Case Study on Hybrid Business Model: KT s Olleh TV Skylife

Transcription

1 Journalism and Mass Communication, ISSN March 2012, Vol. 2, No. 3, D DAVID PUBLISHING Case Study on Hybrid Business Model: KT s Olleh TV Skylife Minzheong Song KT Economics and Management Research Lab, Seoul, South-Korea This paper aims to analyze a case of a telecom operator, Korea Telecom (KT) s hybrid business model Olleh TV Skylife (OTS). This case is KT s new hybrid network and set-top-box (STB) which combines Internet Protocol TV (IPTV) with Direct-To-Home (DTH) satellite reception and business. It serves now as a guideline to better understanding hybrid consumer behavior and their needs. This paper shows how KT s OTS has been formulated as a new business model, how it has changed the market structure, and how it has experienced a successful market performance with new business idea and innovative technology. Before analyzing this case, it firstly discusses about the technological situation and the industrial organization (IO) theory. After this, it shows the previous service offerings of cable TV, satellite TV, and IPTV, before launching OTS and shows that the mixed service portfolio of satellite TV and IPTV is the perfect service combination to beat the cable TV in terms of hybrid consumer needs. After explanation about OTS, this paper verifies whether this hybrid business model really changes market and generates a good market performance and operating synergy with KT s other businesses of content, network, and marketing. In conclusion, this paper expects future growth potential of OTS and KT Skylife in terms of subscription fee, home shopping, and advertising sales based on the total subscriber base. Keywords: hybrid business model, IPTV, satellite TV, industrial organization theory Introduction In the context of TV-Internet Convergence, TV platform operators are trying to seek some innovative ways because the Internet technology would impact the way it does TV business. However, the revolution of the Internet TV has not yet turned out to be anything that people once thought it would be in Korean peninsula, even if the connected TV is available now. Moreover, the connection between social network and TV channel programming is a key issue, but is not realized in the actual use of TV viewers yet. Most TV consumers, especially heavy TV audiences still prefer to engage in traditional way of use. It is not expected yet in Korea that the cord-cutting would be a coming challenge and threat for the pay TV industry, even if the consumers have begun to exercise more choice in the configuration of their TV and video entertainment services in alternative TV like smart TV. This paper aims to analyze a real case of the optimized service offerings because of such slowly changing TV consumer behavior. The case is Korea Telecom (KT) s Olleh TV Skylife (OTS), which is a hybrid business model combining Internet Protocol TV (IPTV) with Direct-To-Home (DTH) satellite reception. This paper will firstly discuss about the technological background of hybrid business model innovation and also the industrial organization (IO) theory. Based on this, it will show the service offerings of cable TV, satellite TV, and IPTV just before the Minzheong Song, Ph.D., senior researcher, KT Economics and Management Research Lab.

