Korean telecommunication industry in transition

Telecommunication Systems 14 (2000) 3–12 3

Preface

Korean telecommunication industry in transition

Dong-Wan Tcha a, June S. Park b, Suk-Gwon Chang c and Kwan Ho Song d

a Graduate School of Management, Korea Advanced Institute of Science and Technology, P.O. Box 201,Chongryang, Seoul, Korea

b Tippie College of Business, The University of Iowa, Iowa City, Iowa 52242-1000, USAc Department of Business Administration, Hanyang University, Sungdong-Ku, Seoul 133-791, Korea

d Korea Network Information Center, 168 Jukjon-Ri, Suji-Eub, Yongin-City, Kyunggi-Do 449-840, Korea

This paper, as a preface to this special issue, gives an overview of recent developmentsin Korean telecommunication market and industry. It provides background information thatis helpful for understanding the motivations behind research papers contained in this issue.In particular, we discuss the transition of the market structure from monopoly to deregulatedcompetition, the activities in telecommunications R&D, and the building of nationwidetelecommunication infrastructure in Korea. A taxonomy of the papers presented in this issueis given at the end.

1. Introduction

In the 1980s, the Korean telecommunication services market was mostly operatedby the government-owned national monopoly. Its activities were mainly focused onbuilding and modernizing the network infrastructure to meet the excess demand fortelephone services across the nation. In 1990, a restructuring of the telecommunica-tion market was initiated by the government to introduce competition in internationaltelephone services and domestic mobile telecommunication services. A number of sub-sequent restructuring by the government followed in 1994, 1995 and 1997 in order toenhance competitiveness of the Korean telecommunication industry.

As a result, there appeared 36 service operators competing in the wireline andwireless telecommunication market by the end of 1997. As of June 1998, Korea hadover 20 million telephone lines or equivalently 43.5 lines per 100 habitants. Shealso had over 10 million mobile cellular and PCS subscribers, 13 million pagers and0.4 million CT-2 phones. The Korean telecommunication industry posted 80 billiondollars of sales in 1997 which represented about 3.6% of the world telecommunicationmarket [6].

As the Korean telecommunication industry moves from the national monopolyinto the multi-operator competition and internetworking environment, the government’srole has also changed from direct market manipulation to indirect control using relaxedregulatory schemes – such as the design of regulatory schemes concerning the equalaccess and fair interconnection among different operators’ networks. Many national-level planning issues such as the telecommunications R&D, the design of new network

J.C. Baltzer AG, Science Publishers

4 D.-W. Tcha et al. / Korean telecommunication industry in transition

architectures and the new services deployment began to be dealt with by individualcorporations rather than by the government – with a quite different set of objectives.

However, the government still plays the leading role in the planning and in-vestment in the nationwide telecommunications infrastructure. The government plansto replace the remaining analog switches (about 30% of all switches in Korea) todigital by 2002. It is also expanding its investment to deploy fiber optic networks,ATM switches, frame relay services, and high-speed services for the Internet accessincluding ISDN, ADSL, cable modem and wireless access services.

This paper reviews the evolution of the Korean telecommunication market andindustry during the 1990s. In the next section, we discuss Korean government’s dereg-ulation initiatives since 1990 that were designed to increase domestic as well as inter-national competition in the Korean telecommunication market. In section 3 we discussR&D investments and accomplishments in the telecommunication industry during the1990s. In section 4 we discuss the construction of nationwide communication net-work infrastructure known as the Korea Information Infrastructure (KII). In section 5we discuss technology and policy issues facing the current Korean telecommunicationindustry as it continues to strive to become a globally competitive industry. It alsoprovides an overview of papers contained in this special issue.

2. Korean government’s deregulation initiatives

The fast growth of the Korean telecommunication industry during the 1990s isattributable to R&D efforts since 1980 and the telecommunication market restructuringsince 1990. Table 1 summarizes transformations of the regulatory framework and themarket structure since 1990.

