Korea’s Broadband Revolution
April 1 2004 by Assif Shameen
A dimly lit staircase leads down to the vast basement of an office building in Seoul’s Shinchon district near Yonsei University. Inside, there are five long rows of personal computers. “The Knock,” as the dungeon calls itself, is a PC baang, or part Internet cafÃ©, part gaming room. On a chilly winter night, the 24-hour baang (pronounced “bong”) is bursting at the seams with almost no elbowroom for 50 or so patrons. They are using the PCs to play online games, check email, watch video clips or even watch two TV channels simultaneously through small windows on their screens. There is little ventilation in the smoky room. Patrons are huddled around the terminals. It is the very picture of broadband intensity.
The Knock is just one of the 30,000 PC baangs in Korea, which between them have some 1.2 million PC terminals connected to high-speed Internet or broadband networks. In metropolitan Seoul, Pusan and other large cities where a majority of Koreans live, there is a PC baang on almost every other street or almost every other block.
South Korea is ground zero in the global broadband boom. In a country of 48 million people, there are 12 million broadband lines, which pump data between 20 to 400 times faster than the old trusted 56K dial-up modem connection over normal copper-wire telephone lines. Of the nearly 16 million Korean households, 78 percent now have a broadband connection-or more than four times the home broadband penetration rate of North America. (The United States has 21.5 million broadband connections serving 110 million households.) On average, Koreans spend more than 20 hours a week surfing the Internet. Korea has the world’s highest rate of video- and movie-on-demand downloads. Last year, 68 percent of all stock trading in Korea was done online (compared with less than 25 percent in the U.S.). Online shopping now makes up nearly 12 percent of all retail sales in Korea. Companies like CJ Home Shopping and LG Home Shopping, which started with home shopping channels on cable TV, now derive the bulk of their revenues from online sales.
It may be surprising to some that Korea is the world leader in broadband, because as recently as 1997 and 1998 it was undergoing what the Koreans call “the IMF crisis.” That crisis, however, helped spark action. “It injected a sense of urgency and spurred Koreans on to new technology because they sensed the older economic model had failed them,” says Dominique Dwor-Frecaut, Northeast Asia economist for Barclays Capital Asia in Singapore.
Dwor-Frecaut says Koreans have traditionally been early adopters of technology in Asia, along with the Japanese. And Korea is home to global technology leaders such as Samsung Electronics, the world’s largest maker of memory chips and LCD screens and second-largest manufacturer of cellular phones, as well as LG Electronics and cellular service giants SK Telecom and KT Corp. The Koreans also took advantage of the bursting of the American tech bubble in 2000 to buy equipment on the cheap from the likes of Juniper Network, Riverstone Networks, Nortel and Cisco Systems.
Not only is broadband ubiquitous in Korea, it is also much faster than elsewhere. At top speed, Korea’s broadband connections over very high-bit digital subscriber lines (VDSL) are on average four times faster than the fastest broadband connections that the likes of Comcast, Time Warner or the Baby Bells provide in the U.S. over cable or the slower ADSL (asymmetric digital subscriber line) modems. “Within two and a half years, we expect more than 70 percent of our households will have Internet connections with access speeds of 20 megabits per second, which will allow them to download movies to watch on their high-definition TVs,” says Chin Daeje, Korea’s minister of information and communications and a former Samsung Electronics executive. “By 2010, the bulk of Korean households would have migrated 100 megabits per second.”
Korea’s broadband network is also well used. A third of Korean Internet users regularly enjoy broadband entertainment such as network games, videos on demand and movies on demand. Local TV channels run their own portals where, for as little as 80 cents, you can download last night’s news or a program you missed. For movie producers and TV channels, revenues from online downloads are becoming an important stream. The Korea Information Society Development Institute estimates that peak traffic on Korean broadband networks is up to five times higher than on similar U.S. networks. “Korea is at the forefront of the broadband revolution, and everyone from telephone and cable companies in America to policy makers in developing countries wants to learn from Korea’s experience,” says Renee Gamble, Asia telecom analyst for technology research firm IDC in Singapore.