2 492 CASE STUDY ON HYBRID BUSINESS MODEL launch of OTS and will explain how the OTS is effective as the mixed service portfolio of satellite TV and IPTV in terms of meeting current consumer needs. Then, it will verify how this hybrid business model OTS changes the market structure, generates a good market performance and operates synergy with KT s legacy businesses, and it will finally vision KT s future innovative business potentials in terms of the TV business ecosystem. Research Background, Questions, and Methods Technology Description Among all the actors in the value chain of the pay TV industry, telecom operators have particular interests in developing digital television service over IP, to sustain long-term profitability, thanks to the technological convergence between broadcasting and telecommunication sectors. It is a chance for telecom operators to leverage their brand equity to offer attractive bundled services and to create the loyalty of broadband and fixed line customers. Also, it can offer telecom operators the opportunity to consolidate multiple specialized networks into one cost-efficient network, as a step in the upgrading of their networks to next generation networks. Telecom operators have emerged as new entrants in the digital pay TV market and been aiming to capture a fair amount of market share. However, it is increasingly not clear, whether new IPTV business models initiated by them would be viable or not, because it is doubtful that the telecom operators TV service offerings should compete with the service package transmitted by the first movers such as cable TV, satellite TV operators. In fact, the cable TV operators in Korea, like in many other countries, still have a significant power in the pay TV market. After the deregulation of telecommunication market, the cable TV operators start entering into the program service, data service and the Voice over Internet Phone (VoIP) market too. A mature business model powered by appropriate technology was lacking in this convergence era. Facing the complexities and dynamics of the changing Information and Communication Technology (ICT) landscape, a very clear and comprehensive business model for IPTV is very important for its sustainable market performance. The ICT solution providers and media service providers best positioned for future success are the ones that take a hybrid approach to customers, combining traditional product sales and support with new offerings, e.g., in managed services, recent cloud computing and customized application development of several telecom and media companies. Especially, today s TV platform competition tends to go beyond single networks and becomes a battle among service domains. That means, the focus has changed from the network-based to the user-experience-based business model. The network is not fixed, but flexible to satisfy the customers. It means the network is just a method to enhance the customer experiences. In this scenario, the competitiveness becomes more complicated in the whole value chain. Moreover, the service provided to the end user is determined by the effectiveness and efficiency of the hybrid network technologies and also the cooperation of all related companies in the value chain. The premise that nature of business models must be dynamic, as the current level of competition puts pressure to shift from sales market to customer market, a response to a changing market environment, requires shifting from legacy to new innovative business models. In practice, companies have opted to use hybrid business models as alternative approaches. In regard to the hybrid network technology, an alternative approach for the delivery of linear TV

3 CASE STUDY ON HYBRID BUSINESS MODEL 493 accepted by ITU-T as of 2008 is to enable the end-users IPTV device to receive the broadcast signal from the broadcaster, e.g., via traditional distribution techniques such as digital satellite TV or terrestrial digital TV. This will then be combined with on-demand content delivered over the network from the network provider (See Figure 1). Figure 1. Hybrid IPTV (Online & off-air TV delivery). In a saturated and stagnated market structure of pay TV industry in Korea, operators usually strive to obtain the largest market share. In that sense, pay TV operators can try to provide various services such as Digital Video Recorder (DVR), interactive services. The hybrid business model adoption is based on those feasibilities requiring new kind of competition and business strategies. Industrial Organization Theory as Theoretical Background This study will analyze the market performance of new hybrid business model, OTS. The market performance is theoretically related to the industrial organization theory which is used to understand the relations between the market structure, conduct, and performance. According to the online site, Wikipedia, the success of an industry in producing benefits for the consumer, depends on the conduct of its firms, which depends on the structure, factors that determine the competitiveness of the market. The structure of the industry depends on basic conditions such as technology and demand for a product. Components making up the structure, conduct, and performance (SCP) model for industrial organization include basic conditions such as consumer demand, production, elasticity of demand, technology, substitutes, raw materials, seasonality, rate of growth, product durability, location, scale of economies, and scope economies. According to Webster s New World Dictionary, industry