The 1990 reform package specified three service classes with a positive listingscheme. Network Service Providers (NSP) are telecommunication service providerswho own their own network facilities. Value-added Service Providers (VSP) are thosewho provide telecommunication services using circuits leased from NSPs. NSPs arefurther classified into General Service Providers (GSP) who provide nation-wide wire-line services, and Specific Service Providers (SSP) who provide telecommunicationservices in geographically limited areas or provide some selected types of servicessuch as wireless services. As a result of the 1990 reform, the second internationaltelephony service carrier (Dacom), ten regional paging service providers, and the sec-ond cellular mobile service provider (Sinsegi Telecom) entered the market in 1991,1992 and 1994, respectively. Also, the value-added service market was opened up tofull-blown competition [3].

The second market restructuring, announced in June 1994, showed furtherprogress in liberalizing basic telecommunications services. Its policy direction wasto remove the line-of-business restrictions, extend the scope of value-added servicesand deregulate the carriers’ business operations. In line with this restructuring, Dacomwas granted a long distance service license in March 1995, and PCS, TRS and wirelessdata services were licensed in 1995 and subsequent years.

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Table 1Evolution of regulatory framework for telecommunication industry in Korea.

Regulation As ofregime 1990 1992 1994 1996 1998

Classification of (GSP, SSP, VSP)* (NSP, VSP)* (NSP, VSP, STP**)service providerDefinition of Positive listing NSP: noneservice scope VSP: negative listing

Regulation on GSP: designation by MOC*** NSP: license from MIC*** STP: registrationmarket entry SSP: license from MOC VSP: none to MIC

VSP: registration to MOC

Regulation on GSP: NSP: STP:ownership Largest shareholder 10% Largest shareholder 33.3% No limit on the

Equip. manufacturer 3% (10% for telephone services) largest shareholderNo foreign ownership Foreigner 33.3% Foreigner 49% (1999)

SSP: Government-owned 100% (2001)Largest shareholder 3% corp. 10%Equip. manufacturer 10% VSP: noneGovernment-owned

corp. 10%Foreigner 33.3%

VSP: none* GSP (General Service Provider), SSP (Specific Service Provider), VSP (Value-added Service Provider), NSP (Network Serivce Provider).** STP (Special Telecommunications Service Provider): 1st category (voice resale, Internet phone, international call-back), 2nd category (aggregator,

re-biller, air-time reseller), 3rd category (premise telecom service).*** MOC (Ministry of Communications) has been transformed into MIC (Ministry of Information and Communications) in December 1994.

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Table 1(Continued.)

Regulation As ofregime 1990 1992 1994 1996 1998

Services Service providersLocal KT HanaroLong KT Dacom Onse Telecomdistance (internat.) (internat., domestic)

Dacom (domestic)Leased line KT Thrunet Dream line& facility Dacom G&G Telecom Radio base station

Onse TelecomCellular KMT Sinsegi Telecom

(SK Telecom)PCS KT Freetel

LG TelecomHansol PCS

Paging KMT (SK Telecom) 10 regional Happy Telecom Pukyong Mobileproviders 4 regional providers

TRS KPT Anam Telecom5 regional providers

CT-2 KT10 regional providers

Wireless Air mediadata Intech wireless comm.

Hancom TelecomSTP 1st category (>20)

2nd, 3rd (>50)GMPCS Iridium, Globalstar,

ICO

D.-W. Tcha et al. / Korean telecommunication industry in transition 7

In July 1995 the third restructuring was announced. For most telecommunica-tion services, the regime of ‘proper’ competition under the government’s interventionwas replaced by the full-blown competition where the market mechanism can work.The market transformation proceeded in three phases. The RFP system was appliedto granting licenses in international voice telephony, leased lines, PCS, TRS, CT-2,wireless data and radio paging services in the first phase. As a result, twenty-sevennew entrants entered the market in 1996, followed by additional eight in 1997. Inthe second phase, relevant laws were revised to allow potential entrants to apply forlicenses without the government-initiated RFP. Based on this rule, a number of serviceproviders were granted licenses in domestic long distance telephone and leased lineservice markets. Pursuant to the WTO/NGBT agreements, the third phase was plannedto gradually lift the restriction on the foreign ownership, bringing more internationalcompetition in the Korean telecommunication market [5].

