Telecommunications companies in South Korea are looking at various options to improve their deteriorating profits by developing products that bundle fixed-line, mobile and Internet services.  As part of this endeavour, SK Telecom (SKM), South Korean wireless kingpin, is currently in talks with Apple Inc. (AAPL) to sell its iPhone 4 and iPad in the South Korean market.
 
SK Telecom’s major rival, KT Corp. (KT), enjoys an exclusive hold on iPhones in the South Korean markets. The iPad is not currently available in the region. If the talks between SK Telecom and Apple succeed, Koreans will have access to a second iPhone and first iPad carrier.
 
Although Apple provides its iPhone exclusively through AT&T Inc. (T) in the U.S., it is considering several carriers in international markets. The talk with SK Telecom is the second negotiation that Apple is working on to expand its carrier base. In China, China Mobile Ltd. (CHL), the country’s biggest mobile operator, has been in negotiation with Apple since March 2010 to offer the iPhone in the country. China Unicom (Hong Kong) Ltd. (CHU) is the only authorized iPhone carrier in China.
 
SK Telecom is pursuing business opportunities in emerging markets given limited growth prospects in the highly matured domestic wireless market. Other prospects for growth include 3G network expansion, mobile banking, IPTV and smartphone offerings.
 
SK Telecom entered into a joint venture deal with PT Telekomunikasi Indonesia (TLK), Indonesia’s biggest phone company, in May for a digital content-distribution hub. In June, the company also agreed to buy a 25.8% stake in a Malaysian broadband network operator, Packet One Networks (Malaysia) Sdn. Bhd., for $100 million to expand its global presence.
 
The South Korean wireless market is technologically advanced and relatively mature with roughly 47 million total subscribers representing 96% penetration of the country’s population. Competition has increased in the Korean mobile market due to the consolidation of KT Corp. and its wireless unit KT Freetel, affecting SK Telecom’s market share and subscriber accretion.
 
SK Telecom continues to spend heavily as the carrier is boosting its promotional efforts to contain customer churn amid stiff competition from rival KT Corp., which is aggressively marketing the iPhone. Operating income dropped 14.8% to KRW480 billion ($423 million) in the first quarter of 2010 primarily due to marketing expenses.
 
The Korea Communications Commission is apparently concerned about the impact of rising marketing costs on the sector’s profitability. In order to redress this concern, the Commission has put a bar on the marketing expense of the telecommunications companies, limiting it to 22% of total revenue. This restriction is applicable for the country’s major mobile operators, including KT Corp., SK Telecom, LG Telecom Co. and SK Broadband Co.
 
While SK Telecom’s aggressive smartphone strategy will boost opportunities in wireless data, associated promotional expenses and heavy handset subsidies may drag earnings in the near future. We are currently maintaining our Neutral recommendation on SK Telecom with the Zacks Rank of #3 (Hold).
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