If someone told that you could use your cell phone for free, would you believe it? Although it sounds like total nonsense, it can be true if you become the user of a “thrifty phone.” While more and more people are attracted to this cheap offer, some say this low-cost phone will cause an upheaval in the mobile communication market. The Sungkyun Times (SKT) examines the concept as well as the pros and cons of the thrifty phone to help readers make a smart choice.
What is “Thrifty Phone?”
The term “thrifty phone” refers to a type of mobile communication service that is offered by an independent brand of a Mobile Virtual Network Operator (MVNO). MVNOs run the business by borrowing the network at a wholesale price and then reselling it at a retail price to general subscribers, and they are sometimes referred to as a “mobile communication resell operators.” As they do not own their own radio frequency, they borrow it along with network facilities from existing operators known as Mobile Network Operator (MNO). In Korea, the MNOs are represented by three major communication companies: SK Telecom (SKT), LG U+, and KT. A Norwegian telecommunication company Sense Communications was the _rst to introduce the concept of the thrifty phone in 1997. Then, Virgin Mobile UK successfully deployed it on a commercial scale in 1999. At _rst, the MVNO was a kind of growth strategy for companies intending to generate additional revenue by lending unused network capacity to non- mobile carriers. Now, their success being tantamount to MNOs, MVNOs are enjoying sustained growth. As of 2014, the global market size of MVNO was worth 26 billion dollars, and it is expected to grow by 1.5 times by 2019.
Thrifty Phone in Korea Background
In the Korean mobile communication market, the oligopoly has always been a chronic problem. Since the 2000’s, the market continuously centered upon three MNOs. Consequently, rather than working to improve the quality of service to benefit consumers, the costs were mostly invested in wasteful marketing campaigns. The government suggested the thrifty phone as a solution, aiming to attain better communication service and relieve the burden on household budgets. However, mobile communication services use radio frequencies, which are a limited resource. Therefore, the number of operators is bound to be restricted. Considering this, the MVNO is an attractive alternative, as they can act without restricting frequencies.
Process of Introduction
Discussion regarding the introduction of MVNO lasted for quite a long time. The high communication expenses always had been an urgent matter for politicians, including former President Lee Myung-bak. He had pledged to lower communication expense by 20 percent, and to fulfill his pledge, the presidential transition team ordered the implementation of MVNO for the first time. Then, the Korean Communications Commission (KCC) enacted the “Telecommunication Business Act, Article 38,” providing the legislative basis on March 22, 2010. On July 20, 2011, the “Guideline for Resale of Mobile Communications” was finalized, and sales of thrifty phones began in earnest. After the attempt to introduce a fourth supplier failed, the KCC particularly focused on the MVNO business, making a chance for MVNOs to become more prosperous. In 2012, to make the public more comfortable with the idea, the service had been nicknamed “Thrifty Phone” through the national naming contest. Currently, 46 Korean MVNO companies are in the business.
Recent Boom of Thrifty Phone
MVNOs have kept expanding their customer base since the release of the thrifty phone. The market share of the thrifty phone companies already exceeded 10 percent of the whole mobile communication market last November. Notably, because of the unprecedented calling plans presented by Korea Post, the Korean postal service headquarters, this January, subscribers of the thrifty phone increased tenfold. The most popular calling plan, “A zero,” requires no minimum rate and includes 50 minutes of free calls. Four days after its release, it had drawn one-third of all thrifty phone subscribers through sales at the post office. What is more remarkable about this trend is that the thrifty phone has started to appeal to the younger generation as well, meaning that the efforts to break the streotype that thrifty phones are suitable only for children and the elderly have finally paid off. Young people have began considering thrifty phones as one of their options. For example, 39 percent of new subscribers of Thrifty Phone Hub, which is an integrated online thrifty phone shop, were in their teens and 20’s. This is a 17 percent increase from the previous year. The increase is mostly because the calling plans have changed from call-oriented to data-oriented. Spreading low-cost models has also played a role. Through international shopping, it became easier to buy decent, cheap models such as those of Huawei or Xiomi. Furthermore, an increasing number of communication companies are designing their own models that target the younger generation. For example, 70 percent of subscribers of “Sol Phone,” launched by SKT, are in their teens, 20’s, and 30’s.
What is So Special About Thrifty Phone? Background of Public Interest
• Heavy Communication Expense
Above all, traditional calling plans are suffering from discouraged consumption due to the continuous recession. Facing tough financial conditions, consumer confidence (the degree indicating consumer’s optimism on the overall economy and one’s financial state) falls greatly. Moreover, compared to a global scale, the communication expense in Korea falls on the expensive side. The level of household consumption for communication expense in Korea is the highest among all OECD countries. In comparison with major European countries, the Gross Domestic Product (GDP) of Korea is 33 percent lower, yet the communication expense is 35 percent higher. As a result, customers are more attracted to affordable calling plans in these harsh economic circumstances.
• Failure of Mobile Device Distribution Improvement Act
The Mobile Device Distribution Improvement Act is a law enacted to equalize subsidies relevant to the way, time, and region a person purchases a mobile phone. Nevertheless, its intent to give the same benefit to every customer became meaningless. Most customers felt it had only cut down subsidies, and mobile phones became more expensive. Consequently, unsatisfied users leaned towards MVNO companies.
