South Korean Cable Operators
Prepare for Two-Way Digital Cable

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By Alan Breznick

Alan Breznick, a veteran business journalist and analyst, is editor of Television A.M. and Cable Datacom News.

South Korea, the nation that has zoomed past others to achieve the highest broadband data penetration rate in the world, is now trying to leapfrog the rest of the planet on the video side too.

Under an ambitious upgrade program orchestrated by the national government, South Korean cable operators are gearing up to launch advanced digital video services throughout their half of the Korean peninsula. Plans call for the first pioneering MSOs to introduce one-way digital service later this year and two-way digital service early next year as they seek to meet the government's target of full digital deployment by 2007.

For instance, Qrix Communications Inc., a major Korean cable operator with 450,000 subscribers, intends to launch digital video-on-demand (VOD) and subscription VOD (SVOD) in the Seoul metro area by the end of the summer. In early June, Qrix tapped SeaChange International to supply the media servers, automation software and real-time broadcast recording gear for managing and delivering on-demand programming.

"They're all looking to deploy digital service," says Vivek Couto, an analyst with Media Partners, a major media research firm in the Asia-Pacific region that works with SeaChange. "They'll probably start in the fourth quarter and accelerate next year."

As part of its drive to leapfrog most of the world, the South Korean Ministry of Information and Communications has mandated that cable operators and manufacturers abide by the OpenCableÔ specifications developed by CableLabs for advanced digital cable-ready devices. Becoming the first country outside North America to do so, Korea adopted the OpenCable hardware specification in Nov. 2001, and the OpenCable Application Platform (OCAPÔ) standard for software in Feb. 2002.

Such moves have helped spur interest from top equipment and software vendors in the U.S., Europe and elsewhere, including Korea itself. Motorola, Scientific-Atlanta, Samsung, Humax, NDS Group, Nagravision, SeaChange, Concurrent Computer Corp. and BigBand Networks Inc. are among the suppliers that have stormed the market, hoping to gain some traction.

"The common standard (with the U.S.) serves the vendors well," says Dan Sutorius, vice president of market development for Motorola Broadband, which is trying to break into the conditional access market first and then grab a share of the digital set-top business. "That's one reason why they picked it."

To prepare for the nationwide launch of digital, South Korean cable operators are setting up the technical infrastructure to support and deliver the more sophisticated technology. In one move, for example, cable operators have formed Broadband Solutions Inc. (BSI), a consortium that's building regional digital media centers controlled by a centralized digital headend. As part of its mandate, BSI is now more than doubling the amount of programming available to cable systems, with plans to carry 130 video and 60 audio feeds initially.

"It's really accelerating the digital deployment," says Richard Chau, vice president and general manager of the Asia-Pacific region for BigBand Networks, which is providing switching, routing, grooming and other support services for BSI. He notes that "a lot of operators lacked the capital" to install and upgrade their own digital headends.

South Korean cable operators are also scrambling to develop and acquire the programming and applications that they'll need for their digital rollouts. They're working on new video and audio programming, pay-per-view (PPV) services, advanced electronic programming guides (EPGs), VOD offerings, high-definition TV (HDTV) channels and interactive TV features, among other things.

To make that process easier, the Korean government recently loosened restrictions on foreign and local conglomerate ownership of program providers (PPs). In March, it raised the foreign ownership cap to 49% from 33% and got rid of the 49% cap on local conglomerate ownership.

Among U.S. cable programmers, ESPN, National Geographic and Viacom have plunged into the South Korean programming market so far. ESPN has a joint venture with MBC, one of the big Korean broadcasters. National Geographic has teamed with CJ CableNet, a major MSO. And Viacom's MTV has hooked up with On Media, a leading Korean PP.

It's easy to see why equipment vendors, software developers and cable programmers are showering so much attention on South Korea. Besides the government's strong push to adopt cutting-edge digital technologies, the market is appealing because the Korean economy is growing at a steady clip and the nation's citizens are relatively affluent. In 2003, South Korea generated a gross domestic product (GDP) of $12,499 per capita.