refers to manufacturing productive enterprises collectively, especially as distinguished from agriculture. Industry also means any large-scale business activity, such as the tourism industry, for example. This double meaning is a frequent source of confusion regarding the object of industrial organization. According to Cabral (2000, p. 3), the industrial should be interpreted in the sense of Webster s dictionary. That means, industrial organization is concerned with the workings of markets and industries, in particular the way firms compete with each other. The main reason for considering industrial organization is its emphasis on the study of the firms strategies that are characteristic of market interaction: price competition, product positioning, advertising, research, development, and so on. The industrial organization is concerned primarily with the intermediate case of oligopoly, that is, competition between few firms (more than one, as in

4 494 CASE STUDY ON HYBRID BUSINESS MODEL monopoly, but not as many as in competitive markets). Based primarily on IO concepts, the IO analysis focused on the linkage between a firm s strategy and its external environment. It includes structure like the number of buyers and sellers, barriers to entry of new firms, product differentiation, vertical integration, diversification, conduct like advertising, research, and development, pricing behavior, plant investment, legal tactics, product choice, collusion, merger and contracts. It includes performance like price, production efficiency, allocation efficiency, equity, product quality, technical progress, profits, and government policy including government regulation, antitrust, barriers to entry, taxes and subsidies, investment incentives, employment incentives, macroeconomic policies. The linkage is evident in the SCP paradigm firstly produced by Bain (1968) and popularized with a strategy mindset by Porter (1980, 1985, 1996). The popularity of Porter s five-force framework in offering a analytical approach in integrating industrial economics and firm strategy established IO as the first major paradigm for strategy research (Albarran, Chan-Olmsted, & Wirth, 2006). The IO theory attempts to explain how companies behave and conduct different services from other competitors services, which in turn affect their market performances. The market structure is usually dependent on above mentioned several factors, and the market concentration of a few operators is the most powerful factor because it determines most about the market structure and performance as well. In TV industry, the TV market performance is heavily affected by the market structure. In a very concentrated market structure, operators usually strive to obtain the largest market share in terms of subscriber base and try to make the services that satisfy as many consumers as possible. The market conduct refers to a company s competition and business strategies and market performance which is evaluated based on the ability of the company to achieve the goals of several criteria such as organizational efficiency or service process (Porter, 1996). The hybrid business model adoption is one of the competition and business strategies to achieve more market share. Research Questions Major players in Korean TV market are free broadcasting operators and pay TVs including cable TV, satellite TV, and IPTV. Major pay TV players are cable TV operators, IPTV operators (KT, SK Broadband, LGU+), and KT Skylife, the only satellite TV player launched in March In fact, IPTV showed the fastest record of growing platform in pay TV services as of 2009, due to aggressive marketing power and triple play service (TPS) offerings with broadband and fixed voice service. Based on the IO theory, the Korean pay TV market performance is heavily affected by the market structure. Especially, the walled-garden cable TV has had super dominant position in Korean pay TV market thanks to the low price tariff for analog pay TV service offering. Before the OTS launch, in September 2009, the number of cable subscribers reached million. In contrast, there were only 2.4 million IPTV subscribers in the same period. In regards to the structure, IPTV market has been struggling with the following limitations: Firstly, the content expense burden causes low profitability of IPTV. As of 2009, the ratio of content expense to gross sales among cable, satellite, and IPTV is different: 15% of cable TV s gross sales, 33% of satellite TV s, and 138% of IPTV s. For offering more differentiated services, IPTV has to keep purchasing Video-On-Demands (VODs) and top-ranking channels with high content acquisition cost. Most of the top-rank channels in Korean program market are vertically integrated in one entity, such as terrestrial broadcasters with their own pay TV channels and

