Company Quick10K Filing
Kt
20-F 2020-12-31 Filed 2021-04-30
20-F 2019-12-31 Filed 2020-04-29
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-28
20-F 2015-12-31 Filed 2016-04-29
20-F 2013-12-31 Filed 2014-04-28
20-F 2012-12-31 Filed 2013-04-29
20-F 2011-12-31 Filed 2012-04-27
20-F 2010-12-31 Filed 2011-06-29
20-F 2009-12-31 Filed 2010-06-29

KT 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A. Directors and Senior Management
Item 1.B. Advisers
Item 1.C. Auditors
Item 2. Offer Statistics and Expected Timetable
Item 2.A. Offer Statistics
Item 2.B. Method and Expected Timetable
Item 3. Key Information
Item 3.A. Selected Financial Data
Item 3.B. Capitalization and Indebtedness
Item 3.C. Reasons for The Offer and Use of Proceeds
Item 3.D. Risk Factors
Item 4. Information on The Company
Item 4.A. History and Development of The Company
Item 4.D. Property, Plants and Equipment
Item 5.C. Research and Development, Patents and Licenses, Etc.
Item 5.D. Trend Information
Item 5.E. Off-Balance Sheet Arrangements
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Item 6.A. Directors and Senior Management
Item 6.B. Compensation
Item 6.C. Board Practices
Item 6.E. Share Ownership
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
Item 7.B. Related Party Transactions
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Item 9.B. Plan of Distribution
Item 9.C. Markets
Item 9.D. Selling Shareholders
Item 9.E. Dilution
Item 9.F. Expenses of The Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Item 10.D. Exchange Controls
Item 10.G. Statements By Experts
Item 10.H. Documents on Display
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16C. Principal Accountant Fees and Services
Part III
Item 17. Financial Statements
Item 18. Financial Statements
EX-1 d710660dex1.htm
EX-8.1 d710660dex81.htm
EX-12.1 d710660dex121.htm
EX-12.2 d710660dex122.htm
EX-13.1 d710660dex131.htm
EX-15.1 d710660dex151.htm
EX-15.2 d710660dex152.htm
EX-15.3 d710660dex153.htm
EX-15.4 d710660dex154.htm

Kt Earnings 2013-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d710660d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 28, 2014

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        Date of event requiring this shell company report                                         

        For the transition period from                      to                     

Commission file number 1-14926

KT Corporation

(Exact name of Registrant as specified in its charter)

 

KT Corporation   The Republic of Korea
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organization)

90, Buljeong-ro

Bundang-gu, Seongnam-si, Gyeonggi-do

463-711 Korea

(Address of principal executive offices)

In Hoe Kim

90, Buljeong-ro

Bundang-gu, Seongnam-si, Gyeonggi-do

463-711 Korea

Telephone: +82-31-727-0114; E-mail: ian.ihkim@kt.com

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing    New York Stock Exchange, Inc.
one-half of one share of common stock   
Common Stock, par value 5,000 per share*    New York Stock Exchange, Inc.*

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2013, there were 261,111,808 shares of common stock, par value 5,000 per share, outstanding (not including 17,308,160 shares of common stock held by the company as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No   ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP  ¨    IFRS  x    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨     Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

              Page  

PART I

     1   

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS

     1   
 

Item 1.A.

  

Directors and Senior Management

     1   
 

Item 1.B.

  

Advisers

     1   
 

Item 1.C.

  

Auditors

     1   

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     1   
 

Item 2.A.

  

Offer Statistics

     1   
 

Item 2.B.

  

Method and Expected Timetable

     1   

ITEM 3.

 

KEY INFORMATION

     2   
 

Item 3.A.

  

Selected Financial Data

     2   
 

Item 3.B.

  

Capitalization and Indebtedness

     6   
 

Item 3.C.

  

Reasons for the Offer and Use of Proceeds

     6   
 

Item 3.D.

  

Risk Factors

     6   

ITEM 4.

 

INFORMATION ON THE COMPANY

     21   
 

Item 4.A.

  

History and Development of the Company

     21   
 

Item 4.B.

  

Business Overview

     21   
 

Item 4.C.

  

Organizational Structure

     49   
 

Item 4.D.

  

Property, Plants and Equipment

     49   

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     53   

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     53   
 

Item 5.A.

  

Operating Results

     53   
 

Item 5.B.

  

Liquidity and Capital Resources

     78   
 

Item 5.C.

  

Research and Development, Patents and Licenses, Etc.

     82   
 

Item 5.D.

  

Trend Information

     83   
 

Item 5.E.

  

Off-balance Sheet Arrangements

     83   
 

Item 5.F.

  

Tabular Disclosure of Contractual Obligations

     83   
 

Item 5.G.

  

Safe Harbor

     83   

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     83   
 

Item 6.A.

  

Directors and Senior Management

     83   
 

Item 6.B.

  

Compensation

     90   
 

Item 6.C.

  

Board Practices

     91   
 

Item 6.D.

  

Employees

     92   
 

Item 6.E.

  

Share Ownership

     94   

 

i


Table of Contents

TABLE OF CONTENTS

(continued)

 

              Page  

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     95   
 

Item 7.A.

  

Major Shareholders

     95   
 

Item 7.B.

  

Related Party Transactions

     95   
 

Item 7.C.

  

Interests of Experts and Counsel

     95   

ITEM 8.

 

FINANCIAL INFORMATION

     95   
 

Item 8.A.

  

Consolidated Statements and Other Financial Information

     95   
 

Item 8.B.

  

Significant Changes

     98   

ITEM 9.

 

THE OFFER AND LISTING

     98   
 

Item 9.A.

  

Offer and Listing Details

     98   
 

Item 9.B.

  

Plan of Distribution

     99   
 

Item 9.C.

  

Markets

     100   
 

Item 9.D.

  

Selling Shareholders

     104   
 

Item 9.E.

  

Dilution

     104   
 

Item 9.F.

  

Expenses of the Issuer

     104   

ITEM 10.

 

ADDITIONAL INFORMATION

     104   
 

Item 10.A.

  

Share Capital

     104   
 

Item 10.B.

  

Memorandum and Articles of Association

     104   
 

Item 10.C.

  

Material Contracts

     110   
 

Item 10.D.

  

Exchange Controls

     111   
 

Item 10.E.

  

Taxation

     115   
 

Item 10.F.

  

Dividends and Paying Agents

     120   
 

Item 10.G.

  

Statements by Experts

     120   
 

Item 10.H.

  

Documents on Display

     120   
 

Item 10.I.

  

Subsidiary Information

     120   

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     120   

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     123   
 

Item 12.A.

  

Debt Securities

     123   
 

Item 12.B.

  

Warrants and Rights

     123   
 

Item 12.C.

  

Other Securities

     123   
 

Item 12.D.

  

American Depositary Shares

     123   

PART II

     124   

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     124   

 

ii


Table of Contents

TABLE OF CONTENTS

(continued)

 

               Page  

ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      124   

ITEM 15.

   CONTROLS AND PROCEDURES      125   

ITEM 16.

   [RESERVED]      126   

ITEM 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT      126   

ITEM 16B.

   CODE OF ETHICS      126   

ITEM 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES      126   

ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      127   

ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      127   

ITEM 16F.

   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      127   

ITEM 16G.

   CORPORATE GOVERNANCE      128   

ITEM 16H.

   MINE SAFETY DISCLOSURE      129   

PART III

     130   

ITEM 17.

   FINANCIAL STATEMENTS      130   

ITEM 18.

   FINANCIAL STATEMENTS      130   

ITEM 19.

   EXHIBITS      130   

 

iii


Table of Contents

PRESENTATION

All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.

All references to “Won” or “” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars, 1,153.3 to US$1.00, 1,071.1 to US$1.00 and 1,055.3 to US$1.00 at December 31, 2011, 2012 and 2013, respectively. Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2013 have been translated into United States dollars at the rate of 1,055.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2013.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission (the “KCC”) or the Korea Telecommunications Operators Association.

PART I

Item 1. Identity of Directors, Senior Managers and Advisers

Item 1.A.  Directors and Senior Management

Not applicable.

Item 1.B.  Advisers

Not applicable.

Item 1.C.  Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Item 2.A.  Offer Statistics

Not applicable.

Item 2.B.  Method and Expected Timetable

Not applicable.

 

1


Table of Contents

Item 3. Key Information

Item 3.A.  Selected Financial Data

You should read the selected consolidated financial data below in conjunction with the Consolidated Financial Statements as of December 31, 2011, 2012 and 2013 and for each of the years in the three-year period ended December 31, 2013, and the report of the independent registered public accounting firm on these statements included herein. These audited financial statements and the related notes have been prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected consolidated financial data for the three years ended December 31, 2013 have been derived from our audited consolidated financial statements.

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with IFRS as adopted by the Republic of Korea (“K-IFRS”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form 6-K. During the three years ended December 31, 2013, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, due to a subsequent event in which early redemption rights were exercised for certain commercial paper guaranteed by KT ENS Corporation (“KT ENS”), our consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB, which were not reflected in our financial statements prepared in accordance with K-IFRS, which were issued on March 13, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance with K-IFRS. See “Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” for additional information. In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission which became effective on March 4, 2008, we are not required to provide a reconciliation to U.S. GAAP.

