.

The company launched phone-based game services in April which enable customers to download and play 3-D games on their handsets. SK Telecom has attracted more than 600,000 subscribers with 15 games.

Apart from acquisitions and new businesses, SK Telecom also formed a 70 billion won fund with local investment companies in May to expand and cover the film industry. In the same month, the mobile operator formed a 30 billion won music fund as well.

SK Telecom also expects to add more customers to its WCDMA services. The company plans to invest 600 billion won ($604 million) in its WCDMA services and network infrastructure by the end of the year when it plans to have nationwide coverage.

WCDMA, short for wideband code division multiple access, is a third-generation mobile telephony standard based on the second-generation GSM (global system for mobile communications) platform that is designed to grant customers access to a greater variety of video and data content.

(soyoung@heraldm.com)



By Kim So-young