5 CASE STUDY ON HYBRID BUSINESS MODEL 495 a few cable TV groups, so-called multiple system providers (MSPs) with their own systems and channels. They can foreclose their channels, or even request huge amount of programming fees from IPTV operators. Secondly, the market saturation tends to lead pierce competition in pay TV service. Since IPTV is a new comer in pay TV market, there is a little room for telecom operators to beat cable TV operators. The only satellite TV in Korea has also similar limitations like IPTV operators. It does not have any interactive network. Therefore it needs other possible network resources from outside. It also has market limitation to increase number of subscribers. Both of them, IPTV and satellite TV operators need to change the rule to beat the almost unchangeable market structure dominated by cable TV industry. Based on the IO theory, they are supposed to conduct different service portfolios from competitors services which will affect the market structure and their market performance. Based on the technological situation and the IO theory, three research questions are selected as follows: Q1. What kind of service portfolio has the OTS tried for changing the rule? Q2. How is the pay TV market structure changed after two years of OTS adoption? Q3. How is the market performance of OTS in financial terms? Research Methodology This paper has no empirical analysis. The most of the data for this case study have been received by the internal business units of KT, media business unit and the subsidiary, KT Skylife, and also some investment bank research institutes. Those are used to analyze the market structure, conduct, and financial performance. The second method of this study is to have some related interviews with professionals in the business and academic areas who would like to discuss about this model adoption, the feasible market change and also policy issues in Korea. They are interviewed informally and referenced on this paper. Research Findings Conduct With Service Optimization According to company data of KT, channel variety and service price are the top priorities when current Korean people select pay TV services. It is also expected that broadcasting quality, such as HD and 3D, and interactive service will be the important pay TV services in near future. Before the OTS adoption, KT recognized the cable TV satisfied the consumers needs best. At that moment, the cable TV has satisfied the TV consumers needs best by serving more channels in shorter zapping time than IPTV s services. The cable TV has served very stable broadcasting service as well. On the other hand, IPTV has had its own strengths in interactive service and price as well, and satellite TV has various live channels with HD (see Figure 2). Since people usually focused on lots of channels with cheap price, the cable TV has had 73.8% market share in pay TV service before the launch of OTS. Seeking the solution to overcome these challenges, it has been thought about how about combining the strengths of satellite and IPTV. That was the beginning of hybrid STB concept. On the other hand, IPTV has its own strengths in interactive service and price as well, and satellite TV has various live channels with HD.

6 496 CASE STUDY ON HYBRID BUSINESS MODEL Figure 2. Key factors for pay TV service selection. KT, as a dominant IPTV operator, had to break through the limitations with new rule for developing convergence business model with KT Skylife. In the middle of 2009, KT found a solution, OTS based on the strategic cooperation with satellite TV, KT Skylife (previous Skylife) 1. Most consumers have not been interested in new IPTV until the hybrid business model was shown in the market. With the new brand, OTS, the new service offerings and price setting, they together can create differentiated services which cable TV cannot imitate. The OTS is sensational service portfolio with the new VOD offerings and price setting. Its concept is quite simple. KT combined the advantages of telecommunication-oriented IPTV and broadcasting-oriented satellite TV. They together have created differentiated services which cable TV cannot deliver. As of the middle of 2009, KT Skylife had 163 channels, which was the largest volume in pay TV market in Korea, but could not offer interactive services for its technical limitation. Olleh TV, on the other hand, has 85,000 VODs and the best platform to serve interactive service, but it was also in trouble in channel supply. The hybrid service, OTS takes channels from satellite TV and takes VOD and interactivity service from IPTV (see Figure 3). OTS also has been combined with KT s fixed-mobile offering. By bundling services with KT, KT Skylife was able to secure KT s strong brand power and distribution channels, as well as two-way services such as VOD, which add to its arsenal for drawing subscribers. For offering OTS, KT developed new STB that could 1 Skylife was selected as a satellite broadcaster in December 2000 after the launch of a consortium funded by KT, KTF (merged with KT on Jun 1, 2009), KBS, MBC, SBS (three major terrestrial broadcasters), Samsung Electronics, etc.. It started the commercial service in 2002 as a sole satellite broadcaster in Korea and its monopoly status must be legally protected. Skylife claims a mere 3.3% of the pay TV market share measured by sales as of But its subscriber base widened to 2.83 million in 2010 and should continue to expand the share in the pay TV arena. Its major sources of revenue are subscription, advertising and channel offerings (incl. transmission commissions from home shopping channels). They respectively generated 69.1%, 3.6% and 11.1% of sales as of KT, the largest shareholder, expanded its ownership in Skylife from 26.6% to 32.1% in April Following its stake build-up, KT in December 2010 also acquired redeemable/convertible preferred stocks (5.6 million) and convertible bonds (5.6 million common stocks when converted) from Dutch Savings Holdings, the second-largest shareholder at that time. KT converted all the shares and CB it bought into common stocks on Mar 14. Skylife plans to issue 2.5 million new shares at the time of IPO and accordingly, KT s interest in Skylife would amount to 50.2%. Now, KT Skylife (previous Skylife) went public on June 3, 2011.