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report.

 

2


Table of Contents

Consolidated statement of operations data

 

     Year Ended December 31,  
             2010(1)                     2011(1)                     2012(1)                     2013                     2013 (2)          
     (In billions of Won and millions of Dollars, except per share data)  

Continuing Operations:

          

Operating revenue

   20,310      22,088      24,644      24,058      US$ 22,797   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     19,993        21,311        23,856        23,729        22,485   

Others

     317        777        787        329        312   

Operating expenses

     18,303        20,101        22,964        23,734        22,491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     2,007        1,987        1,680        323        306   

Finance income

     238        270        499        279        265   

Finance costs

     (596     (642     (782     (648     (614

Income from jointly controlled entities and associates

     33        (6     18        7        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from continuing operations before income tax

     1,681        1,609        1,415        (38     (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (396     318        278        50        47   

Profit (loss) for the year from the continuing operations

     1,285        1,291        1,137        (88     (83
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

          

Profit (loss) from discontinued operations

     29        165        (32              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the year

   1,314      1,455      1,105      (88   US$ (83
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the year attributable to:

          

Equity holders of the parent company

   1,296      1,446      1,046      (190   US$ (180

Profit (loss) from continuing operations

     1,273        1,280        1,076        (190     (180

Profit (loss) from discontinued operations

     23        166        (30              

Non-controlling interest

   19      10      59      102      US$ 97   

Profit from continuing operations

     13        11        61        102        97   

Profit (loss) from discontinued operations

     6        (1     (2              

Earnings per share attributable to the equity holders of the Parent Company during the period (in won):

          

Basic earnings (loss) per share

   5,326      5,943      4,296      (779   US$ (1

From continuing operations

     5,293        5,262        4,417        (779     (1

From discontinued operations

     33        681        (121              

Diluted earnings (loss) per share

   5,326      5,942      4,296      (782   US$ (1

From continuing operations

     5,293        5,261        4,417        (782     (1

From discontinued operations

     33        681        (121              

 

3


Table of Contents

Consolidated statement of financial position data

 

     As of December 31,  
Selected Statement of Financial Position Data        2010(1)              2011(1)              2012(1)              2013      
     (In billions of Won)  

Assets:

        

Current assets:

        

Cash and cash equivalents

   1,162      1,462      2,058      2,071   

Trade and other receivables, net

     4,193        6,191        5,908        5,240   

Short-term loans, net

     725        698        668        839   

Current finance lease receivables, net

     195        249        340        294   

Other financial assets

     270        259        246        480   

Current income tax assets

     0        1        1        35   

Inventories, net

     711        676        935        674   

Other current assets

     264        311        362        340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     7,519        9,847        10,517        9,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-current assets:

        

Trade and other receivables, net

     1,125        1,725        1,073        813   

Long-term loans, net

     408        491        513        510   

Non-current finance lease receivables, net

     403        488        522        416   

Other financial assets

     269        622        672        673   

Property and equipment, net

     13,398        14,090        15,806        16,387   

Investment property, net

     1,146        1,159        1,155        1,105   

Intangible assets, net

     1,419        2,645        3,214        3,827   

Investments in jointly controlled entities and associates

     638        500        379        364   

Deferred income tax assets

     565        530        611        707   

Other non-current assets

     50        86        95        76   

Total non-current assets

     19,422        22,336        24,040        24,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   26,942      32,183      34,558      34,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity:

        

Current liabilities:

        

Trade and other payables

   4,424      5,902      7,221      7,414   

Current finance lease liabilities, net

     33        46        14        19   

Borrowings

     2,722        2,125        3,197        3,021   

Other financial liabilities

     1        8        72        64   

Current income tax liabilities

     284        187        144        100   

Provisions

     58        123        206        115   

Deferred income

     177        168        171        144   

Other current liabilities

     185        220        242        348   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     7,885        8,780        11,267        11,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities:

        

Trade and other payables

     382        652        701        1,059   

Non-current finance lease liabilities, net

     61        90        28        49   

Borrowings

     6,660        8,897        8,239        8,463   

Other financial liabilities

     38        288        70        179   

Retirement benefit liabilities

     264        426        549        586   

Provisions

     110        143        150        134   

Deferred income

     157        161        157        148   

Deferred income tax liabilities

     4        126        137        169   

Other non-current liabilities

     27        32        41        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

     7,703        10,815        10,073        10,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   15,588      19,595      21,340      22,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to owners of the Parent Company

        

Paid-in capital

        

Capital stock

   1,564      1,564      1,564      1,564   

Share premium

     1,440        1,440        1,440        1,440   

Retained earnings

     9,466        10,219        10,646        10,019   

Accumulated other comprehensive income (expense)

     (79     (23     1        25   

Other components of equity

     (1,258     (1,497     (1,343     (1,321
     11,133        11,704        12,309        11,728   

Non-controlling interest

     221        884        909        1,110   

Total equity

     11,354        12,588        13,218        12,837   

Total liabilities and equity

   26,942      32,183      34,558      34,850   

 

4


Table of Contents

Consolidated statement of cash flow data

 

     Year Ended December 31,  
     2010 (1)     2011 (1)     2012 (1)     2013     2013 (2)  
     (In billions of Won and millions of Dollars)  

Net cash generated from operating activities

   2,973      2,164      5,725      4,111      US$ 3,896   

Net cash (used in) investing activities

     (2,949     (2,666     (3,851     (3,783     (3,584

Net cash provided by (used in) financing activities

     (398     772        (1,278     (312     (295

Operating Data

 

     As of December 31,  
     2009      2010      2011      2012      2013  

Lines installed (thousands) (3)

     25,907         25,524         23,925         25,242         24,264   

Lines in service (thousands) (3)

     17,069         16,620         15,900         15,121         14,032   

Lines in service per 100 inhabitants (3)

     35.0         34.0         30.8         30.2         27.4   

Mobile subscribers (thousands)

     15,016         16,041         16,563         16,502         16,454   

Broadband Internet subscribers (thousands)

     6,953         7,424         7,823         8,037         8,067   

 

 

(1) As a result of adoption of IFRS 10 in 2013, the comparative 2011 and 2012 consolidated financial data were retrospectively restated, but 2010 consolidated financial data were not restated as IFRS 10 does not require restatement of the earlier periods presented beyond the immediately preceded period. Also, the amendments to International Accounting Standard 19 were applied retrospectively and the comparative 2010, 2011, and 2012 consolidated statement of operations data were restated by reflecting the adjustments resulting from this retrospective application.

 

(2) For convenience, the Won amounts are expressed in U.S. dollars at the rate of 1,055.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2013. This translation should not be construed as a representation that the Won amounts represent, have been or could be converted into U.S. dollars at that rate or any other rate.

 

(3) Including public telephones.

Exchange Rate Information

The following table sets out information concerning the Market Average Exchange Rate for the periods and dates indicated:

 

Period

   At End
of Period
     Average
Rate (1)
     High      Low  
     (Won per US$1.00)  

2009

     1,167.6         1,276.4         1,573.6         1,152.8   

2010

     1,138.9         1,156.3         1,261.5         1,104.0   

2011

     1,153.3         1,108.1         1,199.5         1,049.5   

2012

     1,071.1         1,126.9         1,181.8         1,071.1   

2013

     1,055.3         1,095.0         1,159.1         1,051.5   

November

     1,062.1         1,062.8         1,072.9         1,055.8   

December

     1,055.3         1,056.7         1,061.9         1,051.5   

2014 (through April 28)

     1,038.9         1,063.2         1,086.1         1,036.0   

January

     1,079.2         1,064.8         1,084.1         1,050.4   

February

     1,067.7         1,071.3         1,086.1         1,060.5   

March

     1,068.8         1,070.9         1,080.3         1,062.6   

April (through April 28)

     1,038.9         1,045.6         1,066.1         1,036.0   

 

Source: Seoul Money Brokerage Services, Ltd.

 

(1) Represents the average of the Market Average Exchange Rates on each business day during the relevant period (or portion thereof).

Our monetary assets and liabilities denominated in foreign currency are translated into Won at the Market Average Exchange Rate on the balance sheet dates, which were, for U.S. dollars, 1,153.3 to US$1.00, 1,071.1 to US$1.00 and 1,055.3 to US$1.00 at December 31, 2011, 2012 and 2013, respectively.

Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2013 have been translated into United States dollars at the rate of 1,055.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2013.

 

5


Table of Contents

We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.

Item 3.B. Capitalization and Indebtedness

Not applicable.

Item 3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

Item 3.D. Risk Factors

You should carefully consider the following factors.

Risks Relating to Our Business

Competition in the Korean telecommunications industry is intense.