Not all of what the Koreans are doing will seep into the American market, but some of it almost certainly will. Consider the widespread adoption of avatars. Nearly 6 million Koreans have a network identity in the form of a cartoon character that represents them. As soon as the user’s avatar appears on the screen, friends, colleagues and family members logged on to the network elsewhere are alerted. They can then join in to play an online network game, share video clips or audio files or just do a quick video chat with the help of their Web camera. They can also invite family or friends to watch the same on-demand video or sports game they are watching.
Although movies and videos on demand are still pie in the sky in the U.S. because of slow download speeds and high costs, they are a reality in Korea. For just 80 cents, you can download a Korean hit movie of the ’90s in not much more than a minute. “What Apple’s iTunes is doing to music in the U.S. now, broadband did to movies and TV archives in Korea two years ago,” says Lee Jae Woong, CEO of Daum, Korea’s largest Internet portal.
Daum beat off a fierce challenge from the likes of Yahoo Korea and Microsoft’s MSN Korea in the battle for Korean eyeballs two years ago. Having spent tens of millions of dollars battling local players, MSN and Yahoo are now resigned to play second fiddle to portals like Daum, NHN and others.
At The Knock baang, most customers play network games like Lineage, Lineage 2, Counterstrike or Navyfield (a game that pits users against each other in high seas battle). Cho Kyu-Tae, 29, an assistant manager of a trading firm, says he is there “just to relax, meet people and play some online games.” Cho spends three to four hours every day of the week including Sundays in a PC baang doling out up to 10,000 won (U.S. $8) a day for his habit. “I have a PC at home, but the speed of commercial broadband at the baang is much faster than my home broadband.” Moreover, he says, “I can also find a variety of games here and meet new people.” More popular baangs like The Knock add almost a new online game every week that keeps regulars like Cho returning to the dungeon. Korea alone now has several hundred game-design firms such as NCsoft and WebZen. Every young game designer wants to be NCsoft founder Kim Taek Jin or WebZen founder Sara Lee.
How did Korea get to where it is? A recent study on Korea’s broadband leadership conducted by Britain’s Brunel University cited “pricing, infrastructure, demographics, geography, deregulation and clear user benefits” as among the factors that have helped. “I wouldn’t say it was just infrastructure or contents or indeed pricing that was responsible,” says Minister Chin. “It was a combination of factors that has made us a global leader in broadband.”
Chin says government policies aimed at improving the country’s telecom infrastructure and fast-paced telecom deregulation in the ’90s helped facilitate the journey. Some factors, however, are unique to Korea or Asia. The Brunel study cited the fact that 65 percent of Koreans live in clusters of high-rise apartment buildings, which makes it easier to roll out ultrafast VDSL broadband.
Foreigners are beating a path to Korea to discover just what elements of its success can be replicated elsewhere. “Everyone from the FCC in Washington to telecom policy makers from Nigeria have sent delegations to study our broadband phenomenon,” says Kim Chang-Kon, vice minister for information and communications in Seoul. The Federal Communications Commission’s Michael Powell and other top FCC brass, for example, are examining how Korea created such vigorous competition between telephone and cable companies.
Little wonder, then, that Korean companies are exporting their skills. Take Korea Telecom, which is called KT Corp. It is the world’s largest broadband service provider, with over 6 million broadband customers in Korea. Broadband Internet access revenues for the company were $2.1 billion last year, or nearly 20 percent of its total revenues. Broadband Internet access is no pie-in-the-sky illusion for KT. “It is now a core part of our revenue stream,” says KT CEO Lee Yong-Kyun.
Lee says telephone companies around the world are queuing up to sign technical cooperation agreements with KT as they roll out their own broadband infrastructure. In February, KT sealed a deal with the state-owned Telephone Organization of Thailand to roll out high-speed Internet networks in Thailand later this year. KT also has a contract with India’s largest fixed-line operator, state-owned Bharat Sanchar Nigam, to provide its expertise in broadband access as well as equipment. “India and China are two of the fastest-growing economies in the world and two of the fastest-growing telecom markets,” says Lee. KT is also looking at Indonesia, the Philippines and Malaysia for similar ventures. “The broadband access market in Korea is limited so we need to expand overseas,” says Lee. “We want to go to markets where broadband penetration is low.”