7 CASE STUDY ON HYBRID BUSINESS MODEL 497 work to deliver through satellite and IP network at the same time. With this, hybrid service subscribers can watch live channels delivered through satellite and enjoy interactive services including VODs with dedicated broadband network. Figure 3. Competence analysis of service platforms before OTS (2009). By launching this, KT can serve most of the consumers needs, have various channels, some of them are HD, short zapping time, stable broadcasting service, and offer interactive service. This hybrid service can serve not only for present consumers but also for the future ones. Hybrid service can also create differentiated benefits by combining the advantages of IPTV and satellite TV. A bundled service of OTS, broadband and telephone costs KRW32,000-40,000 (3 years contract excluding surtax). It provides VODs and a range of channels for KRW35,000 per month (standard) in comparison to the lowest price of cable TV, Cable, and More s KRW33,900 per month. By bundling service with KT, KT Skylife can secure KT s strong brand power and distribution channels, as well as interactive services such as VODs, which add to its arsenal for drawing subscribers. The OTS subscribers can watch live channels delivered through satellite and enjoy interactive services and VOD with dedicated broadband network. Market Structure After the Subscriber Growth One and a half years after the launch of OTS, the cable TV operators have reported a 71,000 net decrease in subscriptions during the first quarter of 2011 and have expected that the drop in subscribers would reach 324,000 by the end of With these numbers indicating a nearly 46% increase, compared to the 218,000 net dropping in subscribers in 2010, cable TV subscriptions have fallen at an increasingly faster pace. On the other hand, IPTV and satellite TV subscriptions have grown each to 4.28 million and 3.07 million in the second quarter of 2011 and to 4.93 million and 3.44 million by the end of KT Skylife posted 124,000 net growth of OTS subscribers to 971,000 in the second 2011, raising the portion of OTS in total subscribers to 32% by the end of According to the Korea Communications Commission, Korean pay TV market is expected to grow up to total revenue of US$ 3.1 billion, and million subscribers by 2012, thanks to the digitization. Terrestrial analog broadcasting will be terminated from the end of 2012, but as of the first quarter of 2011, only 23% of all cable TV subscribers have switched to digital TV. When satellite TV started, cable TV operators had more than 70% hold on the market and satellite TV found it hard to expand its presence at that time. But after OTS, KT Skylife has taken a proactive stance to capture subscribers switching to digital, which helped boost its market

8 498 CASE STUDY ON HYBRID BUSINESS MODEL share to about 15.4% at the end of It is also expected that the market share of IPTV operators should jump 5% year over year to 21.6%, but cable TV operators share would shrink 7.2% year over year to 62.6% at the end of The cable TV has still dominant position in Korean pay TV market thanks to the low price tariff. However, the number of cable TV subscribers has been expected to decrease to about 14 million at the end of In contrast, the number of IPTV subscribers has been expected to swell to about 4.9 million during same period. As for the only KT s Skylife subscribers grew from 1.05 million in 2003 to 3.5 million in Market Performance: Growth and Profitability Enhancement It has been two years after OTS and there are some numbers to show the successful result. In August 2009, Olleh TV (previous Qook TV) accounted for 45% market share in IPTV. After launch of OTS, KT s market share in IPTV market skyrocketed to 60% in nine months and one million new subscribers chose KT s IPTV. At second quarter of 2010, KT has had 1.5 million IPTV subscribers. Thirty percent of new subscribers chose OTS. The number of KT IPTV subscribers has been continuously growing up