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (or SK Telecom) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (or SK Broadband). The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. In January 2010, LG Dacom Corporation (or LG Dacom) and LG Powercom Co., Ltd. (or LG Powercom) merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

In addition to our competition with integrated telecommunications service providers, we face increasing competition from specific service providers, such as Internet phone service providers, Internet text message service providers, voice resellers and call-back service providers. In recent years, the increasing popularity of Internet phone and free text message services, such as Skype and Kakao Talk, have had a negative impact on demand for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

Mobile Service. We provide mobile services based on Wideband Code Division Multiple Access (or W-CDMA) technology and Long-Term Evolution (or LTE) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 30.1% as of December 31, 2013, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 50.0% as of December 31, 2013.

Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Mobile number portability and handset subsidies have intensified competition among the mobile service providers and increased their marketing expenses. If the mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.

 

6


Table of Contents

Since 2011, SK Telecom, LG U+ and we have launched fourth-generation mobile telecommunications services based on LTE technology, which we believe has further intensified competition among the three companies and resulted in an increase in marketing expenses and capital expenditures related to implementing and providing 4G LTE services. SK Telecom and LG U+ began providing 4G LTE services in July 2011, and we commenced providing commercial 4G LTE services on January 3, 2012 utilizing our bandwidths in the 1.8 GHz spectrum that became available upon termination of our 2G services based on Code Division Multiple Access (or CDMA) technology. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized advanced wideband LTE (“Wideband LTE-A”) services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.

On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between 80,000 to 85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which provide mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of 70,000 per month. Although we expect that SK Telecom and LG U+ will face similar challenges to those that we expect to face in offering LTE services and in implementing improvements to LTE technology, such as increased fees and expenses and unforeseeable market responses to the new technology, we cannot assure you that we will continue to be able to successfully compete in fourth-generation mobile telecommunications services. Furthermore, we believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.

Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG U+ and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Onse Telecom Corporation and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, that offer international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these businesses. As of December 31, 2013, we had a market share in local telephone service of 81.4% and a market share in domestic long distance service of 78.7%. Further increase in competition may decrease our market shares in such businesses. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.

 

7


Table of Contents

Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (or HFC) and Asymmetric Digital Subscriber Line (or ADSL) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Onse and LG U+. In recent years, numerous cable television operators have also begun to offer HFC-based services at rates lower than ours. We had a market share of 43.1% as of December 31, 2013. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.

The market for other Internet-related services in Korea, including IP-TV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors enter the Internet industry in Korea. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.

Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum that we use to provide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in December 2016, and we are required to pay approximately 1.3 trillion during the license period of 15 years. In April 2010, the KCC announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which became effective in July 2011, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the 1.8 GHz spectrum expired, and the KCC allocated back to us the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation.

In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a total usage fee of 261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use the 20 MHz of bandwidth in the 2.1 GHz spectrum. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012, and also began using the 20 MHz of bandwidth in the 900 MHz spectrum to provide our 4G LTE services starting in September 2013. We expect to utilize the newly allocated bandwidth in the 800 MHz spectrum to further expand our 4G LTE services in the future, if necessary.

In August 2013, the Ministry of Science, ICT and Future Planning further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the

 

8


Table of Contents

military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately 900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. Acquiring the right to use additional bandwidth in the 1.8 GHz spectrum has enabled us to provide Wideband LTE services beginning in September 2013, as 15 MHz of the newly acquired bandwidth in the 1.8 GHz spectrum was adjacent to our existing 20 Mhz of bandwidth in the 1.8 GHz spectrum.

The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum, receiving additional bandwidth allocation, or cost-effectively implementing technologies that enhance bandwidth usage efficiency, our subscribers may perceive a general decrease in quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business.

Introduction of new services, including our 4G LTE services, poses challenges and risks to us.

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide wireless broadband Internet access (or WiBro) service for 126 billion, and commercially launched our service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 84 cities nationwide and major highways in March 2011, which we believe allows us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had approximately 845,000 subscribers as of December 31, 2013. The number of our WiBro subscribers decreased in 2013 compared to 2012, as more WiBro subscribers chose to access the internet using our 4G LTE network rather than WiBro following the introduction and proliferation of 4G LTE services during 2012 and 2013. Furthermore, we focused our subscriber retention efforts during 2013 on our mobile subscribers rather than our WiBro subscribers. We are also upgrading our broadband network to enable FTTH connection, which enhances data transmission speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH also enables us to deliver digital media content, such as IP-TV, with higher stability.

In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster than W-CDMA, up to 150 Mbps for downloading and up to 50 Mbps for uploading. We believe that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, allows us to offer significantly improved wireless data transmission services

 

9


Table of Contents

with faster wireless access to multimedia content. No assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenues from such services to justify the license fee, capital expenditures and other investments required to provide such services.

We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 common shares of BC Card Co., Ltd. to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately 287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. In January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd., a provider of satellite TV service which may also be packaged with our IP-TV services, from Dutch Savings Holdings B.V. for approximately 246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013.

While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions, without encountering administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the business of the acquired company or the joint venture with our business. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations.

Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.

Disputes with our labor union may disrupt our business operations.

In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years, there can be no assurance that we will not experience labor disputes or unrests in the future, including expanded protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.

We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on May 23, 2015. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.

 

10


Table of Contents

The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.

The Government, primarily through the Ministry of Science, ICT & Future Planning (the “MSIP”) (ICT standing for Information & Communication Technology) and the KCC, has authority to regulate the telecommunications industry. Until March 2013, regulation of the telecommunications industry had mainly been the responsibility of the KCC. With the establishment of the newly created MSIP on March 23, 2013, however, such regulatory responsibility has mostly been transferred to the MSIP. The MSIP’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.

Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIP, it must obtain prior approval from the MSIP for the rates and the general terms for that service. Each year the MSIP designates service providers the rates and the general terms of which must be approved by the MSIP. In recent years, the KCC had so designated us for local telephone service and SK Telecom for mobile service, and the MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services.

The MSIP currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the MSIP. In addition, the MSIP may periodically announce public policy guidelines or suggestions that we take into consideration in setting our tariff for non-regulated services. In June 2011, upon recommendation of the KCC, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by 1,000 for every subscriber, an exemption of usage charges for short text message service, or SMS, up to 50 messages per month and the introduction of flexible service plans for smartphone users. In August 2011, after discussions with the KCC, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by 1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS, of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). The MSIP, which took over the KCC’s tariff regulation function in March 2013, is planning to gradually reduce and abolish activation fees by 2015. Pursuant to this policy objective, the MSIP discussed with us, LG U+, and SK Telecom gradually reducing and abolishing activation fees and as a result of the discussions, in August 2013, we, LG U+ and SK Telecom reduced activation fees by 40%. We reduced our activation fee by 9,600 (from 24,000 to 14,400) and SK Telecom and LG U+ reduced their activation fee by 15,840 (from 39,600 to 23,760) and 12,000 (from 30,000 to 18,000), respectively. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect the remaining activation fees to be abolished by 2015. There can be no assurance that we will not adopt other tariff-reducing measures in the future to comply with the Government’s public policy guidelines or suggestions.

Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately 12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately 2.9 billion), for providing subsidies that were higher than those allowed under

 

11


Table of Contents

current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately 5 billion on SK Telecom, LG U+ and us (our fine being approximately 1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately 67 billion on SK Telecom, LG U+ and us (our fine being approximately 20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately 106 billion on SK Telecom, LG U+ and us (our fine being approximately 30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to 150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed.

President Park Geun-hye, who took office on February 25, 2013 as the 18th President of Korea, announced that the new Government will work toward reducing telecommunications service charges and promoting transparency in the decision making of telecommunications service providers. Accordingly, the new Government has set detailed policy objectives to (1) gradually reduce and abolish activation fees by 2015, (2) expand mobile virtual network operator and mobile voice over Internet protocol (“m-VoIP”) service, (3) intensify regulations on handset subsidies and (4) construct a data-based tariff system. If the new Government goes forward with its new telecommunications policy, it will increase competition among wireless service providers and our business and our profitability may be adversely affected.

The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “Item 3. Key information—Item 3.D. Risk Factors—“Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.” The new allocations of bandwidth could increase competition among wireless service providers, which may have an adverse effect on our business.

We also plan to put more focus on the Internet protocol (or IP) media market, and we began offering IP-TV services in November 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The MSIP and the KCC have the authority to regulate IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP-TV services business must first obtain a license from the MSIP. Moreover, anyone intending to provide contents focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IP-TV providers, must obtain approval from the KCC. Furthermore, anyone intending to provide contents relating to the introduction of consumer products and other similar marketing content with IP-TV providers must obtain additional approval from the MSIP. In addition, KT Skylife Co. (formerly Korea Digital Satellite Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IP-TV services. KT Skylife is also subject to regulation by the MSIP and the KCC pursuant to the Korea Broadcasting Act.

 

12


Table of Contents

Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) may change, which could have a material adverse effect on our operations and financial condition. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”

We are subject to various regulations under the Monopoly Regulation and Fair Trade Act.

The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting debt guarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group. Additionally, we are subject to a prohibition, in effect since July 25, 2014, against circular shareholding among any three or more entities within our business group. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.

