Overseas telcos continue to market aggressively
Concerns grow that overseas telcos will cut marketing costs
Marketing costs at Korean telecom players should erode due to the recent
business suspensions and the new legislation on handset distribution channels. As
such, concerns have emerged that reduced marketing by overseas telcos would
severely undermine Korean handset makers.
Korean telco marketing cost weighting fell in 2013
While marketing by the three Korean telecom players increased in 2013, the
marketing cost-to-sales ratio is trending down (Figure 1), suggesting marketing
competition is already easing gradually. Going forward, marketing costs should fall
further given the tighter regulations on handset subsidies. And given the saturation
of the smartphone market, the overall Korean handset market should shrink.
But, marketing costs at overseas telcos continue to grow
Based on SG&A trends (used as a proxy for marketing costs), the weighting of
marketing costs appears to still be growing in the US, Europe, China, India and
Mexico (Figures 3-6). Specifically, marketing costs in China (China Mobile, China
Unicom and China Telecom) are surging. Marketing costs are down in Europe, but
sales have fallen more rapidly, so the actual marketing cost weighting has
increased. In the largest telecom market, the US (Verizon, AT&T, Sprint and TMobile),
the marketing cost weighting remains around 40%, but total marketing
costs have increased. Overall, we believe overseas telcos continue to compete
aggressively to secure additional subscribers.
Emergence of monthly payment plans should not hurt US sales
In the US, telecoms are moving away from two-year service contracts for monthly
handset payment plans, which offer quicker phone replacements and lower rates
(including data sharing, Tables 1-3). As the two-year plans fueled handset sales via
lower prices, concerns have emerged that the new monthly payment plans will
erode handset sales. However, 1) the monthly payment amount is low, 2) the more
flexible replacement cycle should pull forward smartphone replacement demand,
and 3) handset usage should increase through the data sharing plans. As such, we
believe the monthly payment plans will not undermine US handset sales.
US marketing competition over Galaxy S5 pre-orders intense
Verizon and AT&T are competing aggressively over Galaxy S5 pre-orders (Table 4).
In particular, AT&T is offering a USD100 credit to any customer buying a mobile
phone by April 30, so customers could purchase a Galaxy S5 for as low as
USD99.99. We believe this aggressive marketing will have a positive impact on global handset players.
*Source: Korea Investment & Securities Co.