AH Samsung Galaxy S5 LTE 2.1

Think Subsidies are Bad in the US? Say Hello to South Korea’s Subsidy Crisis

July 1, 2014 - Written By Tom Dawson

 

The Galaxy S5 LTE-A from Samsung is likely to be available in South Korea with heavy discounts and subsidies, as South Korea faces something of a subsidy crisis. You might be wondering what’s wrong with subsidies? After all, they enable consumers like yourself to get your hands on the latest smartphones for somewhere in the region of $200 or so, and while this ties you to a contract you can always get out of it later on if you like. That’s true in South Korea as well, but subsidies have gotten out of hand and carriers are using these subsidies to prop up an industry that looks set to reach saturation if latest growth figures are to be believed.

In South Korea, there is a limit of how much a network can subsidize a device’s retail cost. That limit is 270,000 Won, which is roughly $265 US, and it’s incredibly outdated as it was bought into place before smartphones and the current culture of having the latest Samsung or LG smartphone even existed in South Korea. Now, networks like SK Telecom, LG U+ and Korea Telecom flaunt this subsidy limit on devices using social media and holding sales at 3AM in the morning to try and hide such activity from the government and bring in huge amounts of customers. It’s said that the average consumer changes their smartphone once a year in South Korea, with a lot of people presumably changing more than that, and with Early Termination Fees fairly low in South Korea it’s easy for people to bounce from network-to-network.

There was a 45-day sales ban imposed on the major networks back in April for repeatedly exceeding the government limit of 270,000 Won, with some networks offering subsidies over the retail price of the device in question, resulting in instant cashback. This ban forced Samsung’s Galaxy S5 to launch early in South Korea, and of course there were subsidies galore on the device and networks offering to pay ETF fees to draw in more customers. Again, you’re probably wondering what’s wrong with all of this, isn’t it great for competition and the consumer in general?

While that might be true, the dramatic subsidy practices that are currently going on in South Korea make it hard for people to see the real value of a smartphone. With the Korean Communication Commission looking to pass new legislation imposing restrictions on subsidies, the industry could come to a very abrupt halt. With new legislation limiting subsidies on devices, thus putting the prices up on new smartphones, will customers won’t to pay dramatically higher prices after years of cheap smartphones? Imagine the average consumer is ready for an upgrade on Verizon, but in those last two years since they got that shiny Galaxy S III, the rules had changes and instead that Galaxy S5 they had their eye on is $400 not $200, how likely is that customer to spend twice as much on a smartphone than they did last time?