• Post Offices Working as New Distributor Since September
2013, according to the government’s “Thrifty Phone Activation Planning,” Korea Post has supported small and medium-sized MVNO Companies. For now, 1,300 branches are working as sales agents for 10 MVNO companies. With the help of Korea Post, MVNOs were able to expand their off-line distribution channel to a nationwide level. As a result, consumers could receive better accessibility to stores and obtain detailed information more easily. Furthermore, until this point, some people tended to think of the thrifty phone as an under-class phone and believed it was somewhat unreliable. However, after the endorsement by and sale at a public institution, the thrifty phone could guarantee higher credibility and improve its image.
Advantages of Thrifty Phone • Low-Priced Calling Plans The biggest merit of the thrifty phone is that it is relatively inexpensive. According to the Ministry of Science, ICT and Future Planning, thrifty phone users can save an average of 20,000 per month compared to general users. On average, the communication expense of the thrifty phone subscribers is 56 percent cheaper than that of MNO subscribers. This is because MVNOs can reduce their cost through various methods. First, less promotional cost is the biggest characteristic of MVNO companies. MVNOs usually deal with customers online or at post offices instead of having their own agents. They also do not offer any membership service. Last but not least, they do not need to invest in the installation and maintenance of communication networks. Thanks to the thrifty phone, it is estimated that the amount of money saved by households for the last three years amounts to 156.55 million.
• Equal Quality of Communication Service
The MVNO uses same communications network as the three major mobile communication companies. That is, if there is no difference between mobile models, sound quality and speed of the internet should also be the same.
• Less Constraints First of all, subscribers who want to switch from MNO companies to MVNO companies can use the same phone number they used to have without any limitations. In addition, compared to MNOs, there is no contract banning users from changing their mobile phone model for a specific period of time, thereby entailing no cancellation fee.
Existing Limitations
Excessive Price War
For now, offering a lower price is the main selling point of the competition among the thrifty phone businesses. For example, more than 70 percent of new subscribers this year are users of extremely low-priced calling plans having a minimum rate of under 6,000 a month. Consecutive price-cutting might seem to be advantageous from the user’s point of view. Nevertheless, in the long run, it can have a destructive effect on the whole industry. From the beginning of their business, companies are unable to escape being in the red. Currently, less than 30 percent of the all thrifty phone companies have managed to create profits. Throughout the industry, the total deficit hit 59.6 billion last year.
Discontinuance of the Government’s Support
The government’s policy regarding MVNO is also a big issue. Although they have been exempted from these fees since October 2012, MVNOs will have to pay spectrum fees starting at the end of this September. Spectrum fees, or the tax for using radio waves, charge operators 461 a month per subscriber. Until now, MVNOs have saved almost 30 billion every year thanks to the support. As MVNOs are now suffering from cutthroat competition, it is doubtful whether it is possible for them to survive while fulfilling their duties or not.
Insufficient Consumer Protection
Guaranteeing consumers’ rights is another task yet to be fulfilled. Some thrifty phone companies are negligent in protecting personal information. The KCC performs an evaluation called “assessment of user’s protection task” every year. It shows how well firms have followed privacy policies. According to last year’s data, no thrifty phone company received an “excellent” rating, unlike the three MNO companies. Only four MVNOs ended up with an “average” rating. Not only that, but five among the top six MVNO companies were charged fines by the KCC due to their poor security. This is a big problem as it can lead to crimes that use so-called “burner phones” (disposable phones used to avoid leaving a trail or being caught for illegal activities).
Ways to Overcome Limitations
Competition Based on Supplementary Services
If MVNOs hope to stand on their own, they must overcome price-oriented competition. Instead of focusing on price, they must differentiate themselves from MNOs by offering diverse supplementary services, after which users can choose customized calling plans based on one’s taste. For instance, collaborating with Jeju Airline, KT M Mobile accumulates airline mileage for members of certain calling plans. Policies with various supplementary services will be helpful to secure regular customers.
Governmental Regulations on the Major Companies
MNOs have already become involved in the thrifty phone industry with numerous subsidiaries and have tried to gain greater power in the market. For instance, SKT is pushing ahead with the plan to merge CJ Hello Vision, the biggest thrifty phone company, with its subsidiary SK Telllink. After the merger, market share of SKT will reach 30 percent of the whole market. If the government fails to take any action to stop this tendency, the goal to root out the oligopoly would virtually fail.
Efforts to Dradicate Consumer Deception
In order to make up for poor customer service, the “Guideline to Protect Thrifty Phone Users” has been established. As of yet, this action is nominal since it does not have any compulsion. By developing a thorough system, the government and civic organizations need to cooperate to pressure MVNOs by investigating how well they have followed the guideline. Proper rewards and penalties should also follow. Enlarging labor power to deal with clients is also crucial. If the number of service representatives becomes sufficient, handling civic complaints will become easier.
The saying, “You get what you pay for,” is becoming more obsolete. By offering reasonable prices and decent quality, the thrifty phone is breaking stereotypes that a higher price leads to better quality. Nonetheless, it is true that the thrifty phone has room for improvement to reach sustainable growth. Hopefully, the thrifty phone will work as a wise substitute that can satisfy demanding customers once these improvements are made.