The Dynamic Effects of Government Policies on
Korean Telecommunication Services Market
: Focusing on the Regulations of Mobile Phone Service
Sang-Hyun Park"", Seung-jun Yeon’, Sang-wook Kim’, Doa-hoon Kim’ and Won-gyu Ha?
Electronics and Telecommunications Research Institute (ETRI)
161 Gajong-Dong, Yusung-Gu, Daejon, Repubric of Korea, 305-350
ubiquitous@ etri.re.kr', sjyeon@etri.re.kr” , wgha@ etri.re.kr”
Department of MIS, Chungbuk National University
#48 Gaeshin Dong, Cheongju City, Chungbuk, Republic of Korea, 361-736
sierra@ chungbuk.ac.kr,*
Division of Political Science & Public Administration, Sookmyung Women's University
53-12 Chungpa-Dong 2-Ka, Youngsan-Ku, Seoul, 140-742 Korea
dhkim@ sookmyung.ac.kr*
ABSTRACT: The government regulation policy, in the mobile phone market which is characterized
by its 'asymmetric' stance, has provoked debates on many issues amid pros and cons. For that, many
previous studies have endeavored to point out the limitations of asymmetric regulations and suggested
the improving measure tools, most previous studies showing common shortcomings. This study aimed
at evaluating the government regulation policies over the mobile phone market, by analyzing in
advance the efficacy of any potential regulation policies, and by estimating the timeliness of the
enforcement. To achieve this objective, an empirical research was conducted with an effort to analyze
the level of customer satisfaction(CS) on the mobile phone services and the gravity of each CS related
factors and a simulation model based on the system dynamics methodology was developed to test the
impact of governmental regulation policies being enforced under various scenarios of the mix of
government policies.
KEYWORDS : Government Regulations, Telecommunication Services, Mobile Phone Services,
System Dynamics
1. Introduction
The government regulation policy, in the mobile phone market which is characterized by its
‘asymmetric’ stance, has provoked debates on many issues amid pros and cons. For that, many
previous studies have endeavored to point out the limitations of asymmetric regulations and suggested
the improving measure tools, most previous studies showing common shortcomings, which are
summarized as the following:
First, most of the preceding studies ended up providing just the conceptual explanations for the
shortcomings and the efficacy of the regulation measures that have become the main issues. They did
not give any visible explanations of the impact that the presented alternatives could give. Second,
since regulation measures generally do not apply individually but collectively, it becomes very
important to estimate the impact that would come from the mix of many regulation policies.
Nevertheless, most preceding studies ended up uttering a single and respective regulation issue
instead of handling a multiple of them collectively. Third, literature reviews on the government
regulation policy have to begin with the basic understanding of the competitive market structure. To
do so, it is necessary to analyze how all related variables are interrelated dynamically. Most of the
preceding studies, however, failed to note the market structure or at the best ended up noting through
their static view rather than dynamic point of view.
Above all, debates over the government regulations on the mobile phone market so far have
focused on the market structure shared by the incumbent mobile carrier(SKT) and the competitive
mobile carriers(KTF & LGT), thereby overlooking the effects and benefits to consumers. As a result,
despite the government's active intervention, the service quality and the satisfaction felt by the mobile
phone service users were still being estimated as very poor, leading them to question for whose
benefit the government regulations are being enforced.
Consequently, with these limitations, it has failed to present comprehensive and systematic policy
practice directions for the ongoing major regulation issues that are either now in application or being
reviewed for future application to the mobile phone market, with contrasting views and opinions
coexisting and their gaps not being ironed out yet.
So a holistic review on the governmental regulation policies on the current mobile phone market
and an empirical and dynamic analysis of their impact on the market remains as a very important task
with a view to setting directions of the desirable regulatory policies for the future.
Accordingly, this study aimed at evaluating the governmental regulation policies over the mobile
phone market by analyzing in advance the efficacy of any potential regulation policies, and by
estimating the timeliness of the enforcement. To achieve this objective, an empirical research was
conducted with an effort to analyze the level of customer satisfaction(CS) on the mobile phone
services and the gravity of each CS related factors, and a simulation model based on the system
dynamics methodology(Forrester 1961; Goodman 1989; Richardson and Pugh 1981; Sterman 2000)
was developed to test the impact of governmental regulation policies being enforced under various
scenarios of the mix of government policies.