The reported investigations of and any adverse publicity associated with Mr. Suk-Chae Lee, our former Chief Executive Officer, and our other former executive officers or directors could have a material adverse effect on our business, reputation and stock price.

On November 12, 2013, Mr. Suk-Chae Lee resigned from his position as the president and chief executive officer of KT Corporation following the investigation by prosecutors for alleged embezzlement and breach of fiduciary duty. A warrant for Mr. Lee’s arrest and detainment was submitted for approval to the Seoul Central District Court on January 2, 2014, but was denied on January 15, 2014, due to lack of ascertainable evidence for his arrest. On April 15, 2014, the Seoul Central District prosecutor’s office charged Mr. Lee with embezzlement and breach of fiduciary duty, and also charged Mr. Il Yung Kim, our former non-independent director and former president of the KT Corporate Center, as a co-conspirator in the breach of fiduciary duty by Mr. Lee. On April 16, 2014, the Seoul Central District prosecutor’s office also arrested Mr. Yu-Yeol Seo, our former president of Home Business Group, for his alleged participation in Mr. Lee’s embezzlement. The investigations against these former employees are still ongoing, and we cannot be certain at this time what the outcome will be. However, there can be no assurance that any further developments in these investigations will not adversely affect our business or cause our stock price to decline.

The reported investigation of and any adverse publicity associated with one of our subsidiaries could have a material adverse effect on our business, reputation and stock price.

An employee of KT ENS and several companies, some of which are KT ENS’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which 290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENS. KT ENS’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police raided the offices of the subcontractors in connection with their investigation

 

13


Table of Contents

of the loans. Upon discovery of the incident, KT ENS immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and seven other persons are currently under arrest, and authorities believe that some of these subcontractors have since fled Korea with a large portion of the borrowed money. The banks are demanding that KT ENS, and possibly KT Corporation, be held liable for the repayment of the loans. However, KT ENS and KT Corporation disclaim any responsibility for the employee’s personal misconduct and these transactions, and believe that the banks should be held responsible for failing to detect the fraud while screening the loan applications, given the lack of a board resolution in connection with such sizable loans, as well as the fact that the seal used in connection with the loans bore KT ENS’s former name, KT Networks, and is no longer legally effective.

On March 12, 2014, KT ENS filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately 49 billion in commercial paper that became due after early redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENS. KT ENS faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENS to repay the redeemed commercial paper. While KT ENS’s filing for court receivership is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENS’s revenue for 2013 was approximately 2.0% of our consolidated revenues for 2013, any future legal proceedings against KT ENS and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.

The data breach incidents involving us in recent years have resulted in government investigations and private litigation, and if our efforts to protect the personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and private litigation and may significantly impact our results of operation and reputation.

The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, even though we may take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.

For example, in July 2012, the police arrested two individuals in connection with the alleged theft of personal account information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 30,000 mobile phone subscribers filed lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking a total of approximately 15 billion in damages. The trials are currently ongoing at various district courts.

Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The

 

14


Table of Contents

individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. On March 19, 2014, approximately 100 individuals collectively filed a lawsuit against us in Seoul Central District Court, seeking damages of approximately 200,000 per person. According to news reports, several other subscribers and third party organizations have filed lawsuits against us in connection with the incident, which we are not yet able to confirm as we have not yet received any official notice from the courts regarding these additional lawsuits. As part of an ongoing public-private task force investigation into the recent hacking incidents, the MSIP announced in March 2014 that it confirmed that hackers accessed our websites more than 12 million times using automated hacking programs in the three months prior to the announcement. On March 17, 2014, the KCC announced and the MSIP further announced that we may be fined up to 100 million in light of the most recent hacking incident.

We are unable to predict with any degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, if we experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile phone subscribers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions in such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidents may materially and adversely impact our business, reputation, results of operations and financial condition.

Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.

In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas

 

15


Table of Contents

sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the 8,490 billion total principal amount of long-term borrowings (less current portion) outstanding as of December 31, 2013, 1,726 billion was denominated in foreign currencies with an average weighted interest rate of 3.52%. The interest rates of such long-term debt (less current portion) denominated in foreign currencies ranged from 0.59% (Japanese Yen 5 billion bond issued in 2013) to 6.50% (for US$100 million fixed rate notes due 2034 issued under our medium-term note program). Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such strategies, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. See “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.

Risks Relating to Korea

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.

Substantially all of our operations, customers and assets are located in Korea. Accordingly, the performance and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “Item 3.A. Selected Financial Data—Exchange Rates.” A depreciation of the Won increases the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been an overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index, or KOSPI, declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. While the KOSPI has recovered since 2008, closing at 1,969.3 on April 28, 2014, there is no guarantee that the stock prices of Korean companies will not decline again in the future. Future declines in the KOSPI and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

 

16


Table of Contents

Developments that could have an adverse impact on Korea’s economy in the future include:

 

   

difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;

 

   

timing and potential economic impact of a future scale-down by the U.S. Federal Reserve of its “quantitative easing” stimulus program;

 

   

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;

 

   

increasing levels of household debt;

 

   

continuing adverse conditions in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

further decreases in the market prices of Korean real estate;

 

   

increasing delinquencies and credit defaults by consumer and small- and medium-sized enterprise borrowers;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

 

   

social and labor unrest;

 

   

a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased Korean government budget deficit;

 

   

financial problems or lack of progress in the restructuring of large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities or corporate governance issues at certain Korean companies;

 

   

the economic impact of any pending or future free trade agreements;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

the occurrence of severe health epidemics in Korea or other parts of the world;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy;

 

17


Table of Contents
   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

natural disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

   

hostilities or political or social tensions involving oil producing countries in the Middle East or North Africa and any material disruption in the supply of oil or increase in the price of oil; and

 

   

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

Escalations in tensions with North Korea could have an adverse effect on us.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

   

In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space;

 

   

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests;

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013;

 

   

In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in violation of the agreement with the United States as well as United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology; and

 

   

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near

 

18


Table of Contents
 

the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to the Securities

If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.

Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the MSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights.

 

19


Table of Contents

In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The MSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying common stock and become our direct shareholders.

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise appraisal rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.

The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

   

a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

   

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.

We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.

Forward-looking statements may prove to be inaccurate.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not

 

20


Table of Contents

limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

Item 4.  Information on the Company

Item 4.A.  History and Development of the Company

In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who had previously been appointed by the Government under the Korea Telecom Act.

Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.

Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. In June 2009, KTF, a subsidiary providing mobile telephone services, merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4.B. Business Overview—Competition.”

Our legal and commercial name is KT Corporation. Our principal executive offices are located at 90, Buljeong-ro, Bundang-gu, Seongnam-si, Gyeonggi-do, Korea, and our telephone number is (8231) 727-0150.

Item 4.B.  Business Overview

We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:

 

   

mobile telecommunications services;

 

   

telephone services, including local, domestic long-distance and international long-distance fixed-line and VoIP telephone services and interconnection services to other telecommunications companies;

 

21


Table of Contents
   

broadband Internet access service and other Internet-related services, including IP-TV services;

 

   

credit card processing and other financial services through KT Capital Co., Ltd. and BC Card Co., Ltd.;

 

   

automobile rental services through KT Rental Co., Ltd.; and

 

   

various other services, including leased line service and other data communication service, satellite service and information technology, real estate business, satellite TV service, media contents business and network services such as cloud computing services.

Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:

 

   

in the mobile services market in Korea, we achieved a market share of 30.1% with approximately 16.5 million subscribers as of December 31, 2013;

 

   

in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 24.3 million installed lines, of which 14.0 million lines were in service as of December 31, 2013. As of such date, our market share of the local market was 81.6% and our market share of the domestic long-distance market was 79.1%;

 

   

we are Korea’s largest broadband Internet access provider with 8.1 million subscribers as of December 31, 2013, representing a market share of 43.1%; and

 

   

we are also the leading provider of data communication services in Korea.

For the year ended December 31, 2013, our operating revenues were 24,058 billion, our loss for the period was 88 billion and our basic loss per share was 779. As of December 31, 2013, our total assets were 34,850 billion, total liabilities were 22,013 billion and total equity was 12,837 billion.

Business Strategy

We believe the telecommunications market in Korea is nearing saturation, despite certain areas of growth remaining due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. To maintain our competitiveness, we believe we need to pursue growth in other areas, while maintaining our strength in existing businesses. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation in June 2009, with KT Corporation surviving the merger. In 2014, we restructured our organization into four business groups, the Marketing Group, the Customer Group, the Global & Enterprise Group and the Future Convergence Strategy Group, so that we may achieve higher synergies, more effectively address differing needs of our customer segments, as well as strengthen our competitiveness and discover new growth opportunities. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.

