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 The IMT-2000 Project

 The Goose that Lays the Golden Eggs?  

Will Korea's IMT-2000 (International Mobile Telecommunication ) project be the goose that lays the golden eggs for the eventual operators? The licenses to participate in what is considered to be a guaranteed moneymaker will be awarded at the end of this year. Meanwhile, wireless phone service providers are competing head-to-head to determine who will be the lucky winners.

A contest is presently going on in Korea. The contest is being waged both domestically and internationally and the rewards are considered to be high. The prizes at stake are the licenses to operate Korea's third-generation IMT-2000 ( International Mobile Telecommunication) project. The contest has been both open and behind-the-scenes, and in many respects, it has been fiercer than that for the selection of second-generation mobile phone personal communication service (PCS) licensees in 1996. The growing competition for the IMT-2000 licenses have been fueled by the forecast that mobile phone services will become the mainstay of the information and communication industry. This has been substantiated by the fact that, following a whittling down process, the surviving 2G ( second-generation) PCS operators have managed to prove their businesses "Golden eggs" to some degree.

Industry observers opine that the outlook for 3G and 4G wireless systems is similarly positive. They point to the fact that, SK Telecom, which claimed 11 million subscribers as of the end of last year, generated 4.3 trillion won in turnover and 306.8 billion won in net profits in the same period. This translates into a 20 percent rise in revenue and a 102 percent increase in net profits from a year earlier. The firm has expanded its subscriber base to 15 million since it took over Shinsegi Telecom this year.

Investors have responded to these developments by boosting SK Telecom stock from a recent low of 1 million won per share in September 1999 to 5 million won per share in February this year, the highest Korean share price ever attained. In addition, its high level of cash flow is representative of the attraction the mobile phone industry has held for investors. Industry players have garnered huge profits since they established their networks and began operations.

However, skepticism is emerging in many quarters about the "rosy" notion that the IMT-2000 project will be the cash cow it has been hyped to be. The doubters cite primarily that the project will involve initial costs of several trillion won and will take at least four to five years before operations will break even.

They also point to the fall-out from over-competition in the PCS market, which resulted in HansolM.com being acquired by Korea Telecom and Shinsegi Telecom being taken over by SK Telecom. In both cases the costs of excessive, overlapping facility investment and the practice of giving subscribers phone sets for free sealed the fate of the companies which exited the market.

During a recent seminar on IMT-2000, Prof. Kang Cheol-hi of Korea University said, "The demand for wireless Internet service will expand greatly. However, demand through notebook computers will exceed that through mobile phones ," he said. "It is thus highly likely that the IMT-2000 project will become the goose that will 'lay an egg' rather than lay golden ones."
 

A consensus of experts, though, is of the notion that the IMT-2000 project will prove lucrative. They say it is inevitable that the industry will adopt the 3G IMT-2000 in place of the current 2G PCS mobile phone system. They also foresee the market becoming even greater.

The Korea Information Society Development Institute ( KISDI) recently projected that the IMT-2000 project will generate 28 trillion won in additional GNP over the 2002-2010 period. It also forecasted that the project will produce added value worth 21 trillion won throughout the economy and create 550,000 jobs over the same period.

The Electronic Telecommunication Research Institute (ETRI ) foresaw that the new project would boost GNP by 49 trillion both directly and indirectly during the same period. It forecast the project would generate 31 trillion won in added value and 550,000 new jobs. It is figures like these that have focused industry players on achieving winning bids.

Internationally, the impending introduction of IMT-2000 systems is the subject of intense interest because of the potential to form a global network. Many Western industrial countries have already selected IMT-2000 operators and determined technology standards to be used.

Finland selected four operators in March this year. Britain and France have already finalized their operator selection processes. Britain chose five operators under an auction system, collecting 39 trillion won from them in payment for frequency allocation. France also selected four concerns under a screening system, receiving 21 trillion won from them for the same purpose. Japan chose three operators without demanding payment for frequency allocation. The Ministry of Information and Communication (MIC) has set a minimum payment for band allocation at 1.0 trillion and a maximum at 1.3 trillion won, each. Observers predict all those selected will pay the amount required, although the industry has complained that the price was set too high.

The Korean government announced its procedure for the selection of operators at the end of July. The MIC will announce the successful applicants at year's end after receiving their project submissions in September. The ministry has tentatively decided to select three operators. Initially, four candidate groups began vying for IMT-2000 licenses: Korea Telecom, SK Telecom, LG Group and the Korea IMT-Consortium led by Hanaro Telecom.

Korea Telecom formed a consortium, which included its major subsidiary, Korea Telecom Freetel, enlarged by the takeover of former PCS competitor HansolM.com (later renamed KT M.com) on June 15th. Korea Telecom now represents a gigantic business group claiming 7.6 million mobile phone subscribers and 23 million fixed-line phone service subscribers.