after the launch of OTS (see Figure 4). Figure 4. Amazing growth story of KT s IPTV with new hybrid service OTS in Korea. The number of subscribers has skyrocketed 878 % from 87,000 at the end of 2009 to 848,000 at the end of the first quarter of After two years, Olleh TV and KT Skylife are experiencing growth and profitability enhancement, as its OTS subscribers are expanding. KT Skylife has plenty of room to improve its margin, since joint marketing with KT can reduce subscriber acquisition cost (SAC). Although OTS Average Revenue Per User (ARPU) is less than KT Skylife s one, it can be offset by subscriber growth. OTS is seen as highly competitive now, in terms of content, offering the largest number of regular and HD channels through KT Skylife, as well as nearly 90,000 VODs from Olleh TV. As of 2011, compared to other Korean IPTV and cable TV operators (see Figure 5), KT Skylife is offering 211 channels, versus around 100 channels offered by peers. KT Skylife also offers 82 HD channels, more than double the number of HD channel offered by competitors. VOD services are the strongest point of Olleh TV, with IPTV competitors offering only 30,000-50,000 VODs and cable TV operators offering far less VOD content. KT Skylife s services offer cost benefits to subscribers as the company provides a larger number of channels at price levels similar to that of

9 CASE STUDY ON HYBRID BUSINESS MODEL 499 competitors. Figure 5. The largest number of channels of KT Skylife. Surging subscriptions to OTS have dramatically improved results at the fixed-line division by boosting broadband and fixed-line telephone subscribers. KT added 200,000 net broadband subscribers in 2008 and 240,000 in In 2010, net additions rose to as much as 470,000 and this trend is continuing in 2011 with net additions at 130,000 over January March, 27.3% of the 2010 full-year net increase. The OTS has helped to lure broadband subscribers, demonstrated by the sharp rise in KT s share of broadband subscriber net additions since Sales of OTS, jointly offered with KT s Olleh TV, seem to maximize synergy between the two companies, resulting in an increase in subscriptions and higher profit margins. In addition to the TV business itself, it is expected that bundled products help secure subscriptions from existing KT broadband subscribers and the number of KT Broadband subscribers currently amounts to 7.55 million, with nearly 58% of these subscriptions bundled with Internet telephone services or IPTV. Bundle rates with IPTV subscriptions are about 32%. Overall, KT Broadband and IPTV subscribers should help to boost overall subscriptions for OTS. In summary, KT overwhelms competitors in terms of price, quality, content, and bundling competitiveness and enjoys stronger price and content competitiveness than other telecommunications and outstrips cable TV system operators (SOs). Moreover, KT s distribution (marketing) channels encompassing 1,460 branches across Korea, secure growth in new subscriptions. New subscriptions received through KT surged from 12% in 2009 to 55% in Direct channels play a larger role by securing subscribers, while at the same time improving profit margins by reducing SAC. Direct marketing channels accounted for 26% of KT Skylife and 30% of KT s total channels in KT further expands efforts at securing more subscribers through distribution channels and partnership companies. The OTS has a positive impact on the fixed-line telephone division. Although KT s fixed-line telephone (PSTN + VoIP) subscriptions have dwindled, the decline has slowed. Over February March 2011, signups to fixed-line telephone service posted positive growth to an increase in VoIP subscribers and a slow decline in PSTN subscribers, as a result of the bundled service reducing churn rate. As broadband-only subscribers have signed up for the bundled service with OTS, this could bring down the broadband churn rate. KT s ratio of IPTV subscribers to total broadband subscribers stood at 31% as of March 2011.