 

22


Table of Contents

We also established subsidiaries to oversee our media contents, satellite and real estate operations, and expanded the number of specialized employees for each business, to further strengthen such operations and to pursue strategic alliances with other global corporates. To seek further growth in a stagnant telecommunications market, we aim to become a global media distribution company, and utilizing our synergies, we intend to focus on developing the media contents, finance, security and automobile rental business and the expanding convergence market, as well as diversifying our portfolio into the advertising, education, health care and energy industries. Using our strong fixed-line/wireless and clouding technologies, we also aim to contribute to a global market environment for active distribution of media contents, applications and solutions. Consistent with our overall goals, we aim to pursue the following strategy for our business groups:

 

   

Marketing Group. Through our Marketing Group, we aim to expand our telecommunication and convergence operations by (i) improving our fixed-line and wireless telecommunication market shares and average revenue per user, (ii) developing business strategies and plans specifically related to telecommunications and convergence, (iii) strengthening our competitiveness over products, customer service and other related services and (iv) developing and executing efficient marketing strategies. We also focus on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smartphones. We are working closely with handset manufacturers to expand our offerings of smartphones and handsets designed to promote convergence of fixed-line and mobile telecommunications services, as well as promote development of various applications for such devices.

In line with this strategy, we began offering Apple’s iPhone for the first time in Korea in November 2009 and have expanded our offerings of smartphones from other mobile handset manufacturers. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smartphones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to smartphone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smartphone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.

In 2010, we launched a new brand “olleh” to promote our bundled products, which include broadband Internet access service, IP-TV service, Internet phone service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.

We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so

 

23


Table of Contents

that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.

 

   

Customer Group. Through our Customer Group, we aim to improve our marketing and customer service efforts for all of our products and services by (i) planning and executing strategy for each product that we offer and our marketing efforts, (ii) contributing to expanding our market share by strengthening our marketing and customer service efforts, and (iii) maximizing customer satisfaction by providing high quality customer service.

 

   

Global & Enterprise Group. Through our Global & Enterprise Group, we aim to provide our corporate, small- and medium-sized enterprise and government agency customers with one-stop solution services, including designing data communications and information technology infrastructure and overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings, as well as establishing and executing business plans for our global operations by (i) establishing active marketing strategy for expanding into the global market and (ii) entering into alliances and joint ventures with international corporates and agencies.

To that end, we provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smartphones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.

 

   

Future Convergence Strategy Group. Due to the saturation within the Korean telecommunication market and limitations on growth in the traditional telecommunications services market, through our Future Convergence Strategy Group, we aim to concentrate our existing business capabilities in discovering new growth opportunities and expand our telecommunication capabilities.

The Telecommunications Industry in Korea

The Korean telecommunications industry is one of the most developed in Asia. According to the MSIP, the number of mobile subscribers in Korea was 54.7 million and the number of broadband Internet access subscribers in Korea was 18.7 million as of December 31, 2013. As of December 31, 2013, the mobile penetration rate, which is calculated by dividing the number of mobile subscribers (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 106.9%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 102.9%.

Mobile Telecommunications Service Market

The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage

 

24


Table of Contents

further market growth and competition, the Government awarded three 2G licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial 2G service was launched in October 1997.

Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation and SK Telecom offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering fourth-generation communications services based on LTE technology, which enables data transmission at a speed faster than W-CDMA or WiBro networks, and we began our 4G LTE services in January 2012. Additionally, in September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidths in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized Wideband LTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.

On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between 80,000 to 85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which provide mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of 70,000 per month. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.

The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:

 

     As of December 31,  
     2009     2010     2011     2012     2013  

Total Korean Population (1)

     49,773        50,516        50,734        50,948        51,141   

Mobile Subscribers (2)

     47,944        50,767        52,507        53,624        54,681   

Mobile Subscriber Growth Rate

     5.1     5.9     3.4     2.1     2.0

Mobile Penetration (3)

     96.3     100.5     103.5     105.3     106.9

 

 

(1) In thousands, based on the number of registered residents as published by the Ministry of Security and Public Administration of Korea.

 

(2) In thousands, based on information announced by the KCC.

 

(3) Penetration is determined by dividing mobile subscribers by total Korean population.

 

25


Table of Contents

Broadband Internet Access Market

With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (or UTP) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.

Since the subscribers of two-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality of HFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhances data transmission speed up to 100 Mbps as well as improves connection quality, and enables such service providers to offer video-on-demand services with real-time high definition broadcasting.

In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention on providing wireless Internet connection capabilities. They have introduced wireless LAN service with speed of up to 300 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smartphones in hot-spot zones and at home. Some service providers have also developed wireless Internet networks to provide WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 3 Mbps.

Our Services

Mobile Service

We provide mobile services based on W-CDMA technology and LTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. KTF obtained one of the three licenses to provide nationwide 2G service in June 1996 and began offering 2G service in October 1997. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. We currently offer HSDPA-based IMT-2000 services, which are third-generation, high-capacity wireless Internet and video multimedia communications services based on W-CDMA wireless network standards. In January 2012, we also began offering 4G LTE services following the termination of our 2G services. We completed the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced providing wideband LTE services in September 2013, and commercialized Wideband LTE-A services in March 2014, as discussed above.

Revenues related to mobile service accounted for 27.9% of our operating revenues in 2013. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 16.9% of our

 

26


Table of Contents

operating revenues in 2013. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our subscribers as of the end of such periods:

 

     As of or for the Year Ended December 31,  
             2011                      2012                      2013          

Outgoing Minutes (in millions)

     36,102         34,520         34,164   

Average Monthly Outgoing Minutes per Subscriber (1)

     183         174         182   

Average Monthly Revenue per Subscriber (2)

   34,379       33,519       35,236   

Number of Subscribers (in thousands)

     16,563         16,502         16,454   

 

 

(1) The average monthly outgoing minutes per subscriber is computed by dividing the total minutes of usage for the period by the weighted average number of subscribers for the period and dividing the quotient by the number of months in the period. The weighted average number of subscribers is the sum of the total number of subscribers at the end of each month divided by the number of months in the period.

 

(2) The average monthly revenue per subscriber is computed by dividing initial activation fees, total monthly fees, usage charges, interconnection fees and value-added service fees for the period by the weighted average number of subscribers and dividing the quotient by the number of months in the period.

We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG U+ that began its service at around the same time as KTF. As of December 31, 2013, we had approximately 16.5 million subscribers, or a market share of 30.1%, which was second largest among the three mobile service providers.

We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2013, there were approximately 2,300 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.

In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 194 customer plazas that engage in mobile service sales activities as well as provide a one-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.

We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history of non-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using a pre-paid card.

Telephone Services

Fixed-line Telephone Services. We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services and land-to-mobile interconnection services. These fixed-line telephone services

 

27


Table of Contents

accounted for 12.4% of our operating revenues in 2013. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, have led to significant decreases in our domestic long-distance call minutes and local call pulses.

 

     As of or for the Year Ended December 31,  
     2009      2010      2011      2012      2013  

Total Korean population (thousands) (1)

     49,773         50,516         50,734         50,948         51,141   

Lines installed (thousands) (2)

     25,907         25,524         23,925         25,242         24,264   

Lines in service (thousands) (2)

     17,069         16,620         15,900         15,121         14,032   

Lines in service per 100 inhabitants (3)

     34.3         32.9         31.3         29.7         27.4   

Fiber optic cable (kilometers)

     405,528         448,328         527,188         584,932         636,347   

Number of public telephones installed (thousands)

     144         123         111         101         94   

Domestic long-distance call minutes (millions) (4) (5)

     9,526         7,318         6,574         6,067         4,842   

Local call pulses (millions) (4)

     8,406         7,973         6,697         6,071         4,895   

 

 

(1) Based on the number of registered residents as published by the Ministry of Security and Public Administration of Korea.

 

(2) Including lines used for public telephones but excluding lines dedicated to centralized extension system services for corporate subscribers.

 

(3) Determined based on lines in service and total Korean population.

 

(4) Excluding calls placed from public telephones.

 

(5) Estimated by KT Corporation.

Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. All of our lines are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network.

The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2013:

 

     Year Ended December 31,  
     2009      2010      2011      2012      2013  
     (In millions of billed minutes)  

Incoming international long-distance calls

     442.2         523.5         541.6         520.3         628.4   

Outgoing international long-distance calls

     325.9         325.1         332.1         289.7         244.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     768.1         848.6         873.7         810.0         872.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Japan (23.2%), China (15.3%) and the United States (11.5%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2013. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.

Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include SK Broadband and LG U+ (offering local, domestic long-distance and

 

28


Table of Contents

international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom and LG U+ (transmitting calls to and from their mobile networks). Revenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) accounted for 2.3% of our operating revenues in 2013. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.

Internet phone services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. As of December 31, 2013, we had approximately 3.5 million subscribers.

Internet Services

Broadband Internet Access Service. Leveraging on our nationwide network of 636,347 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 8.4% of our operating revenues in 2013. Our principal Internet access services include:

 

   

ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” brand name;

 

   

wireless LAN service (or WiFi) under the “ollehWiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smartphones in hot-spot zones and olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at a speed of up to 150 Mbps. We sponsored approximately 114,000 hot-spot zones nationwide for wireless connection as of December 31, 2013; and

 

   

olleh 4G WiBro Internet access service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 5 Mbps per user.