SK Telecom is the undisputed leader of the nation's mobile phone industry. It has 15 million subscribers following the acquisition of Shinsegi Telecom and is a favorite to win an IMT-2000 license. SK Telecom is seeking to join hands with NTT DoCoMo of Japan to bolster its financial standing and enhance its technological capability .

LG Group has distinguished itself by being the only conglomerate, or chaebol, to simultaneously operate as a service provider and an equipment maker in the communications market. By becoming a major shareholder in Dacom, it boosted its capability in the area of wireless phone service provision and fixed-line equipment manufacture. Its only demerit has been that it lost to Korea Telecom in the takeover battle for KTM.com, a development that fortified the latter's stake in the mobile phone market.

However, LG's bid has gained momentum since it won the backing of LG Telecom shareholder, British Telecom. Peter Erskine, CEO of British Telecom Wireless said, "BT will take part in the bidding for the IMT-2000 license to help LG participate in the project." Mr. Erskine recently visited Korea and discussed his company's intentions during a press conference held Aug. 16th. BT, the second largest shareholder in LG Telecom (LGT), has already won the right to operate the IMT-2000 project in Britain. It is presently anticipating in IMT-2000 projects in Germany and Japan as a major shareholder in system operators.

Hanaro Telecom joined with PICCA, a consortium of information and communication-related small and medium sized businesses formed in conjunction with the Korea Federation of Small Business (KFSB). Hanaro, which entered the ring under the name, Korea IMT-2000, is a novice in the mobile phone business. Given the intensifying level of assistance to venture businesses and small and medium sized companies at the state level, its consortium initially drew attention as the possible dark horse in the race.

Hanaro has since declared that the consortium would eventually break up, proclaiming that the participants in its grouping would be allowed to seek alliances with the other three major consortia.

CDMA versus W-CDMA

For those companies bidding for the IMT-2000 project, the technology standard to be adopted has been the main point of concern. Faced with choosing between CDMA (Code Division Multiple Access) and W-CDMA (Wideband-Code Division Multiple Access), the government has opted for the concept of a double standard.

Although the wireless market currently employs the synchronous CDMA technology, first commercialized in Korea and through which over 26 million subscribers are served, the country's mobile phone operators have moved to adopt the W-CDMA system.

Asynchronous W-CDMA technology is widely employed throughout Europe and many other parts of the world as a technology standard. In fact, over 80 percent of the world's mobile phone systems are based on W-CDMA technology. Since 1996, the Korean wireless industry has focused on developing products based on CDMA technology to the neglect of the W-CDMA area. To date, relatively few equipment makers and mobile phone operators have been successful in making inroads into the development of W-CDMA based products and systems.

In contrast, domestic companies can boast world-class technological capability in the CDMA area. As the technological reach of the domestic industry has progressively extended, the number of related components made in Korea now exceeds 400, representing a localization ratio of 63 percent. The trade surplus in CDMA systems and handsets is forecast to reach $3 billion this year, contributing to the national drive to achieve a record trade surplus in 2000. Since an increasing number of mobile phone service providers worldwide have adopted W-CDMA as their technological operating base, the CDMA method accounts for less than 20 percent of the world wireless market. As a result, the CDMA-based domestic wireless industry has been disadvantaged in its efforts to launch an IMT-2000 system , the chief object of which is to provide a global standard of communication.

Korea Telecom, along with its partners KT Freetel and KT M.com, currently claim 30 percent of the CDMA-dominated domestic mobile phone market while LG Telecom/ Dacom has about 15 percent. SK Telecom/Shinsegi Telecom has a stake of more than 50 percent. All three bidders have expressed their intent to adopt the W-CDMA method as the government has announced a double technology standard for the Korean IMT-2000 project.

It's a different story in regard to Korean equipment markers. Individual companies have different levels of technological capability and some are opting for CDMA over W-CDMA. Samsung Electronics, the nation's largest maker of phone sets, acclaims the CDMA method, stressing that the domestic industry cannot give up on CDMA as it has the world's best technology in this area.

In particular, Samsung claims that as the firm is currently developing 5Mbps level wireless data technology, its CDMA technology is far superior to that of W-CDMA. In view of current trends in technological development, Samsung maintains that in fourth- generation products, for which the data transmit speed will reach 20Mbps, the CDMA method will be adopted as the technology standard.