2. Current status of the Korean mobile phone service market
The entrance of Shinsegi Telecom in April 1996 put an end to the monopoly of SKT. After the
introduction of digital service, the entry of the three PCS carriers in 1997 triggered a full-scale
activation of the market. Competitions among carriers quickly brought down subscription fees, and
led to a struggle for securing new subscribers by such means as subsidizing the purchase of mobile
devices. All these developments contributed to the rapid growth of the mobile phone services market.
The growth rate of the subscriber base was 114% from 1996 to 1997, and 105% from 1997 to
1998(Choi et al, 2001). Now, the number of phone mobile subscribers exceeds over 30 million,
surpassing the wire-line subscriber base.
This high rate of growth, however, came to an end with the new millennium, when the market,
nearing its maturity phase, started to slow down (ETRI, 2002). The diffusion rate of mobile phone
services having surpassed 70% of the total population, factors such as the discontinuing of subsidies
for mobile device purchases after June 2000 reduced the increase of subscriptions to a marginal level,
and some carriers even experienced a decrease in subscriber numbers.
This is evident in support of the assertion that the mobile telecommunication services sector had
reached its saturation point in terms of customer numbers, in other words, attained market maturity. In
addition, over-investment and excessive competition, combined with the deterioration of profitability
for latecomers to the industry, have led to a market restructuring(Kim, Park & Jeong, 2003). The most
noteworthy current development in the Korean mobile phone services is the introduction of mobile
number portability in 2004.
Table 1
Trends in the Korea mobile phone service market
Year 1999 2000 2001 2002 2003
Subscriber numbers(thousands) 23,443 26,816 29,045 32,342 33,591
Penetration rates(%) 50.0 56.6 61.4 68.3 69.9
Sales(million USD) 7216.0 9785.5 1140.0 1150.7 1285.5
Monthly ARPU(USD) 30.7 36.4 39.2 35.6 37.4
Source: Reconstructed from the homepage of ministry of information and communication (http://www.mic.go.kr)
3. Causal Loop Diagram of Competition structure
Since PCS service was introduced in 1997, domestic mobile phone markets have expanded rapidly
and become saturated; As of June 2003, the number of subscribers have exceeded over thirty three
million and seventy percent of the people in the country have now joined PCS providers. Therefore, it
has become more difficult to collect new subscribers. The Korean mobile phone markets, SKT, KTF
and LGT now have an oligopolistic economy structure and zero sum, that is, the market expansion of
a competition company leads to a market reduction of the counter-company.
In such a saturated condition, customers leaving a company are flown into the counterpart and this
secession is inversely proportioned to customer satisfaction and customer loyalty. Customer
satisfaction is when a supplier meets the expectations of the consumer. Customer loyalty can be
defined as a function of customer satisfaction, transition barrier, sound of customer, and complaint
(Fornell, 1992). In the case of a mobile phone user, it would be the rate of the customer's satisfaction
that affects the secession of the customer.
On the other hand, under competitive environment, it is useless to consider only the rate of the
customer’s satisfaction because a loyal customer’s satisfaction doesn’t mean superiority over
competition or a guarantee of re-purchase. The concept of Customer Value Added (CVA) can be used
to complement these issues. CVA(Customer Value Added) is the evaluation index of customer's
satisfaction introduced by AT&T in 1993. This CVA evaluates the level of customer satisfaction and
service of my own company and competitors and produces worth-what-paid-for(WW PF). Then that
exponential value is divided by the weighted average of the competitor. this measured CVA is
meaningful to allow feedback and effectively analyze direction and intensity of the activity of
customer satisfaction by relatively comparing and grasping the present position of its company and
main entrepreneur, understand merits and demerits of its company and competitors and establish a
competition strategy according to goods, customer, and region. According to this, CVA of its
company is proportional to its company inflow of the customer of the other company.
In this study, switching cost also has a positive relation with customer loyalty and CVA is
influenced positively with customer satisfaction. The customer satisfaction of its company is
influenced by a communication charge, service quality, and brand power.