We had approximately 8.1 million fixed-line olleh Internet subscribers and approximately 142,000 ollehWiFi service subscribers as of December 31, 2013. We commercially launched our WiBro service in June 2006, and we had approximately 846,000 subscribers as of December 31, 2013. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.

Our olleh Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July

 

29


Table of Contents

2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances data transmission speed of up to 100 Mbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV, and other digital media content with higher stability.

The high-speed downstream rates can reach up to 8 Mbps for ADSL and 100 Mbps for VDSL and FTTH. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our olleh Internet service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.

Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and network portal services. Our other Internet-related services accounted for 4.1% of our operating revenues in 2013.

We operate seven Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storage and leased lines. Internet data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our Internet data centers are designed to meet international standards, and are equipped with temperature control systems, regulated and reliable power supplies, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Internet data centers allow corporations to outsource their application and server hardware management.

Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.

We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry standard and specialized business solutions, including integrated business administration solutions and intranet collaboration solutions.

We also offer high definition video-on-demand and real-time broadcasting IP-TV services under the brand name “olleh TV.” Our IP-TV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee or on a pay-per-view basis. Through a digital set-top box that we rent to our customers, our customers are able

 

30


Table of Contents

to browse the catalogue of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting in November 2008. We had 4.97 million olleh TV subscribers as of December 31, 2013.

Data Communications Service

Our data communications service involves offering exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2011, 2012 and 2013, we leased 286,302 lines, 246,951 lines and 235,147 lines to domestic and international businesses. The data communication service accounted for 5.0% of our operating revenues in 2013.

We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 10.0 Gbps connected to our internet backbone network with capacity of 6.6 Tbps, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- and medium-sized enterprises, businesses engaging in Internet access services and government agencies.

Financial Services

To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank for approximately 252 billion in October 2011. As we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately 287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. BC Card Co., Ltd. offers various credit card and related financial services. KT Capital had consolidated operating revenues of 3,317 billion and net income of 129 billion for the year ended December 31, 2013 and consolidated assets of 5,462 billion and liabilities of 4,759 billion as of December 31, 2013. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun off and merged into KT Corporation, to further strengthen the synergy between telecommunication and finance operations within the KT group and increase shareholder value. Financial Services accounted for 13.6% of our operating revenues in 2013.

Automobile Rental Services

We also operate KT Rental, a subsidiary that provides rental cars and equipment. In March 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for 263 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental in June 2010. KT Rental became a consolidated subsidiary starting in 2012, as the restriction on our controlling power over KT Rental pursuant to a shareholders’ agreement was resolved as a result of the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012. KT Rental operated approximately 91,700 vehicles as of December 31, 2013 and has a market share of 24.7% of the domestic car rental market in 2013. See Note 37 to the Consolidated Financial Statements. Automobile rental services accounted for 2.5% of our operating revenues in 2013.

 

31


Table of Contents

Miscellaneous Businesses

We also engage in various business activities that extend beyond telephone services and data communications services, including satellite services, information technology and network services, real estate development, satellite TV services, with the consolidation of KT Skylife Co. starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. As of December 31, 2013, KT Media Hub Co., Ltd. had revenues of 305 billion. Our miscellaneous businesses accounted for 9.2% of our operating revenues for 2013.

We provide transponder leasing, broadcasting, video distribution and data communications services through our satellites. We currently operate two satellites, Koreasat 5 and Koreasat 6 (also known as olleh 1), and own interests in two additional satellites, Koreasat 7 (also known as ABS-1) and Koreasat 8 (also known as ABS-2). In August 2006, we launched Koreasat 5 to replace Koreasat 2 (also known as Mugunghwa 2, launched in 1996 with a design life of ten years). Koreasat 5, a combined civil and governmental communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service coverage area includes Korea, Japan, Taiwan, the Philippines, the eastern part of China and the far-eastern part of Russia. The design life of Koreasat 5 is 15 years, and it currently remains in operation.

We launched Koreasat 6 in December 2010, with a design life of 15 years, to replace Koreasat 3 (also known as Mugunghwa 3, launched in 1999 with a design life of 12 years). Koreasat 6 began its commercial operation in February 2011 and carries transponders that are mainly used for direct-to-home satellite broadcasting, video distributions and data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by KT Skylife Co. We also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers. In August 2010, we procured from Asia Broadcast Satellite (“ABS”), a Hong Kong-based satellite operator, four transponders on the ABS-1 satellite and an additional eight transponders on the ABS-2 satellite in order to provide global satellite services. ABS-1 began its operations in September 2010 and ABS-2 launched its operations in February 2014. We sold to ABS the Mugunghwa 2 satellite in May 2010 and the Mugunghwa 3 satellite in September 2011 for a combined price of approximately 5 billion, as the satellites had reached the end of their design lives.

In December 2012, we spun-off our satellite service business by establishing KT Sat Co., Ltd., in an effort to enhance operational specialization and to foster management efficiency, enabling us to respond more promptly to the changing market environments and increasing competitiveness.

In December 2013, the MSIP declared that the contract over our sale of Mugunghwa 3 was null and void, on the grounds that the satellite was sold without obtaining proper government approval, and ordered us to take corrective measures. We are currently involved in arbitration proceedings against ABS at the International Court of Arbitration of the International Chamber of Commerce and the American Arbitration Association over the Mugunghwa 3 satellite ownership rights and contract violation claims.

We offer a broad array of integrated information technology and network services to our business customers. Our range of services include consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.

We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites,

 

32


Table of Contents

as well as in the leasing of buildings we own. We established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets, and established KT AMC, an asset management company, in September 2011 as a subsidiary of KT Estate Inc. to create additional synergies with our real estate assets. We made a contribution in-kind of 1,254 billion to KT Estate Inc. in December 2012 to further strengthen KT Estate’s competitiveness and to better utilize our assets.

To respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately 246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013. KT Skylife offers satellite TV services, which may also be packaged with our IP-TV services as further described below, and had consolidated operating revenues of 630 billion and net income of 73 billion for the year ended December 31, 2013 and consolidated assets of 685 billion and liabilities of 283 billion as of December 31, 2013.

In December 2012, we also established KT Media Hub Co., Ltd., a subsidiary that specializes in the development of media contents, with a cash capital contribution of 80 billion. We believe that the media contents business will be a future growth opportunity for us, and this subsidiary further enhances our specialization in the media contents business. It also allows us to better adapt to the rapidly changing market environment in the field.

Revenues and Rates

The table below shows the percentage of our revenues derived from each category of services for each of the years from 2011 to 2013:

 

     Year Ended December 31,  
     2011     2012     2013  

Mobile services

     30.7     26.7     27.9

Fixed-line telephone services:

      

Local service

     10.3        8.2        7.7   

Non-refundable service initiation fees

     0.2        0.1        0.1   

Domestic long-distance service

     1.4        1.1        0.9   

International long-distance service

     1.8        1.6        1.4   

Land-to-mobile interconnection

     3.5        2.7        2.3   
  

 

 

   

 

 

   

 

 

 

Sub-total

     17.2        13.7        12.4   
  

 

 

   

 

 

   

 

 

 

Internet services:

      

Broadband Internet access service

     8.4        8.3        8.4   

Other Internet-related services (1)

     3.9        3.5        4.1   
  

 

 

   

 

 

   

 

 

 

Sub-total

     12.3        11.8        12.5   
  

 

 

   

 

 

   

 

 

 

Goods sold (2)

     19.8        18.6        16.9   

Data communications service (3)

     5.7        5.3        5.0   

Financial services

     4.5        13.5        13.6   

Automobile rental services (4)

     0.0        1.0        2.5   

Miscellaneous businesses (5)

     9.4        9.4        9.2   
  

 

 

   

 

 

   

 

 

 

Operating revenues

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

 

(1) Includes revenues from services provided by our Internet data centers, Bizmeka and olleh TV.

 

(2) Includes mobile handset sales.

 

(3) Includes revenues from Kornet Internet connection service and satellite services.

 

33


Table of Contents
(4) KT Rental Co., Ltd. became our consolidated subsidiary starting in 2011. See Note 37 to the Consolidated Financial Statements.

 

(5) Includes revenues from satellite services, information technology and network services and real estate development business.

Mobile Services

We derive revenues from mobile services principally from:

 

   

activation fees;

 

   

monthly fees;

 

   

usage charges for outgoing calls;

 

   

usage charges for wireless data transmission;

 

   

contents download fees; and

 

   

value-added monthly service fees.

We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. In September 2009, we reduced our activation fee for new subscribers by 20% from 30,000 to 24,000. In August 2013, we, SK Telecom, and LG U+ reduced the activation fee for new subscribers by approximately 40%. Our activation fee was reduced from 24,000 to 14,400, SK Telecom’s activation fee was reduced from 39,600 to 23,760, and LG U+’s activation fee was reduced from 30,000 to 18,000. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect our remaining activation fees to be abolished by 2015. In August 2011, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by 1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). We currently only offer our standard rate plan for our HSDPA-based service. Under our standard rate plan we charge a monthly fee of 11,000, voice calling usage charges of 1.8 per second and video calling usage charges of 3 per second, without any free voice or video call airtime minutes.