10 500 CASE STUDY ON HYBRID BUSINESS MODEL There is improvement in profit margins along with growth in OTS subscribers. ARPU of KT Skylife s satellite TV without bundling is at KRW10,000 versus the 10%-20% lower ARPU of OTS, at KRW8,000-9,000 levels. However, OTS incurs 50% less SAC and advertising costs (see Figure 6), helping to boost profit margins, despite its lower ARPU. For OTS, KT Skylife, and KT split expenses equally, regarding STB installation subsidies, subscription commissions and other marketing costs, significantly lowering SAC, as well as STB purchase costs (now accounted for as assets, after switching to a lease system). Figure 6. SAC of OTS/Satellite only and joint marketing lowering advertising cost. The SAC of OTS recorded far less than the SAC of non-bundled services, at KRW46,891. Co-marketing efforts with KT can lower advertising costs. Total advertising costs fell by 70% from 2009 to 2010, and advertising costs remained low (near 2010 levels) at the end of KT Skylife also has an operating synergy with its own business. In terms of revenue, KT Skylife s subscription revenue amounts to 68.7% of total sales. Therefore, the number of subscribers is critical to generate revenue. With OTS, subscriber numbers have grown despite of the saturation of pay TV industry. Before the OTS, KT Skylife s subscribers increased 9.4% year over year during However, it is assumed that the ARPU of OTS would decline, but any drop in ARPU would be limited even though there may be three months free promotions because the OTS has price competitiveness with bundling service. Home-shopping transmission revenue also can be reflected to the profit and it has risen to KRW30 billion in 2011 from KRW19 billion in However, the per-subscriber home shopping transmission revenue for KT Skylife amounted to KRW7,200 while per subscriber revenue for cable companies reached KRW25,000. With subscriber number increasing, KT Skylife s home-shopping revenue per subscriber can be higher than before. In terms of cost structure of KT Skylife, program cost and SAC account each for 27.1% and 17.8% of total cost in They are related to subscription revenue and new subscriber additions. Program cost represented 27% of total sales in 2010, from 27.8% in Thanks to the larger subscriber base, sales growth outstripped the rise in program cost. But the program cost portion should increase, due to the emergence of comprehensive channels and retransmission payments to terrestrial broadcasters. The number of new subscribers should increase, but thanks to joint promotion with KT, KT Skylife can save on advertising and marketing and share the subscriber acquisition cost. KT Skylife can better control sales commissions and promotion cost per new subscriber. The company spent KRW84,603 on sales commissions and KRW28,251 on promotions in 2010 to acquire each new subscriber, but these figures have dropped each to KRW63,452 and KRW17,233 at the end of Thanks to the subscriber growth of OTS, the market is much more favorable to KT Skylife. The pay TV

11 CASE STUDY ON HYBRID BUSINESS MODEL 501 market in Korea is undergoing structural changes, including a switch to digital services and consequently, MSOs focusing on analog and apartment segments are losing a lot of subscribers in multi-dwelling units. But KT Skylife can steadily gain market share, thanks to the competitiveness of its OTS over the MSOs services and co-marketing with KT. KT Skylife expects its growing subscriber base to not only boost its service sales, but also its market presence, thus generating additional profit through increased bargaining power over program providers, which should give it advantages in securing content and setting program usage fees and an ability to demand higher home shopping and advertising commissions. The firm s per-subscriber fees charged through home shopping channels are likely to increase from their comparatively low levels vis-à-vis MSOs. Operating profit has swollen by 15% year over year to KRW42.9 billion at the end of The operating margin reached 9% in Profitability improvement is attributed to robust sales and operating synergy with KT. Summary and Conclusions This paper focused on investigating the OTS which will change market structure and have a successful market performance. KT has a big potential to be leading telecom and media industry. KT Chairman Lee Suk-chae recently announced it will rise as a global media distributor selling virtual goods such as content, applications at the company s latest management vision day. With the launch of the OTS, KT doubled its net broadband subscriber additions. Since 2010, KT s share of net additions has reached close to 56%. Signups to fixed-line telephone service (PSTN + VoIP) posted positive growth from February 2011, thanks to falling churn rate. Broadband and IPTV sales can offset shrinking fixed-line telephone service sales. Thanks to the remarkable market performance and operating synergy with