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1 Lessons from South Korea: When Broadband Meets the Mass Market The adoption of broadband Internet access by the mass market has the potential to revolutionize the businesses of both local telecom and cable operators. It may open the door to a variety of popular new services and associated revenue streams, but at the same time it will cannibalize some established revenue streams. Indeed, some operators are struggling to generate net revenue growth from the switch to broadband, and almost all countries still have a long way to go before broadband becomes a mass-market phenomenon. The lone exception is South Korea, where more than half of all households (8.5 million homes) now have broadband connections. Broadband penetration is three times greater in Korea than in the United States and more than ten times greater than in Germany and France. In the past two years, the adoption rate has grown more than 20-fold, which in turn has led to the development of Korean applications and services that have yet to appear elsewhere. Korea s experience has important implications for other countries. We will focus here on three critical questions: What has caused the rapid penetration in Korea? How has broadband changed consumer behavior? And which players are likely to make money from broadband? The Drivers of Penetration The rapid adoption of broadband in Korea has been driven by a confluence of factors. We see five forces as particularly significant. A high percentage of households have PCs. Korea has benefited greatly from a large installed base of personal computers. In 2001, more than 70 percent of all households had PCs, which they used primarily for entertainment, homework, and . The government has played an influential role in encouraging consumer adoption by giving incentives to PC makers to offer inexpensive models and by requiring all public schools to offer computer training. As a result, broadband service providers have a large potential market of homes with PCs. Subscription and connection fees are relatively low. In contrast to the United States and most European countries, where monthly subscription rates for broadband can be more than $50, monthly access in Korea starts at less than $30. A big factor behind the low prices is industry competition. In many areas, consumers can purchase DSL or cable broadband service from multiple providers. To attract new subscribers, service providers pursue aggressive and highly visible marketing programs. Some hold weekly contests for new customers, with prizes (such as new refrigerators) for the winners. As in many markets, the up-front broadband-connection fees are typically waived for new customers. Users get to test-drive broadband services in PC rooms. Among younger Koreans, in particular, interest in broadband Internet has been fueled by PC rooms, or Internet cafés, which have proliferated throughout the country. Currently, there are some 24,000 PC rooms in THE BOSTON CONSULTING GROUP 1

2 Korea double the number three years ago. People in their late teens and twenties gather at these establishments after school or work with friends to play online games, check e- mail, or have video chats or blind dates. The PC rooms, most of which are independently owned, typically charge customers hourly fees (less than $1) to use a PC with broadband access. In some cases, users pay additional fees for premium services. Highly popular applications have been developed that build on broadband s unique features. Games such as NCsoft s Lineage and Nexus s Kingdom of the Winds are among Korea s most successful broadband applications. They take extensive advantage of fast connection speeds, broadband s always-on feature, and networking capabilities that allow thousands of users to play simultaneously. Industry data show that many young people who began playing games in PC rooms continue to pursue these activities with their broadband connections at home. The fat pipe and continuous connection are responsible for the rapid growth of other types of applications, too, including video chatting and online stock trading. Although electronic stock trading was available in Korea with narrowband service, in the past three years it has more than tripled. Retail investors see online trading through broadband as both quicker and more reliable. Currently, more than 60 percent of the country s retail share transactions are conducted over the Internet. Government policies have been supportive. Over the past decade, the Korean government has backed several policies that have fostered broadband deployment and adoption. Encouraging PC makers to offer low-priced units and promoting computer training at schools has been helpful. Yet other policies the investment of $1.2 billion in the build-out of high-speed data networks nationwide, free broadband connections to all primary and secondary schools, and competition among the various service providers have been significant as well. Together they have resulted in the widespread availability of broadband service and low prices. Changes in Consumer Behavior Korean consumers, with their appetite for and comfort with technology, may be somewhat unusual compared with consumers in other industrialized countries. For many Koreans, having a PC has become as important as owning a TV or refrigerator. Nevertheless, as Korean households gain access to broadband services, they display three significant changes in behavior. With broadband, users spend more time online. Korean broadband subscribers spend substantially more time online than users in other markets, where Internet access is predominantly through dial-up service. According to recent data, users in Korea spend an average of 16.3 hours per month online, compared with 10 hours for users in the United States and 7.9 hours for those in Japan. (See the exhibit South Korea Leads Other Countries in Broadband Usage. ) While online, they view two to three times more Web pages than consumers in other countries. What s more, higher Internet usage appears to be cutting into the time Koreans spend watching TV. Despite a welldeveloped television market with three major commercial networks, more than 50 cable chan- THE BOSTON CONSULTING GROUP 2