A subscriber may also subscribe to an individually designed calling rate plan by mixing free voice calling airtime minutes and free text messages at a set monthly fee. We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.

We introduced rate plans specifically for smartphone users starting in September 2009. In June 2013, we introduced the Everyone olleh rate plan, which permits users to make unlimited voice calls within our wireless network, and the Fixed-Line & Wireless Unlimited rate plan, which permits

 

34


Table of Contents

users to make unlimited voice calls within both our fixed-line and wireless networks. The following table summarizes the charges associated with our representative smartphone service plans:

 

     Free Airtime Minutes (1)      Free Data
Transmission (2)
     Monthly Fee  
     Voice or video calls to
anyone
           Voice or video calls to
our mobile subscribers
     (in megabytes)         

i-teen (3)

       193             34,000   

i-Slim (3)

       150            100         34,000   

i-Lite (3)

       200            500         44,000   

i-Talk (3)

       250            100         44,000   

i-Value (3)

       300            Unlimited         54,000   

i-Medium (3)

       400            Unlimited         64,000   

i-Special (3)

       600            Unlimited         78,000   

i-Premium (3)

     800           Unlimited         Unlimited         94,000   

Everyone olleh 35(3G)

     130           Unlimited         750         35,000   

Everyone olleh 45(3G)

     185           Unlimited         1,536         45,000   

Everyone olleh 55(3G)

     250           Unlimited         2,560         55,000   

Fixed-Line & Wireless Unlimited 67(3G) (4)

     Unlimited (50)         Unlimited         5,120         67,000   

Fixed-Line & Wireless Unlimited 77(3G) (4)

     Unlimited (50)         Unlimited         9,216         77,000   

Fixed-Line & Wireless Unlimited 97(3G) (4)

     Unlimited (50)         Unlimited         17,408         97,000   

Fixed-Line & Wireless Unlimited 129(3G) (4) (5)

     Unlimited (50)         Unlimited         25,600         129,000   

 

 

(1) Starting in May 2012, each second of video call counts as 1.66 second of voice call.

 

(2) We do not charge for data transmission in wireless LAN zones and charge 0.01 per 0.5 kilobyte for any data transmission exceeding the free monthly quota, up to a maximum of 150,000.

 

(3) We provide discounts of up to 38.2% for mandatory subscription periods ranging from one to two years.

 

(4) Includes free voice calls from KT to KT and other carriers, free fixed-line voice calls, and 50 minutes of free video calls.

 

(5) Provides an additional daily quota of 1GB after the free monthly quota of 25GB has been exhausted and also provides unlimited use of data at transmission speed of up to 2Mbps after the daily quota of 1GB has been exhausted.

In connection with the rollout of our 4G LTE services in January 2012, we also introduced new rate plans specifically for LTE phone users. For a limited time between February and April 2013, we also offered LTE rate plans with unlimited data usage. The following table summarizes charges for our representative LTE service plans:

 

     Free Airtime Minutes (1)      Free Data
Transmission (2)
     Monthly Fee  
     Voice or video calls to
anyone
           Voice or video calls to
our mobile subscribers
     (in megabytes)         

LTE-340

       160            750       34,000   

LTE-420

       200            1,536         42,000   

LTE-520

       250            2,560         52,000   

LTE-620

       350            6,144         62,000   

LTE-720

       450            10,240         72,000   

LTE-G550

     250           3,000         2,560         55,000   

LTE-G650

     350           3,000         6,144         65,000   

LTE-G750

     450           3,000         10,240         75,000   

LTE-850

     650           3,000         14,336         85,000   

LTE-1000

     1,050           3,000         20,480         100,000   

LTE-1250

     1,250           Unlimited         25,600         125,000   

LTE -35 (3)

     130           Unlimited         750         35,000   

LTE-45 (3)

     185           Unlimited         1,536         45,000   

LTE-55 (3)

     250           Unlimited         2,560         55,000   

LTE-67 (3)

     Unlimited (200)         Unlimited         5,120         67,000   

LTE-77 (3)

     Unlimited (200)         Unlimited         9,216         77,000   

LTE-79 (3) (4)

     Unlimited (200)         Unlimited         10,240         79,000   

 

35


Table of Contents
     Free Airtime Minutes (1)      Free Data
Transmission (2)
     Monthly Fee  
     Voice or video calls to
anyone
         Voice or video calls to
our mobile subscribers
     (in megabytes)         

LTE-97 (3)

     Unlimited (200)         Unlimited         17,408       97,000   

LTE-129 (3) (4)

     Unlimited (200)         Unlimited         25,600         129,000   

Wideband Safe Unlimited 67 (5)

     100              15,360         67,000   

Wideband Safe Unlimited 77 (5)

     300              15,360         77,000   

 

 

(1) Starting in May 2012, each second of video call counts as 1.66 second of voice call.

 

(2) We do not charge for data transmission in wireless LAN zones. We charge 0.01 per 0.5 kilobyte for any additional data transmission exceeding the free monthly quota, up to a maximum of 150,000.

 

(3) Rates applicable to both wideband LTE and LTE-A.

 

(4) Provides an additional daily quota of 2GB after the free monthly quota of 10 GB (for LTE-79) or 25GB (for LTE-129) has been exhausted, and also provides unlimited use of data with speed of up to 3Mbps after the daily quota of 2GB has been exhausted.

 

(5) Provides unlimited use of data at transmission speed of up to 400Kbps after the monthly quota of 15GB has been exhausted, and also provides unlimited voice calls with one designated number within our network.

We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, several leading banks, an operator of cinema complexes, a leading automobile manufacturing company and Korea Railroad Corporation, and we offer subscribers of our mobile service monthly discount coupons, membership points or movie tickets from such partners as promotional gifts.

In December 2010, we also introduced 3G data-only plans targeting tablet PC users, smartphone users and other special phone users, offering subscription plans for data transmission amounts ranging from 1 GB to 4GB at monthly fees ranging from 25,000 to 49,000.

In June 2012, we introduced LTE data-only plans, in both basic and various discounted packages, which provides 1.5 GB to 6 GB of data at monthly fees ranging from 25,000 to 49,000. The following table summarizes charges for our representative data-only plans:

olleh Lifetime Data-Only Pricing Plan

 

     Monthly Data Quota
(3G Network)
     Monthly Fee      Discount (1)  

olleh Lifetime Data 1G (2) (3)

     1GB       22,500       10,000   

olleh Lifetime Data 2G (2) (3)

     2GB         27,500         11,500   

olleh Lifetime Data 4G (2) (3)

     2GB         42,500         18,000   

 

 

(1) Discounts are only plans are only available with a two year contract. Early termination will result in a cancellation fee.

 

(2) We charge 0.025 per 0.5 kilobyte for any additional data transmission in excess of the monthly quota.

 

(3) We provide olleh WiFi services.

Pricing Plan for LTE Pad users

 

     Monthly Data Quota
(3G and LTE  Networks)
     Monthly Fee      Discount  

LTE Lifetime Data Basic 1.5G (1) (2) (5)

     1.5GB       25,000       7,000   

LTE Lifetime Data Basic 3G (1) (2) (5)

     3GB         35,000         12,500   

LTE Lifetime Data Basic 6G (1) (2) (5)

     6GB         49,000         19,000   

LTE Lifetime Data Safe Blocking 1.5G (3) (4) (5)

     1.5GB         25,000         7,000   

LTE Lifetime Data Safe Blocking 3G (3) (4) (5)

     3GB         35,000         12,500   

LTE Lifetime Data Safe Blocking 6G (3) (4) (5)

     6GB         49,000         19,000   

 

 

(1) We provide free additional data in the form of Safe Zone data which amounts to 20% of the monthly data quota.

 

36


Table of Contents
(2) We charge 0.01 per 0.5 kilobyte for any additional data transmission in excess of the monthly data quota and Safe Zone data, regardless of network.

 

(3) Data is automatically blocked after the monthly data quota is exhausted.

 

(4) We provide additional data recharge in units of 500MB, 1GB and 2GB, at a fee of 8,000, 13,000 and 18,000, respectively. Additional data recharge is available a maximum of 10 times per month.

 

(5) Unused data is not carried over to the next month (applies to both monthly quota and additional recharge data). Customers may not subscribe to our m-VoIP services and data add-on services, such as Data Plus, Data Sharing, Genie Pack and OTN Pack.

Fixed-line Telephone Services

Local Telephone Service. Our revenues from local telephone service consist primarily of:

 

   

service initiation fees for new lines;

 

   

monthly basic charges; and

 

   

monthly usage charges based on the number of call pulses.

The rates we charge for local calls are currently subject to approval by the MSIP after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. Our current local usage rates, which have been in effect since May 2002, are 39 per pulse for regular service and 70 per pulse for public telephones. For local calls, a pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.