The 1997 restructuring introduced a new class of telecommunication serviceproviders called Special Telecommunication Service Providers (STP) for which only aregistration with the Ministry of Information and Communications (MIC) is requiredfor the market entry and no limits exist regarding the corporate ownership other thanthe foreign ownership. The foreign ownership is temporarily limited to 49% until2000. The 100% equity participation by foreigners is going to be allowed from 2001.The STP class consists of voice resale, internet phone service, international call-backservice, and premise-network service providers. By July 1998, over fifty STPs havebeen registered. The 1997 reform also granted licenses to prospective regional GMPCSservice providers. In addition, it allowed Hanaro to enter the local telephone servicemarket, which had remained in monopoly until then, culminating the long progress ofmarket restructuring in the 1990s.

3. R&D activities for emerging network services

Since the 1980s, the Korean government and private sectors have invested aggres-sively in telecommunications R&D to secure core technologies. Korea’s own digitalswitching system TDX was developed and installed nationwide in the late 1980s. Atpresent, TDX-1A/1B and TDX-10/10A developed between 1986 and 1996 are the mainswitching systems in Korea. By the end of 1997 Korea had exported more than $800million worth of TDX lines (3.69 million lines) to over 26 countries [6].

As for the wireless technology, the Korean government made a strategic decisionin 1989 to adopt the CDMA digital technology invented by Qualcomm as its nationalstandard, and initiated R&D activities to commercialize the technology. Three privatecompanies participated in the CDMA system development consortium, led by theElectronics and Telecommunications Research Institute (ETRI) of Korea. SK Telecom,which was the incumbent in the analog cellular service market, launched in January1996 the Korea’s first commercial CDMA digital cellular service. Sinsegi Telecom,which was licensed as a CDMA digital cellular service provider, also launched its ownservice in April 1996. At the end of June 1998, the digital mobile service subscribers


Table 2Overview of the HAN/B-ISDN R&D plan.

Area Item Target year Host

Prototype Commercial organization

Switching ATM-MSS 1994 1998 Korea TelecomATM switch (small scale) 1994 1998 ETRIATM switch (large scale) 1997 1999 ETRI

Transmission 10G optical transmission 1995 1998 ETRI100G optical transmission 1999 2001 ETRIB-NT 1995 1998 ETRI

Terminal Broadband terminal 1996 1998 Korea TelecomB-TA 1995 1997 ETRI

Network Broadband test-bed Progressive construction Korea Telecom

including the PCS subscribers accounted for 90.2% of the total 10,179 thousand mobilesubscribers. During the period of 1995–1997, Korea registered a total of $723 millionin exports of CDMA technology and handsets.

In 1992, another government-led national R&D project, named HAN/B-ISDN,was announced as outlined in table 2. Many industrial consortia were organized andparticipated in the R&D project. The primary targets of development were those B-ISDN technologies which were deemed to have great spill-over effects on the economy,have the potential to create new broadband telecommunication service markets, andprovide core technologies critical for building the KII. As of June 1998, some ATMswitches, optical transmission systems, B-NT, B-TA, FLC and B-terminals passed thecommercialization test, and others are in the stage of standardization [4].

4. Construction of the Korea information infrastructure

In Korea the demand for basic telephone services was fully met in early 1990s.However, the national broadband information infrastructure seemed insufficient to pro-pel the transformation of the Korean economy into a knowledge and high-tech inten-sive one. Recognizing it, the government established a blueprint for the KII in March1995. Under this plan, the KII is composed of the KII-Government (KII-G) and theKII-Public (KII-P). The former is built to meet the broadband communication needsof public administration, research institutes and universities, while the latter to meetthe needs of the private sector and the general public.

On behalf of the government, the National Computerization Agency (NCA) tookcharge of the KII-G implementation, and the construction of KII-G was delegated totwo major facility-based service providers, Korea Telecom and Dacom. From 1995to 1997 they built high-speed optical fiber backbone networks (155 M – 2.5 Gbps),linking eighty cities nationwide and providing broadband services (9.6 K – 45 Mbps)to over 10,000 public agencies. They also installed a total of seven ATM switches


Figure 1. A simplified model of the KII architecture.

in five metropolitan cities to begin ATM services in 1998. At the same time, effortscontinued to upgrade the existing networks with digital switches and fiber optic cables.