the OTS, KT has a leading position in pay TV market and KT Skylife has large growth potential in home shopping 2 and advertising sales 3, backed by the increase in KT Skylife s total subscriber base. In order to be effective, home shopping and advertising require a certain level of subscribers. KT Skylife s total subscriber increased to 3.5 million by the end of 2011 and it provides a sufficient subscriber base for home shopping and advertising. On KT s side, a big convergence strategy can be accomplished based on the stabilized TV business backdrop with OTS. In front of drastic evolution into new media driven by global players like Apple, Google, and Netflix, KT has already announced open IPTV strategy in February Unlike conventional IPTV which can be described as Walled-Garden business model, where KT takes total control over its resources and provides 2 Home shopping sales are expected to post rapid growth, quickly closing the gap with cable TV home shopping, as a result. KT Skylife s per-person home shopping broadcasting fees are significantly lower than that of cable TV (at KRW7, 229 in 2010, versus above KRW30,000 levels for large MSOs with more than 2 million subscribers and the KRW27,000 market average). With KT Skylife s subscriber base rapidly increasing, it is expected to see the company quickly close the gap in home shopping with cable TV, going forward. 3 Advertising sales should also post steady growth with the increase in the number of subscribers raising advertising effectiveness, as well as the company s bargaining power. Per-person advertising profits averaged KRW8,440 for cable TV operators (top six companies, based on 2009 earnings), nearly 40% higher than KT Skylife s KRW5,900 (based on 2010 earnings). In April 2011, Netflix s (online video service provider) subscribers outnumbered Comcast s (US first rank cable TV operator), and Netflix s market cap continues to set new highs on a daily basis, while US cable TV operator shares are pulling back. With changing industry conditions, such as the diversification of media and digitization of content, existing media players are gradually losing ground. Over the past year, the media industry went through more substantial changes than over the past decade on fierce price competition and dramatic subscriber in-/outflows in the near term. As shown in the cases of the US satellite broadcasting and over-the-top (OTT) service providers (e.g., Netflix), those who succeed in attracting customers to continue to see re-ratings in share prices.

12 502 CASE STUDY ON HYBRID BUSINESS MODEL only selected content and applications, this open IPTV makes all the resources available to content and program providers. KT plans to open Application Programming Interface (API) to content and application developers and support them with software development kit (SDK) soon. The final goal of KT s open IPTV strategy backed by OTS is the development of multi-screen service offering. New competitors from entire ICT industry rush to pay TV industry and it is expected that the decline of pay TV subscription will accelerate as the new competitors diffuses. TV evolves to be smart and new competitors are entering this smart TV market. Korean media industry is also witnessing similar change. In the third quarter of 2009, the net increase in cable TV subscribers turned negative for the first time alone, KT and KT Skylife s pay TV subscribers enjoyed a net increase of 726,000. This surge in net growth will continue, as KT further beats rivals on multiple fronts, pricing, bundling, content competitiveness, bandwidth, multi-screen, and customized services using customer relationship management technology. In order to prepare for looming challenges, KT builds a future roadmap at the level of platform, content, and devices. The first step is open platform. The second step is the recent launch of video service provider, Ustream. It will enable overseas distribution of Korean video content, as it acts as the main distribution channel for Korean contents provided by KT Skylife, Olleh TV, Genie (music), and Sidus FNH (movies). Furthermore, KT is also building a global application marketplace named OASIS in collaboration with China Mobile and NTT Docomo after acquiring the video search engine company Enswers, which can be embedded in the smart devices. KT plans to ultimately achieve KRW 40 trillion won ($35.6 billion) sales by 2015 by boosting such kinds of media distribution earnings. References Albarran, A. B., Chan-Olmsted, S. M., & Wirth, M. O. (2006). Handbook of media management and economics. Lawrence Erlbaum Associates. Inc.. Bain, J. S. (1968). Industrial organization (2nd ed.). New York: Wiley. Cabral, L. M. B. (2000). Introduction to industrial organization. MIT Press. Porter, M. E. (1980). Competitive strategy (free press). New York. Porter, M. E. (1985). Competitive advantage (free press). New York. Porter, M. E. (1996). What is strategy? Harvard Business Review,