3 nels, and the recent introduction of satellite TV per capita viewing time in Korea dropped 8.6 percent in Users broaden their range of online activities. Both online games and multimedia chatting have gained rapid acceptance among young Koreans using broadband. However, as the user base expands to people over 30, other types of applications are generating increasing interest as well. For example, e-commerce is growing more than twice as fast in Korea as in other countries. Among the country s fastest-growing e-commerce categories are electronic banking and Internet shopping malls, which sell a wide range of products, including consumer electronics, clothes, and vacation tours. Another area that is catching on is online education, or e- learning. For example, baeoom.com offers interactive tutoring to prepare students for school entrance exams and foreign-language instruction. Customers pay a flat monthly fee of $16 to $24 per course. South Korea Leads Other Countries in Broadband Usage Average 20 user hours per month Hong Kong United States Germany Japan Spain United Taiwan Singapore Kingdom France Denmark Percentage of households with broadband Internet SOURCES: emarketer; NetRatings; NetValue; BCG analysis. South Korea (57%, 16.3 hours) Consumers are willing to pay for services. With narrowband Internet, most consumers have been averse to paying for online services. With broadband, however, there are early signs that, for some users, the resistance to paying is breaking down. This is occurring mostly in cases where the online service is an extension of the traditional service, a reasonable alternative to that service, or somehow distinctive in how it uses the power of the network. For example, Seoul Broadcasting Service, a TV network, sells reruns of its popular soap operas and sitcoms on demand over the Internet for about 40 cents per episode. SBS generates almost $400,000 per month in revenues from these services. Similarly, both Korea.com and Lycos Korea sell streaming movies and cartoons on either a payper-view or monthly basis. In January 2002 the first month it offered its new premium service Lycos Korea had an average of 100,000 customers per day. One of Korea s most novel feebased services is NeoWiz, a multimedia chat community that generates most of its sales from subscriptions to SayClub. Members pay to interact with one another in real time through avatars (virtual images of themselves), which they design according to their own preferences. In 2001, NeoWiz earned $5.3 million on revenues of $24.2 million. Making Money with Broadband Although broadband is generating considerable consumer interest in Korea, translating that interest into profits and a sustainable business model has proved challenging. Players must address several important issues if they hope to succeed. Competition among access providers creates a situation in which it is difficult to make money. The degree of competition in Korean THE BOSTON CONSULTING GROUP 3

4 broadband has been a two-edged sword. Although it has pushed down prices and led to rapid subscriber growth, prices have fallen to levels where access providers have difficulty making money. Industry experts think the biggest player, Korea Telecom with more than 4 million subscribers has recently passed the breakeven point, and that the number-two player, Hanaro Telecom, will be profitable by the end of this year. Small players, however, are still struggling. Consolidation among access players may be the only immediate way to increase profitability. In the near term, a reduction in the number of broadband providers could help relieve the financial pressure on providers by reducing the need for overlapping network investments and lowering marketing costs. Still, investors worry about long-term growth. Now that more than half of all households have broadband access, subscriber growth rates are slowing down. Ultimately, operators are hoping to generate revenues over and above subscriber fees by establishing portals and selling content and application services (either their own or someone else s). Applications and services are proving to be hit-driven businesses. For mobile phone operators, Japan s i-mode proved that subscribers would pay for the right mobile services. Similarly, Korean broadband operators are discovering that when services have the right features, customers will pay for them, too. However, the market dynamics are much like publishing, entertainment, and software: the market is highly fragmented, and consumer acceptance is extremely variable. Indeed, the applications and services that consumers like best tend to generate a high percentage of both revenues and profits in the category. For example, NCsoft captured more than 40 percent of all Korean game revenues in (In 2001 the company earned $13.4 million on revenues of $98.8 million.) For every big winner, though, there are dozens of less successful offerings. Challenges for Broadband Players In some ways, South Korea is not a typical market. It is urban, highly educated, youth oriented, and technologically sophisticated factors that combine to make it extremely open to broadband adoption. But to dismiss the country s experience as irrelevant would be a mistake. Rather, the Korean experience highlights two challenges for broadband players in all markets: How do you achieve critical-mass penetration without undermining the economic attractiveness of broadband access? There is little doubt that lower prices help drive penetration. But since relatively few broadband applications have made money so far, it will take a brave operator to subsidize access in anticipation of future revenue from services. The challenge, then, is to find the nonprice levers that drive penetration. Providing consumers with opportunities for trial either in PC rooms or at home, with low connection fees and short contracts is key. Building strong word-of-mouth support is also essential. Operators need to find the levers that work best in their local markets and cultures. How do you create an environment in which applications and service businesses can develop and grow? In Korea, a number of factors have converged. The critical mass of potential users has been important, but so has the abundance of PC rooms, which provide a showcase for new services. If broadband is going to generate significant new revenue streams from consumers, new applications and services will be THE BOSTON CONSULTING GROUP 4

5 required. The markets for such services are likely to be highly segmented, but in many segments they will also exhibit winner-takes-all characteristics. Operators need to find ways to create the environment that fosters these markets. * * * Korean broadband gives us a glimpse of the upside that broadband Internet can offer: a truly mass-market product that appeals to a wide range of customer segments; Internet usage that continues to grow and takes share of customers time from old media; and consumers who start to display a willingness to pay for Internetdelivered services. The challenge for service providers in other countries is to understand the differences, take note of the similarities, and apply the experience creatively at home. Harry Kwon Henry Elkington Bob Victor Harry Kwon is a vice president in the Seoul office of The Boston Consulting Group. Henry Elkington is a vice president in the firm s London office. Bob Victor is a vice president in BCG s Washington office. You may contact the authors by at: kwon.harry@bcg.com elkington.henry@bcg.com victor.bob@bcg.com The Boston Consulting Group, Inc All rights reserved. THE BOSTON CONSULTING GROUP 5