We also charge a monthly basic charge ranging from 3,000 to 5,200, depending on location, and a non-refundable service initiation fee of 60,000 to new subscribers. The non-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2013, we had 467 billion in refundable service initiation deposits outstanding and 2,162 thousand subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less the non-refundable service initial fees).

Domestic Long-distance Telephone Service. Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the MSIP.

Our current basic domestic long-distance rates, which have been in effect since November 2001, are 39 per three minutes for distances of up to 30 kilometers and 14.5 per ten seconds (equivalent to 261 per three minutes) for distances in excess of 30 kilometers. For domestic long-distance calls for distances of up to 30 kilometers, a pulse is triggered at the beginning of each call and every three minutes thereafter. For domestic long-distance calls for distances in excess of 30 kilometers, a pulse is triggered at the beginning of each call and every 10 seconds thereafter. Rates for domestic long-distance calls for distances up to 30 kilometers are currently discounted by an adjustment in the period between pulses, by approximately 11% (utilizing a pulse rate of 200 seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 43% (utilizing a pulse rate of 258 seconds) from midnight to 6:00 a.m. every day. Rates for domestic long-distance calls for distances in excess of 30 kilometers are currently discounted by

 

37


Table of Contents

approximately 10% (utilizing a rate of 13.1 per ten seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 30% (utilizing a rate of 10.2 per ten seconds) from midnight to 6:00 a.m. every day.

In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “— Bundled Products.” Some of our flat rate and discount plans that we currently offer include the following:

 

   

a subscriber who elects to pay a monthly flat rate of 12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes of land-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;

 

   

a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of 39 per three minutes; and

 

   

a subscriber who elects to subscribe to our broadband Internet access service or HSDPA-based mobile service for a three year mandatory subscription period is able to make local, domestic long-distance and land-to-mobile calls of up to 150,000 with a flat rate payment of 50,000 or such calls up to 50,000 with a flat rate payment of 10,000. Standard rates apply to calls that exceed the capped amounts.

International Long-distance Service. Our revenues from international long-distance service consist of:

 

   

amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);

 

   

amounts we bill to foreign telecommunications carriers for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and

 

   

other revenues, including revenues from international calls placed from public telephones.

We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis of one-second increments. We are able to set our own rates for international long-distance service without approval from the MSIP.

For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier at the applicable settlement rate specified under the agreement with the foreign carrier. We have entered into numerous bilateral agreements with foreign carriers. We negotiate the settlement rates under these agreements with each foreign carrier, subject to the MSIP’s approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers monthly or quarterly on a net basis.

 

38


Table of Contents

Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network.

Land-to-mobile Interconnection. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. The MSIP periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The MSIP determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls:

 

     Effective Starting  
     January 1, 2011      January 1, 2012      January 1, 2013  

SK Telecom

   30.5       27.1       26.3   

LG U+

     31.9         28.2         27.0   

Since September 2004, the usage charges per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber are 87.0 during weekdays, 82.0 during weekends and 77.2 during evenings (defined as 12:00 a.m. to 6:00 a.m. every day). We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.

The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the KCC:

 

     Effective Starting  
     January 1, 2011      January 1, 2012      January 1, 2013  

Local access (1)

   16.4       15.5       14.6   

Single toll access (2)

     18.6         17.4         16.7   

Double toll access (3)

     22.2         20.3         19.9   

 

 

Source: The KCC.

 

(1) Interconnection between local switching center and local access line.

 

(2) Interconnection involving access to single long-distance switching center.

 

(3) Interconnection involving access to two long-distance switching centers.

Mobile-to-mobile Interconnection. For a call initiated by a mobile subscriber of our competitor to our mobile subscriber, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of our competitor, we collect from our subscriber our normal rate and remit to the mobile service provider a mobile-to-mobile interconnection charge.

 

39


Table of Contents

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators, and the charges received per minute (exclusive of value-added taxes) from mobile operators for mobile to mobile calls:

 

     Effective Starting  
     January 1, 2011      January 1, 2012      January 1, 2013  

SK Telecom

   30.5       27.1       26.3   

LG U+

     31.9         28.2         27.0   

KT

     31.7         28.0         27.0   

We recognize as mobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Internet Services

Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers a one-time installation fee per site of 30,000 and modem rental fee of up to 8,000 on a monthly basis.

The following table summarizes our charges for our representative broadband Internet service plans:

 

    

Maximum Service Speed

   Monthly Fee  

olleh Internet Special (1) (6)

   100 Mbps    36,000   

olleh Internet Lite (1) (6)

   50 Mbps      30,000   

WiBro 10G (2) (6)

   40 Mbps (for downloading) / 12 Mbps (for uploading)      10,000   

WiBro 20G (3) (6)

   40 Mbps (for downloading) / 12 Mbps (for uploading)      20,000   

WiBro 30G (4) (6)

   40 Mbps (for downloading) / 12 Mbps (for uploading)      30,000   

WiBro 50G (5) (6)

   40 Mbps (for downloading) / 12 Mbps (for uploading)      40,000   

 

 

(1) We waive the installation fee of 30,000 for mandatory subscription periods of one to four years.

 

(2) We charge a monthly fee of 10,000 for up to 10,000 megabytes of data transmission and 10 per megabyte for any additional data transmission in excess of 10,000 megabytes per month.

 

(3) We charge a monthly fee of 20,000 for up to 20,000 megabytes of data transmission and 10 per megabyte for any additional data transmission in excess of 20,000 megabytes per month.

 

(4) We charge a monthly fee of 30,000 for up to 30,000 megabytes of data transmission and 10 per megabyte for any additional data transmission in excess of 30,000 megabytes per month.

 

(5) We charge a monthly fee of 40,000 for up to 50,000 megabytes of data transmission and 10 per megabyte for any additional data transmission in excess of 50,000 megabytes per month.

 

(6) Various discounts and promotional rates are available depending on the time of subscription and the minimum subscription contract, which may reduce the actual monthly fee paid.

olleh TV Services. We charge our subscribers an installation fee per site of 24,000, which is waived with a three-year contract, a set-top box rental fee ranging from 2,000 to 8,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the MSIP.

The following table summarizes charges for our representative olleh TV service plans:

 

     Real-time
Broadcasting Channels
     Monthly Fee (1)  

olleh TV Live Choice (2)

     91       8,000   

olleh TV Live Education (3)

     68         8,000   

 

40


Table of Contents
     Real-time
Broadcasting Channels
     Monthly Fee (1)  

olleh TV Live Thrift (4)

     170         12,000   

olleh TV Live Standard (4)

     201         16,000   

olleh TV Live Deluxe (4)

     205         23,000   

olleh TV SkyLife Economy (5)

     187         22,000   

olleh TV SkyLife Standard (5)

     194         27,500   

olleh TV SkyLife Premium (5)

     198         33,000   

olleh TV Mobile (6)

     70         5,000   

Olleh TV Live All-right (7)

     177         14,000   

Olleh TV Skylife All-right (7)

     177         14,000   

 

 

(1) We typically provide discounts of 5% to 20% for a mandatory subscription periods ranging from one to three years. For olleh TV SkyLife subscribers, we provide discounts of 20% for mandatory subscription period of three years.

 

(2) Assuming selection of one package. Subscribers must choose at least one channel package, each of which charges a monthly fee of 2,000. The packages include entertainment, media, leisure and education and multi-room.

 

(3) Assuming selection of one package. Subscribers must choose at least one Video-On-Demand package, each of which charges a monthly fee of 2,000. The packages include elementary school, middle/high school and English education.

 

(4) We charge additional monthly fees for value-added services such as short messaging service, video conferencing and high-definition channels from KT Skylife Co., our subsidiary satellite broadcasting operator.

 

(5) For subscription to olleh TV SkyLife service, installation fee is waived for a mandatory subscription period of three years.

 

(6) Product for N-Screen (a service which allows purchased content to be displayed on multiple devices) launched in October 2011. The service is offered free of charge if bundled with our Internet, olleh TV and mobile services.

 

(7) olleh TV all-right products are basic IPTV packages with more than 55 TV broadcasting channels, 25 data broadcasting channels, 30 radio broadcasting channels, and more than 40,000 video-on-demand channels.

 

Data Communication Service

We charge customers of domestic leased-lines on a monthly fixed-cost basis based on the distance of the leased line, the capacity of the line measured in bits per second (“bps”), the type of line provided and whether the service site is local or long-distance. In addition, we charge customers a one-time installation fee per line ranging from 56,000 to 1,940,000 depending on the capacity of the line.

Bundled Products

We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with IP-TV, Internet phone, fixed-line telephone service, WiBro, and mobile services, at a discount.

The following table summarizes our various basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years:

 

     Monthly Rates
     Flat Rate     

Mobile Monthly Fee

Internet / Internet Phone / Mobile

   24,000       Discounts are between 1,500 and 10,000, depending on the mobile fee plan (up to 5 mobile numbers) (2)

Internet / Fixed-Line Phone / Mobile

     27,000      

Internet / IP-TV / Mobile (1)

     34,000      

Internet / Fixed-Line Phone / IP-TV / Mobile (1)