In the revision of the KII plan in 1997 the Internet received a stronger atten-tion, and as a result Internet backbone networks were installed over the KII-G. PublicInternet backbone networks such as KOSINet and HCPNet and commercial Internetbackbone such as KINX operate at 200 Mbps. In addition, there are several other pub-lic and commercial Internet backbones operating at the T3 speed including KREN andPUBNet [7]. Recently broad- or wide-band access network architectures like ADSL,FLC, cable modem, and WLL have begun to be deployed in metropolitan areas, facil-itating speedy access to the backbone networks.

Figure 1 shows a simplified KII architecture model. The KII service area iscomposed of 151 local areas (LAs) and 77 system operator (SO) areas. Each LAcorresponds to an end office of the PSTN, while each SO area corresponds to a CATVoperator’s service area. The regional area (RA) and the district area (DA) are associatedwith the central office and the toll office in the PSTN hierarchy, respectively.

The government hopes that the KII-G market will justify its KII investment,especially in the initial stage when private companies hesitate to invest in broadbandnetworks and services due to the uncertainty of demand and profitability. Afterwardsthe private sector is expected to take over the construction of KII-P.

5. Technology and policy issues for current Korean telecommunicationindustry

Reflecting the great success of commercialization of the CDMA mobile commu-nication technology and its growing importance as a strategic export item in Korea,a large number of papers out of the 19 papers presented in this special issue addressresearch issues arising in improving the performance of CDMA cellular and personalcommunication systems. J.-H. Baek et al. show that the multiple zone-based regis-tration is performance-wise superior to the single zone-based one in CDMA mobile


radio systems. Y.H. Lee et al. investigate the performance of convolutional codedDS/CDMA systems in Nakagami fading channels. K. Jang et al. propose a newrerouting and resource reservation scheme for speeding up the inter-switch handoffin ATM-based PCS networks. D. Kim provides an analysis method to determine thenumber of paging channels that can be used simultaneously with traffic channels in aCDMA forward link. D.K. Kim et al. propose an architecture of the ATM-based PCSnetwork with ring-topology access networks. S.-H. Kim et al. develop an algorithm tosolve the channel allocation problem arising in CDMA mobile radio systems. C.Y. Leeet al. develop an algorithm to design multi-layered location registration areas in PCSsystems with an objective of minimizing control signals. S.-K. Lim et al. present ananalysis on the call and mobility processing capacity of the personal communicationexchange (PCX) system under development in Korea. S. Shin and D.K. Sung proposean adaptive channel assignment scheme to improve the utilization of the link capac-ity in DS/CDMA systems. D.-W. Tcha et al. develop an algorithm for the optimallocation of base stations that can minimize the setup cost while keeping the blockingprobability under control.

Several papers study SONET and ATM networks to help better design and man-age the broadband switching systems and networks that constitute the KII. M.-R. Changand S.Y. Chang develop an algorithm to design a single-homing cluster in unidirec-tional SONET ring networks. D. Kang et al. develop an algorithm to find a set ofunidirectional SONET rings which covers all the nodes (central offices) and supportsall traffic demand on a given physical network at a minimal cost. S.-J. Chung et al.develop an algorithm to find an optimal configuration of virtual paths on an ATM net-work taking QoS of VPs into account. H. Lee et al. propose both static and dynamic,virtual path restoration algorithms for the survivability of ATM networks. S.S. Leeet al. present the architecture of an ATM switching system being developed in Koreaand an analysis of its performance. J.W. Heo et al. develop the simulators to evaluatecell-level and call-level performances of the Korea-made ATM switch.

In addition, D.B. Jun et al. forecast the demand for low earth orbit satellite (LEOS)services in Korea using a diffusion model as well as a logit model. Y.K. Kim et al.develop an algorithm to design feeder transport networks that connect local accesssubnets to a high-speed, packet switched backbone in Korea. S. Lee et al. investigateorganizational factors affecting successful implementation of electronic data exchange(EDI) in Korea using a regression model. All these studies are based on field datacollected in Korea.