"It is a very attractive market," Couto says. "It's a market that a lot of people are looking at, especially with OpenCable."

Indeed, South Korea has become the third largest cable market in the Asia-Pacific region, trailing only such giants as China and India. Although Korea has just 16 million TV households, it has nearly 11 million basic cable homes. That amounts to a cable penetration rate of more than 65%, similar to the U.S. and Canada.

"Most Korean homes have cable," Chau says. "Now they are getting ready for digital video. They're catching up pretty quickly."

The South Korean market also seems ripe for digital cable because Koreans clearly love new technological gadgets and interactive applications. On the broadband side, more than half of the homes already have high-speed data connections, thanks in part to the government's strong push in this area. At the end of 2002, DSL accounted for 5.4 million broadband subscribers and cable for 3.5 million.

"Fundamentally, the Koreans are huge gamers and huge peer-to-peer file users," says Mitch Matteau, vice president of international sales engineering for Arris, which recently sold its C4 cable modem termination system (CMTS) to Woori Cable Broadcasting in Uijeongbu. "It's definitely a data market."

It's far from assured, though, that digital cable will be a slam-dunk success in South Korea. For one thing, SkyLife, the rival digital satellite TV service owned in part by Korea Telecom, has aggressively signed up as many as 1.5 million subscribers in just two years. With heavy set-top box subsidies for consumers and popular pay, PPV, HDTV and interactive services, SkyLife is shooting to reach its breakeven target of 3 million subscribers soon.

"That is serious competition," says Jeff Pinero, the country head for Motorola Broadband's communications sector in South Korea. He also frets about potential competition from phone companies getting ready to deploy IP video services. "The market's conditioned for two-way, interactive services," he says. "They (cable operators) need to get there quickly."

For another, the relatively large price tag of OpenCable-based digital set-tops may prove to be a big hurdle for South Korean cable operators, at least initially. With the OpenCable boxes costing more than $200 per set-top, that's a lot to swallow for cable operators who now make an average of about $6 a month on each analog cable customer, thanks to price wars with SkyLife and amongst themselves.

"It's just prohibitive for a lot of people to consider," Couto says. "The prices will come down once the volume goes up. But you've got to get through five years of losing money on digital."

Cable industry fragmentation and a relative lack of strategic investors may also thwart the smooth nationwide rollout of digital. Due to much consolidation of smaller systems over the past couple of years, the top three MSOs - Taekwang, C&M and CJ CableNet -- now command 40% of the cable market and the top seven MSOs control 55%. But analysts like Couto say the top three MSOs need to control 60% of the market, as in the U.S., for digital to really take off.

Curiously enough, South Korea's remarkably high broadband penetration rate may act as another big obstacle to digital, or at least to VOD services. That's because many cable subscribers can use their computers and high-speed connections to get movies and TV programming quickly from the Internet. "With all that bandwidth, they can just download DVDs," Matteau says.

In fact, a recent "worldwide Internet piracy study" conducted by the Motion Picture Association of America (MPAA) found that a whopping 58% of Korean Internet users have reportedly downloaded movies from the Web, more than twice the rate found in any of the seven other countries studied. Plus, the study revealed that 52% of Korean "Internet pirates" reported buying fewer films than before and nearly a third said they're going to the movies less often than they used to.

Small wonder, then, that, as Couto says: "There's a fear that the cable guys are premising too much on VOD."

One final challenge for South Korean cable operators will be coming up with the right business model for digital. In a market where the average cable subscriber pays about $6 a month for analog service and only a select few pay more than $13 a month, can cable operators get away with charging $20 or more a month for digital, even with all the bells and whistles of HDTV and interactive services? Nobody really knows.

Nevertheless, industry observers believe that digital cable will eventually blossom in South Korea. They cite the national government's strong backing and the cable industry's need to keep up with its swiftly growing satellite TV rival, SkyLife.

"At the end of the day, the growth is going to come from cable TV," Couto says. "They need to really drive that digital tier."