The Gaming is Serious
Another Korean company exporting its expertise in broadband is online gaming giant NCsoft. Its multiplayer network games like Lineage 1, which lets people dream up characters on the Web and interact with other role players, raked in sales of $145 million last year and net profits of $27.5 million. Analysts are forecasting sales growth of 52 percent this year, with overseas sales growing more than 70 percent.
NCsoft’s games are already a huge hit in Taiwan and are catching on in Japan, Hong Kong and China. But its 34-year-old founder and CEO, Kim Tack Jin, is keen on expanding in the U.S. So far, the only problem has been the lack of broadband access in the U.S. “Broadband penetration rate is still low and access speeds are still slow compared with Korea, Japan and Taiwan,” says Kim.
But that hasn’t stopped him from customizing his games to suit U.S. players. A new game called City of Heroes will be released in the States later this year. And NCsoft has bought online game design houses in the U.S. through share swaps. In 2001, it bought Destination Games, an Austin, Tex.-based online gaming company run by brothers Richard and Robert Garriott. Two years ago, NCsoft acquired another U.S outfit called Arena Net, based in Bellevue, Wash. Its designers were behind popular online games like Starcraft and Diablo. “Our strategy is to grow globally and as we do that we will have to acquire expertise as we have done with those two American companies,” says Kim.
The Next Frontiers
One lesson from Korea’s experience is that wireless broadband (WiFi) and fixed-line broadband aren’t competitors as much as they complement each other. Not surprisingly, Korea is also the world leader in WiFi, which allows PDA and laptop-carrying customers to access the Internet at warp speed. Some 30 percent of the world’s WiFi hot spots-in cafÃ©s, shopping malls, hotel lobbies, airports and other high-traffic places-are in Korea.
Wireless phones are also part of the picture. Revenues from mobile Internet access are now driving growth at two large cellular companies, SK Telecom and KT Freetel. Nearly 80 percent of Koreans have a cellular phone, and Korea was one of the first markets in the world, two years ago, to adopt Third Generation (3G) technology. SK Telecom has a technical partnership with China Unicom to assist in expanding its wireless Internet services. Late last year, SK Telecom signed a deal with France’s Alcatel to jointly develop and sell multimedia messaging services worldwide. These services allow users to send or receive images, sound and other content-rich applications via their mobile phones. Now, as the rest of the world plays catch-up with 3G, SK Telecom is readying new mobile satellite broadcasting services that would deliver satellite TV channels on cellular phones and PDAs for commercial launch in 2006.
With its next project, Korea hopes to widen its already sizable lead. Last year, the Korean government forked out more than $2 billion of the $10 billion needed to build the world’s fastest integrated network. This “broadband convergence network” (BcN) will provide connection speeds of between 50 to 100 megabits per second by the end of next year. The fastest connection speed in the U.S. is just 3 megabits right now. “BcN will be a core platform for the creation of an advanced communications market,” says Minister Chin. “If we want to be a leader in broadband, we need to stay far ahead of other countries that are catching up,” says Chin. “That means we need to invest more in our high-speed Internet backbone, we need to be innovative, and the government must work hand in hand with the private sector.”
What’s next? Korea’s top electronics giants, Samsung and LG, are now pushing along a new frontier, home networking, and are developing a wireless network that will allow digital appliances at home to work with each other. With broadband penetration so high, “Korea is an ideal test bed for home networking,” says Kim Jung Woo, a research fellow at Samsung Economic Research Institute in Seoul.
Last year, the government named home networking as an important plank of its technology strategy. “Samsung and LG now need to find a killer app for home networking before it starts to fly,” says researcher Kim.
Of course, not everything the Koreans are trying to do in their own country will work, much less reverberate in the U.S. But many trends and technologies will make the leap across the Pacific. Just as the Japanese once used their domestic consumer electronics market as a platform for new product development, the Koreans now have an opportunity to do the same with their technology gains. Consider how Samsung emerged as one of the top three makers of cell phone handsets globally, partly on the strength of a home market that demands constant innovation. So the challenge for American CEOs is figure out how to ride the Korean broadband wave-before it rides over you.