30 trillion won question: Can it deliver as promised?

The new broadcasting bill was passed in the National Assembly's committee on culture and tourism on November 30, a step toward opening the floodgate for new opportunities as well as perils. (See related article "Broadcasting bill finally passed, 30 tril. won impact seen," December 13, 1999, p. 8.)


Understandably, there is much euphoria surrounding advancement of the measure. It is projected that the resultant deregulation will create a 30 trillion won (approx. $25 billion) market in the $450 billion economy. However, there are so many hurdles to clear before this can become reality.


Of course, the reforms will certainly lead to consolidation of those businesses involved in voice and data communications, network TV, cable TV, satellite communications, computers, advertising and program content. Such industry reshuffling is inevitable because "digital convergence" is sweeping across the business world, rendering irrelevant the distinctions as to how information gets delivered to the final user. Any information can now be reformatted into the same packets of digital bits and transported through the ubiquitous Internet pipelines.


The winnowing out of weak players will follow, which makes big companies bigger while small ones get taken over or go extinct. It will not always be a pleasant experience to be in a sea of consolidation, especially for the small fish.


It is instructive to see what has happened since the US Congress passed the Telecommunications Act in 1996. The law was intended to expand consumer choices and to reduce the service fees which consumers pay. For the last three years, however, the US legislation has not achieved those goals.


Local phone companies, or Baby Bells, still maintain their monopoly on the local calling markets based on exclusive ownership of "last mile" copper wires leading to residential customers. While mega-mergers are being announced in the media industry, there has been little substantial change to bring customers real benefits.


For Korea, there are many challenges down the road to realizing the 30 trillion won digital dream. Although being touted as a 15 trillion won market, digital TVs are not such an easy sell as it first seemed. The success of digital TVs depends on whether consumers would pay a hefty premium for marginally better picture quality. In the initial stages of limited digital programming, it is highly doubtful that most TV viewers would want to shell out 5 million won for a TV receiver in order to watch a once-a-day-or-two soccer event. The prediction of 2 million won digital TV sets is based only on the precarious assumption that a sufficient number of early buyers will pay that premium price, thus enabling producers to realize economies of scale and ultimately bring down the price.


The failure of Divx, a variation of the DVD format, illustrates this point. Supported by Circuit City stores in the US, Divx movies costing $5 for a 48 hour rental did not catch customers' attention, and early this year Divx disappeared entirely from the market. As shown in this case, a product cannot succeed unless companies devise smart marketing strategy, including pricing, regardless of how good the underlying technology is.


It is the same for satellite broadcasting whose channels would increase up to 200 within five years, estimated to produce 7.9 trillion won. Without quality programming to attract viewers' attention, added available channels do not mean much. In addition, ever-increasing means of home entertainment force consumers to spread their time among many choices, thus reducing the time spent on each venue. (According to one study, an average American spends 9.5 hours a day on entertainment, including TV, video rental, magazine reading, Internet surfing, etc. As yet, there is no comparable study for Koreans.) Under such circumstances, it is not easy to increase advertising revenues which are directly proportional to the number of eyeballs attached to a given media unless an innovative "killer app" emerges to grab more people's attention longer and induce them to pay more.


The marriage between telephone and cable services had seemed promising when AT&T and Tele-Communications Inc. announced their merger in 1998. It was pursued because long-distance carriers wanted to bypass Baby Bells' local loops and avoid paying them access fees. The "cable telephony" was supposed to bring about integrated services ranging from voice and data communications to TV and the Internet. However, the full-blown service requires at least $30 billion for an upgrade alone, which makes the digital vision further aloof. The fledgling cable industry in Korea cannot come close to the market penetration achieved by its American counterpart. It clearly is in no position to envision such fusion between cable and telephony, let alone any revenue stream from commercial services.


As the above examples illustrate, the path to digital convergence and the resulting 30 trillion won fortune is littered with many roadblocks. None will be cheap or easy to overcome. The key to success is in how well the companies involved can execute their business plans, including pricing, timing of service introduction and tiering of service offerings. Only then can companies expect a slice of the hoped for 30 trillion won pie. It is, after all, better to think that passage of the bill is just one of many real hurdles which must be overcome.