Korea's MOIC discusses its role in Korea's internet revolution

Yang Seung-taik, Minister of Korea''s Ministry of Information and Communication explains how the ministry has aided the explosion of broadband internet usage and aims to fully privatize Korea Telecom by June.

FinanceAsia: Give me a sense of your priority for 2002.

Yang Seung-taik: For the past six months we've started making broadband internet a universal service.

How do you determine when one technology needs help over another?

The implications of promulgating broadband internet are very broad in many aspects. Since last year, telephony ceased to be a so-called blue chip industry, mainly because of the explosion of mobile communications, plus voice-over IT. With this, the usage of [fixed line] telephony is going to go down and that reflects on the revenue assumptions of the major global telephone companies. On top of that they have over-invested in infrastructure, and they paid a huge amount of money for third-generation mobile licenses. And that is on top of Y2K investments, which you may recall. All of this accumulates into a very big debt while their revenue is going down. So they are in really big trouble. That also affects the equipment manufacturers.

By introducing broadband internet, they can utilize all that over-investment, and the popularity of the internet can be used to boost revenue. The growth of the internet can provide large benefits to companies, in addition to providing conveniences to the public.

We targeted this industry in 1998 and it exploded in 2000 and 2001. By June of 2001, Korea Telecom - now they call themselves KT - passed the break-even point with three million subscribers in broadband. Until then, everyone in telecoms had thought broadband was a business no one could make money on.

What was the role of the Ministry of Information and Communications in promoting broadband usage?

The market was very sluggish at the beginning, around early 1999. No one in telecommunications wanted to get involved in broadband internet because they didn't see any money in it, except one company, Thrunet, which was involved in cable television. Then we passed an obscure policy called the cyber apartment certificate, which is like an emblem that certifies residential buildings are IT-ready - fitted out with ADSL, for example.

Construction companies realized if they could get this certificate, they could sell apartments at higher prices, thanks to the popularity of the internet. Say installing ADSL cost $600, but the cost of an apartment was $300,000. If they can sell the apartment at 1% more because it's certified from us, they can make a lot more money. They don't care whether the technology is used or not. They approached Thrunet and also Hanaro, which was licensed for local telephone services - which is not an industry that companies can compete and make a lot of money in. Hanaro realized this and when it was approached by construction companies using our certificate, grabbed the idea of investing in broadband. By the end of 1999, Thrunet's cable subscribers and Hanaro's ADSL subscribers passed the one million mark.

Then Korea Telecom jumped in. They have to be number one in everything - but here the other guy had one million subscribers in broadband and they didn't have anything. So they started to compete. By the end of 2000, Korea had four million broadband subscribers, a fourfold increase. By June of 2001 we had six million subscribers, and about 50% of that market share was held by Korea Telecom. At that point the broadband internet sector in Korea broke even. At the same time, the price of ADSL dropped to about $120.

The boom has started: everywhere in the world is now trying to introduce broadband internet, and the orders are pouring into Korea. Companies from other countries are coming here for engineering and ADSL purchases. When we first started, each ADSL unit cost over $600 and it didn't work so well. Now we have it down to almost $100 and it works very well.

So if you look back at the origins of this boom you can see we played a catalyst role with the construction companies that then sparked the interest of the telecom companies.

How long have you also been in the role of seeding venture capital?

In 1998 we thought this would be a good idea. We require the venture capital fund manager put up 10% of their own money. We encouraged venture capital companies to form a fund, and we contribute around 40%, and encourage other investors to participate. We don't manage the fund, the venture capital company does.

Why does MIC play this role - is there not enough interest from the private sector?

There's a lot of interest from the private sector. We thought we would encourage them and make funds available for them. By doing that we support the creation of new ventures.

I have a theory that I call the fertility of soil theory. The fertility is governed by the amount of hardware infrastructure, the number of broadband internet users and the general interest of consumers. We have the most fertile soil in the world to grow completely new businesses or industries. How to sprout such a new business is to let the people spread the seed. If you find a seed that grows well, that's the direction we want to go. The seeds, we call them venture companies, are full of creative young people.

The government increases the fertility - improving the environment so they grow well. Those factors we can plan. So we decided to change the future programme in a way by supporting venture companies in Korea - these companies tell us in which direction to go. They also provide new jobs and new businesses.

How big is your portfolio?

Over $160 million has been put up by the ministry since 1998, and three times that from the private sector constitutes the overall volume, almost $500 million.

As an investor do you have a target return?

It really depends on the fund and who manages it. The first one from 1998 has given us a return of 30% a year; one we formed last year has yielded almost nothing.

What is your role in privatization?

We used to own 100% of Korea Telecom. At the end of last year we sold 49% overseas, now we own 28.4% and we're going to sell that off by the end of June. Our international advisor is JPMorgan for the last tranche.

What is the feedback you get from investors?

The most frequently asked question is whether the size of the sale is big enough to influence prices in the stock market. We're talking 1.5% of Korea's total market cap - I don't think that's enough to have too much of an impact. The stock market is now growing very fast as well. So it's less of a problem now than it would have been a year ago. We have a W5 trillion sale target, a little less than $4 billion.

June - so you hope to catch some euphoria from hosting the World Cup?

I hope so.

Is there anything else to be privatized?

KT is the only company we own. But the post office service has become a profit centre for the past three years. It will take some time, however, before we can think about turning that into a corporation.

I've heard when MIC uses partners, you favour just big ones - is there a scale requirement in your investment partners?

That's not quite true. What happened is that we've had large R&D projects for the past twenty years, such as developing CDMA mobile businesses or electronic switching systems. The systems are so big, no small companies can participate. It's a huge amount of R&D money. The large companies participated and they happened to be very successful and made a lot of profits.

But we have small programmes to encourage smaller companies to develop their own technology, and by developing the fertile soil, many companies have been brought up through the help of MIC.

Fund managers tell me that the process of picking private-sector partners is not very transparent.

The funds we raised are managed by private companies. We announce these programmes and collect volunteers, and then find their qualifications to raise money, or judge if they have enough past experience to work on a project. It's fairly transparent.

Does policy sometimes veer too quickly from one technology to another? I understand last year there was a big emphasis on developing bluetooth, which is now considered out.

If we've found someone in the private sector is already developing a technology, then we don't need to get involved. We have to make sure any policy we develop is a first in Korea, preferably a first in the world. It must be a technology that no one has developed. And we usually finance whoever comes to us with proposals.

You've just launched the Nasdaq IT fund. What is its goal?

Before the Nasdaq fund we seeded the Shanghai wireless fund with the Shanghai municipal government, so Korean companies can set up a company in the Shanghai area in mobile communications. The Nasdaq IT fund is our second overseas fund. We have Korean companies that have started up in Silicon Valley or elsewhere in the United States - we will finance them to grow enough to be ready to list on Nasdaq. We're still picking overseas partners. It's up to our venture capital partners, STIC Venture Capital and KDB Capital, to manage the fund.

Will there be other such international funds launched this year?

Right now we don't have any plans. We'd like to see the success of these two funds. They have to show they benefit the country first.

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