As discussed earlier, the Korean telecommunication services market has beenquickly exposed to full-blown competition by a series of market restructuring duringthe 1990s. Wireline and wireless service providers are now competing aggressively withone another to acquire a better subscriber base and a higher profit. It is this time thatthe interconnection negotiation is recognized as a key competitive strategy among thenetwork operators. Interconnection can be cooperative since all interconnected partiescan benefit from network externalities. Cooperation usually extends across technicalstandards and protocols, new service development, investment obligations, tariff struc-


tures and revenue settlements. However, in a competitive marketplace, each party alsohas incentives for opportunistic behaviors.

Throughout the 1990s, the MIC has upgraded the existing regulatory frameworkand prepared various safeguards concerning the conditions of interconnection and ac-cess to each other’s networks. They include equal access, disclosure of information,open network service provision and accounting separation. The national numberingplan was revised to satisfy the equal access condition, and the preselection of serviceproviders was introduced in domestic long-distance market in 1997. In addition tothis, the introduction of the local number portability is planned in the near future [1].

Some policy issues remain unresolved. The calculation of access charges basedon actual costs and accounting separation is still limited to PSTN. Access charges forcellular mobile and PCS networks are not yet cost-based. Other controversial issuesconcerning access charges include the cross-subsidy, the lack of rigorous auditingof accounting, and the scope of the government’s intervention. The calculation ofinterconnection charges also need improvements. It is currently determined based onfully allocated costs including an appropriate return on capital. This costing schemeprovides little incentives to minimize costs [2].

The Korean telecommunication market has a complex structure as depicted intable 1. In the telephone service market, some network operators provide nationwideservices, while others are limited in their geographic coverage. Some enjoy verticalintegration across network facilities and services, while others do not. The regulatoryintegrity and symmetry should be enhanced so that market players are discouraged frombehaving opportunistically and the efficiency of interconnection networks is improvedoverall.

The historic recession of Korean economy which began in 1997 resulted in arapid degradation of profitability of telecommunication companies, the privatization ofgovernment-owned telecommunication service providers such as Korea Telecom andKorean Electric Power Company, and a broader market access from abroad. Foreignersinvested $2 billion in the information and telecommunication industry in 1998 whichis 23% of the total foreign investment in the same year.

The Korean economy seems to be making a turning point in 1999 towards re-covery. Now that any network service provider has opportunity to create broadbandtelecommunication services on the basis of the KII-P and as the demand for broadbandservices starts to take off, there is a concern that an overheated competition may resultin inefficient and duplicated infrastructure investments. In the coming years, furtherreshaping of the Korean telecommunication market will be continued in the forms ofstrategic alliance, merger, acquisition and joint venture among domestic and foreignwireless, wireline and CATV network operators. The regulatory framework will alsobe significantly altered through the interaction among the regulatory body and marketplayers. More research is called for to find desirable solutions to not just technologyissues, but also policy issues that the Korean telecommunication industry is facing andwill face in its evolutionary path towards a matured, competitive industry.


References

[1] S.-G. Chang, Numbering plan and policy issues for emerging telecommunications services, Proc.Korean Inst. Commun. Sci. 15 (1998) 15–30 (in Korean).

[2] S.-G. Chang and Y. Chun, An engineering approach to telephone network investment cost analysis,Korean Telecom. Policy Rev. 4 (1997) 191–221 (in Korean).

[3] S. Cho, B. Choi and S.K. Choi, Restructuring the Korean telecommunications market, Telecom.Policy 20 (1996) 357–373.

[4] S.H. Kim, State-of-the-art survey of B-ISDN technology development in Korea, Proc. Korean Inst.Commun. Sci. 15 (1998) 19–32 (in Korean).

[5] H.M. Ku and J.C. Kim, An interim assessment of competition in the Korean international telephoneservice market, Telecom. Policy 21 (1997) 265–274.

[6] Ministry of Information and Communications, 1998 Annual report for telecommunications industry(1998) (in Korean).

[7] National Computerization Agency, 1999 national informatization white paper (1999) 511–516 (inKorean).

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Korean telecommunication industry in transition