Inflow of new customers is affected positively by word of mouth which is strengthened by the
market share in each service entrepreneur. These assumptions are based on a preceding research
which indicated that mobile phone users who were satisfied with the quality factors recommended the
service to others.
Therefore, in the case of the competition model by the churning brand, the previous customers of
the other company could be distributed into other companies as a function of their market share.
Actually, taking a look at the probability of the churning brand according to the mobile phone
service provider studied by preceding research, we can recognize that it is similar to the market share
of big 3 in the mobile phone service market represented by Table 2.
Customers of each service provider is a base of interests of each company. On the other hand, the
more customers secured, the more interests are secured. And the interest feedback loops to the QoS
for customer's satisfaction are the Brand Power and the investment for increasing of Brand churning.
So, that makes network effects - to reinforce of each mobile company's customer's satisfaction and
market share.
Therefore, the key to the success of the carrier depends on a confirmed customer and Average
Return Per Unit(ARPU) and also the ARPU is proportional to the Minutes of Usage and Price per
customer. However the price has a positive relation with ARPU and a negative relation with MOU
simultaneously so the effect of the price on ARPU could vary. Actually, in the case of SKT, it could
keep ARPU after providing a 14 percent discount. The reason was the not much large real charge
reduction width by the existing discount package management with the 5% level, but the largest cause
was analyzed by being in the rise of MOU by charge reduction.
Table 2
Probability of churning brand according to mobile phone service provider
Classification Conversion probability
011 0.2765
SKT 0.4751
017 0.1986
016 0.2048
KTF 0.3616
018 0.1568
LGT 019 0.1633
* Source : Reconstructing "communication market structure analysis and Prediction through customer churning
brand model"(Kim et. al., 2000)
* Conversion probability : probability changing into other service in a whole secession customer
Figure 1 is a causal map of the market competition structure designed by integrating a causal
relationship between variables produced from previous research.
Present domestic mobile phone service providers are three companies (SKT, KTF, LGT) but it is
designed with a two company competition to simplify it. That is, A and B denote its company and
competitor respectively.
Figure 1 Causal diagram of mobile phone company market's competition
The causal relationship in the integrated causal diagram of Figure 1 is explained as follows.
© Its company ([A] Brand Customer) is increased by Brand churning (Churning [B] to [A])
@ Its company ([A] Brand Customer) increases collecting of new customers through Word - of-Mouth
Effect([A ]) and has a positive relationship with Brand power ([A] Brand Power).
© Churning [B] to [A] has a positive relationship with CVA([A] CVA) its company and negative
relationship with customers’ loyalty([B] Customers Loyalty) of a competitor.
@® CVA([A] CVA)of its company has a positive relationship with its customer satisfaction and a
negative relationship with customers Satisfaction ([B] Customers Satisfaction)of a
competitor.
© Customers Satisfaction of its company([A] Customers Satisfaction) depends on its price ([A]
Price), its service quality([A] QoS), and its Brand
© The price of its company([A] Price) has a negative relationship with the Minutes of Usage and
has a positive relationship with the Average Return Per Unit ([A] ARPU). Average Return Per
Unit ([A] ARPU) has a positive relationship with its customers ([A] Brand Customers)
together with its profit ([A] Profit).
@ Increase of its profit ([A] Profit) increase its investment budget ([A] Investment Budget) and
the investment budget ([A] Investment Budget) is invested into Infra Spending, Branding
Spending, and Supplement Service Spending.
® It increases [A] customer satisfaction by [A] Infra Spending and Branding Spending increases
[A] QoS and [A] Brand Power respectively. [A] Supplement Service Spending) reconsiders
[A] Customer Loyalty by increasing [A] Switching Cost.
Many positive-feedback, self-reinforcing loops exist in the causal diagram designed with these
causal relationships (R1-R10). Figure 2 emphasizes the positive-feedback loop existing in the causal
map.
In figure 2, the self-reinforcing system represents a positive feedback loop. The more customers
there are, the more profit is made. The more profit made, the more investment. The more investment,
the higher the customer satisfaction which leads to even more customers.