Specifically, Samsung asserts that although CDMA technology was launched four years after that of W-CDMA, its use has spread to 44 countries around the globe. Initially, only three jurisdictions - Korea, the United States and Hong Kong -employed the method. In addition, CDMA's 20 percent market share cannot be regarded lightly considering its short history, asserts Samsung. In addition, Samsung maintains, citing research by expert institutes, that CDMA 's market share will continue to increase, exceeding 30 percent by 2002 when IMT-2000 systems will begin to be commercially viable. The chaebol also argues that adoption of the W-CDMA method has a significant demerit in that it requires the payment of much greater royalties. Samsung claims that since ownership of W-CDMA technology is shared by 27 enterprises, those companies adopting it as a standard will have to pay more in the way of royalties than if CDMA becomes the standard.

Hyundai, a latecomer to the field of wireless equipment manufacture also maintains it would prefer the CDMA system. Hyundai Electronics Industries' vice president Park Hang-koo said it had been complete nonsense for the government to adopt the double technology standard. "So far, the mobile phone companies are estimated to have spent about 2 trillion won promoting services and expanding their subscription base," he said, "and about 60 percent of the money was spent subsidizing the purchase of mobile handsets.¡±

Mr. Park's remark underscores the high price of phone sets due to costly royalties. Hyundai asserts that the adoption of the CDMA method will mean lower subscriber costs since the company also believes use of the W-CDMA method will involve higher royalties.

By contrast, LG Information and Communication (LGIC) has opted for the W-CDMA system with an eye to expanding its global roaming service, advancing into overseas markets and gaining price competitiveness in handsets through mass production. LG recently developed a W-CDMA based commercial service system, which enables simultaneous audio-visual communication. It has also completed the development of key visual units that can run on either CDMA or W-CDMA technologies.

In addition, the company opposes the notion that the CDMA system has a technological edge over that of W-CDMA. LGIC senior executive officer Lee Jeong-ryul said , "Although some have claimed that CDMA technology offers more prompt service than that of W-CDMA, that's nonsense. Rather, it is the W-CDMA next-generation technology that is faster, and the two technologies should be compared on the same basis."

Despite the brewing dispute over the most suitable technology standard, the government has maintained its double standard policy although its requirements are bound to become more specific in the near future. Should all of the would-be operators opt for the W-CDMA method, a trade conflict with the United States in all likelihood would be sparked. U.S.-based Qualcomm Inc holds proprietary rights to CDMA technology, the standard on which the Korean wireless industry is based. A switch to W-CDMA would mean a major portion of royalties would be paid instead to European developers Nokia of Finland and Ericsson of Sweden. Experts share the opinion that the government and the hopeful operators will solve their differences shortly.

The government, for its part, appears to want to keep the domestic market CDMA-oriented to protect it from outside competition in the event that it is completely opened as agreed with the World Trade Organization. In addition, the government is keen for CDMA technology based domestic companies to maintain sales in foreign markets. Against this backdrop, some in government have called for the 57 percent state-owned Korea Telecom to be the vanguard of CDMA technological development and the promotion of CDMA systems and products.

Pressure is similarly mounting on SK Telecom to follow suit. The government believes that should SK Telecom, which claims more than 50 percent of the mobile phone market, adopt the CDMA system, Korea Telecom and LG, should adopt a W-CDMA-based system. Both Korea Telecom and SK Telecom, though, have declined to adopt CDMA system, and at present it is not certain who will .

Small in Size but Strong in Technology

While the intense debate over the technology standard to be adopted for the IMT-2000 project involves large enterprises in general, small and medium-sized companies have also begun to throw their hats into the ring. According to a forecast by the Information Communication Technology and Management Institute, an organization under the umbrella of the ETRI, the IMT-2000 handset market will reach 689.7 billion won while the associated systems market will amount to 1.67 trillion won by 2002. Given also the potential for exports, the total market is set to expand phenomenally as other countries prepare to introduce IMT- 2000 projects. Meanwhile, an increasing number of small and medium sized Korean businesses are seeking involvement in the domestic project. Experts say that depending on their ability to gain technological advantage, small firms might emerge as formidable competitors in the IMT-2000 market. Such firms include Telson Electronics, Sungmi Telecom, Pantech, and Locus.

Established in 1992, Telson began production of CDMA handsets in 1997. Despite its relatively short history in this area, the company ranks third in terms of Korean handset production after Samsung and LG, and rates between second and third places in terms of technological ability.

Telson supplies phone sets under original equipment manufacturing (OEM) agreements to Korea Telecom Freetel, LGIC, and Motorola, which export the products. Telson aims to secure the CDMA market before capturing the W-CDMA market on a gradual basis. Because of the huge facility investment costs demanded by W-CDMA technology, the firm judges Asia's newly industrializing economies like China, as well as Latin American countries will look eventually to adopting CDMA based systems.

