"Will Phone Subsidy Disclosure Lower Communication Costs? Challenges of the Separate Disclosure System"

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[Asia Economy Reporter Koo Chae-eun] The separate disclosure system, which was scrapped at the last minute during the enactment of the Device Distribution Act in 2014, is being reintroduced. The separate disclosure system involves separately announcing the subsidies provided by telecom carriers and manufacturers when selling devices, and its reintroduction is being discussed to ensure transparency of the publicly announced subsidies.

However, there are concerns that the causal relationship between ‘introduction of separate disclosure → disclosure of subsidy sources → reduction of retail price’ is weak, and that excessive market transparency, as seen in the Device Distribution Act, could further suppress price competition. There are also strong voices worried about the exposure of manufacturers’ trade secrets, who need to sell devices in the global market.

Re-promotion of the Separate Disclosure System

According to industry sources on the 15th, the Korea Communications Commission recently expressed support for the introduction of the separate disclosure system to the National Assembly and has begun discussions on system reform. In its recent 5th policy vision announcement, the KCC presented the separate disclosure system along with easing regulations on incentive discrimination as policy tasks. While the easing of incentive discrimination regulations is being pursued through government legislation, the separate disclosure system is expected to be discussed as a pending bill. Currently, in the 21st National Assembly, there are amendment bills to the Device Distribution Act related to the introduction of the separate disclosure system proposed by Cho Seung-rae, Jeon Hye-sook, and Kim Seung-won of the Democratic Party of Korea.

The reason the government and the National Assembly are pushing for the separate disclosure system is the belief that it can lower device prices. If it becomes clear that manufacturers are bearing large amounts of subsidies, there could be pressure to reduce the device price by the amount of the subsidy.

For example, if a 1 million won smartphone is sold with a publicly announced subsidy of 300,000 won, it can be confirmed that 100,000 won was provided by the carrier and 200,000 won by the manufacturer. This could lead to pressure to launch the smartphone at 800,000 won from the start. The intent is also to uphold consumers’ right to know and to monitor whether subsidies are concentrated only on high-priced plans.

The Paradox of Market Transparency

However, the industry's calculations are somewhat complicated. Since subsidies and retail costs are trade secrets, manufacturers may be reluctant to disclose them and might even refrain from investing resources in subsidies altogether. In particular, the Device Distribution Act enacted in 2014 aimed to ensure that “everyone can buy devices at the same price without discrimination” by allowing consumers to receive only the amount of the publicly announced subsidy. However, as a result, carriers did not invest resources in subsidies, causing the unintended consequence that everyone ended up buying devices at high prices. This paradox could also appear in the separate disclosure system. A telecommunications industry official said, "Although the subsidy cap system expired in 2017, subsidies did not increase at all. If subsidies must be given as publicly disclosed under the separate disclosure system, the incentive to compete for consumers disappears, and subsidies could actually decrease compared to the current level."

Especially since manufacturers like Samsung Electronics sell devices not only in Korea but also globally, comparisons of retail prices with overseas markets are inevitable. It is unlikely that only Korea would lower retail prices due to separate disclosure. Given that marketing expenses, including subsidies, vary by country, if marketing costs in one country are disclosed, it could cause controversies over differential subsidy payments and disrupt overseas sales strategies. This could benefit global competitors such as Apple and Huawei.

Professor Shin Min-soo of Hanyang University said, "How subsidies from carriers and manufacturers are incorporated during distribution and the extent of differential subsidies among businesses are very delicate and sensitive negotiation areas," adding, "Since this is a market dominated by monopolistic operators, if mishandled, negotiation power could be redistributed and double margins could arise. Therefore, the concerns about the separate disclosure system should be carefully examined before proceeding."

This content was produced with the assistance of AI translation services.