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Figure 3 Negative Feedback Loops and Balancing Effects
On the other hand, Figure 3 shows a negative feedback loop leading a system to balance. A
negative feedback loop (B1, B2) is caused by the reduction of QoS due to a deficiency of service
capacity. That is, generally a high market share isn't easily able to offer the service in which many
customers can be satisfied in the industry by which desire of a customer is not uniform and supply is
standardized and to give a customer high satisfaction in the opposite case.
A deficiency of service capacity is regarded as NP(Network Performance), QoS consists of
Service Support Performance, Service Operability, Serviceability, and Service Security Performance.
Such NP and QoS is not an individual concept but the mutual complement property.
Such NP and QoS have the mutual complement-character which is not an individual concept, and
such general service quality has positive relationship with customer satisfaction and a direct influence
on customer loyalty (Bitner, 1990). This deterioration in the quality rapidly causes customer
secession and conversion for the competitor simultaneously.
When considering only the positive feedback of Figure 2 in the beginning stage, as the leading
company which has a high market share raises customer satisfaction and the customer market share
continuously strengthens itself, the gap between the leading company and the late-coming work
company becomes larger. Ultimately, it is thought that only one company will survive.
Such concepts make companies likely to carry out a bleeding competition to keep customers. A
competitive subside provision strategy of the 3 carriers are typical examples reflecting this
competition.
However subsidy provision of an equal level cannot have differentiation as a result, but comes to
fall as only profitability aggravation. It comes to fall into the vicious circle which can not only offer
the incentive for new customer collection but also spread the burden on its users.
Also, the increment of customers has a form that the market share of mobile phone companies is
converged on a proper level by activating a balance loop like Figure 3.
4, Simulation Results
A simulation designed to track the variation in the number of subscribers and the market share for
mobile phone services providers under multiple scenarios of combinations of government policies
presents two implications: First, in relation to the introduction of Mobile Number Portability(MNP),
had the system not been introduced one by one in turn, SKT, the incumbent mobile carrier in the
industry would have had a good chance of strengthening its significant market power. Even in the
case the system was introduced by turn, the competitive mobile carriers would be able to increase
their market share in the initial stage, but starting from the temporal point that all the three mobile
phone carriers are put under the MNP, the leading SKT's market share would rebound, and had they
enforced the sequential introduction of the MNP one year earlier, the phenomenon would have
proceeded more speedily. So the study found that with the introduction of the MNP alone, they fell
short of controlling the incumbent mobile carrier's significant market power, but that still the
sequential introduction of MNP would be most timely and most effective if they began introducing
the system in January, 2004.
Second, the simulation found that the discriminating frequency usage fee and the interconnection
charge would resolve the disadvantageous position for the competitive mobile carriers' in controlling
the cost, providing them with some rooms for more price-cut or helping them accumulate the
investment capital for their service quality improvement, thus providing the competitive mobile
carriers with the chances of their developing competition edges that will continue and will be more
fundamental than the introduction of MNP would give them.
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Figure 5 Stock-flow diagram for Simulation
Especially, a comparative analysis of individual regulation policy and their mix showed that if the
competitive mobile carriers were encouraged to charge down by giving them preferential treatments
in their frequency usage fee and their interconnection charge while introducing the MNP, the
controlling effect over the incumbent mobile carrier's significant market power can come out more
durably and more effectively, signifying that it is really important to analyze the complex impacts that
may result from various policies rather than to analyze the individual regulation policy enforced by
the government.
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Figure 6 SKT the number of subscriber graph
Figure 7 SKT market share graph
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Figure 10 LGT the number of subscriber graph
Figure 11 LGT market share graph
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2004
Scenario 1: not conducting of government policies
Scenario 2: PCS carriers’ price reduction by 10% in 2004(KTF & LGT)
Scenario 3: Sequence introduction of MNP in 2004(in order SKT, KTF, LGT, interval is six
Scenario 4: Sequence introduction of MNP with PCS carriers’ price reduction by 10% in
5. Conclusion
Based on the results of the simulation analyses, it was pointed out that the focus of the governmental
regulation policies should shift from the protection of the competitive mobile carriers to the customer
protection. In the same token, the study gave its emphasis to the basic principle of regulation which
mitigates the economic regulation while tightening up the social regulation.
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