Sungmi Telecom, which is considered to be strongly competitive in the W-CDMA area, decided as far back as 1997 to develop the basic technology and related systems. The company began development of its own IMT- 2000 W-CDMA transmission stations and handsets in June last year. A transmission model station designated BS- 2000P /D was eventually completed. Sungmi, which already has a demo system in operation, aims to complete the formulation of its plan for a network of W-CDMA transmission sites and associated handsets by March next year.

By planning to have the actual hardware in place by December 2001, the company is aiming to participate alongside the large companies in the IMT-2000 test service in May 2002, and be a player in the operation of the subsequent commercial service.

Pantech is well known for its stable management and its potential for growth. On the basis of its pager manufacturing technology, it has been supplying 2G and 2.5G handsets to Motorola under the OEM system. While gradually closing out its declining pager business, the company has been focusing on mobile phone production, registering a total turnover of 240 billion won last year. As a result of its success in the mobile phone sector, Pantech has emerged as a leader among small and medium sized handset makers.

With regard to its approach to the IMT-2000 project , Pantech is seeking to develop both CDMA and W-CDMA technologies. In the CDMA area, the firm is maintaining its 2G service level handset production and is preparing to launch a new series of MC1x handsets that will match the IS-95 C service in March next year.

Locus has maintained a competitive level of technology with respect to its preparation for the introduction of IMT- 2000. The company has continued to develop key technologies pertaining to voice mail service (VMS), computer telephone integrated (CTI) call centers and the Locus Intelligent Point System (LIPS), covering applications in telecommunications, Internet service and digital networking infrastructure, respectively.

In January this year, the firm took over Sevenwave, a wireless and fixed-line Internet solution provider, laying the groundwork to advance into the IMT-2000 equipment market. Earlier this year, the company participated in the development of specific tasks for the Network Integrated PC Client (NiPC) system. The system provides bilateral A/V and multimedia Internet service via a high-speed wireless and wired communication environment.

It is anticipated that NiPC will be developed as a standardized system that will provide appropriate service to support the IMT-2000 project. The current stage of development of NiPC indicates the maturity of the firm's preparation for the introduction of the IMT-2000 project. The firm claims it will have no difficulties in bringing the NiPC project to fruition as it has acquired competence in both CDMA and W-CDMA technologies.

Global mobile players set sights on the domestic mart

With only four months before the Korean government selects the operators of the IMT-2000 program, the world's leading companies in the field are positioning themselves to claim a stake in what is anticipated to be an extremely lucrative market. The major players attracted by the promise of the domestic market include Ericsson, Qualcomm, Lucent Technologies, and Motorola.

These giants of the industry, well-financed and regarded as technological powerhouses in their fields, are multifaceted in their ability to compete. They are also seeking to forge alliances with local companies.

What has drawn them to the Korean market? There are two reasons. First, Korea has a mobile telephone market penetration rate in excess of 60 percent and ranks second with regard to growth in Internet service subscriptions. All in all, Korea is regarded as a very promising market in the area of IMT-2000, which represents an integration of Internet and mobile phone services. In addition, Korea is among the few countries that have devised a feasible timetable for the introduction of an IMT -2000 project.

Ericsson of Sweden, whose products and systems are GSM ( Global System for Mobile Communication) based, has been the most active of the foreign companies in positioning itself for the launch of the IMT-2000 project. It has recently joined hands with Nokia, another world leader in GSM technology, to prevent Qualcomm taking a leadership position in the Korean market.

In seeking an alliance with domestic companies, the Swedish firm is also poised to offer three "strategic initiatives"- reduced royalties, technology transfer and local production. In June this year, the firm formed a business tie-up with LG Telecom to produce IMT-2000- related goods in Korea. As part of the deal it charged royalties at rates below those of its major competitors, including Qualcomm.

In response, Qualcomm, the originator of the CDMA technology and a leader in the associated market, has begun to take countermeasures to contend with the challenge from Ericsson. Its strong suit is offering technology transfer, pointing to the fact it has already transferred CDMA technology en masse to the domestic wireless industry to enable it to become the standard for Korea.

The company's chief vice president recently visited Korea and declared his company's intention not to lose its footing in the Korean market under any circumstances. He said to this end, the firm would introduce products based on both the CDMA and W-CDMA technologies.

Lucent Technologies, the world's largest maker of information and communication equipment, has also declared its intention to enter the Korean market. The company attracted considerable local industry attention by the display of its Universal Mobile Telecommunication System (UMTS) at the 5th Inter-national Information and Communication Exhibition held May 28th at the Convention and Exhibition Center (COEX) in southern Seoul . Scott Ericsson, the firm's vice president who took part in the event, said the company would set up a Bell Research Institute in Korea within the year.

Korea has emerged as the stage where the world's leading communications giants will fight for dominance in the 21st century. It is a contest in which Korean industry players will be forced to hone their competitive edges in an environment of ever harshening competition.