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2016 ICT Industry Outlook of Korea

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2016 ICT Industry Outlook of Korea

Copyright Ⓒ 2015 Korea Information Society Development Institute

All rights reserved. No part of this book may be reproduced or transmitted in any form of by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the authors.

All requests for permission to reproduce or translate all or part of this book should be made to:18, Jeongtong-ro, Deoksan-myeon, Jincheon-gun, Chungcheongbuk-do, 27872 Rep. of KOREAPhone : +82-43-531-4383Fax : +82-43-531-4099

Message from the President

Despite the upward momentum of the U.S. economy, the global economy has been recording lower growth rates than expected due to insufficient economic recovery in the European region and Japan as well as the slowing growth of the Chinese economy. In the case of Korea, although investments are picking up, its economic turnaround is slow as private consumption remains sluggish, which is in turn causing a delay in the recovery of domestic demand. In addition, Korea is affected directly by China’s slow-growing economy because of its heavy dependence on trade with the country.

The importance of ICTs as a growth engine that helps overcome the economic downturn in Korea is highlighted more than ever. Recently, the ICT convergence market has been expanding drastically as an increasing number of businesses utilize ICTs not only in typical ICT industries but also in other industries, such as finance, medical services and education. In this regard, there is a growing need for comprehensive and objective data on the market trends and outlook for the ICT industry, which can be used as the basis for developing government policies relating to ICTs and as a source of reference for the private sector in making investment decisions.

This study aims to assess the performance of the Korean ICT industry in 2015 and provide projections on production, exports and subscriptions for each ICT industry in 2016, taking into account various issues raised within the industry. It also analyzes the global competitiveness of the ICT industry based on major global competitiveness indexes and examines new growth businesses in order to draw policy implications to be considered in planning future strategies for the ICT industry.

This report discusses the current status and issues of Korea’s ICT industry in three parts. Part I outlines the trends and outlook for the Korean ICT industry in the five areas: communications services, broadcasting services, broadcasting and communications convergence services, ICT equipment, and software. Part II provides comparisons of Korea and other countries in the ICT industry to find out where Korea’s competitiveness lies and where improvements need to be made. Lastly, Part III offers insights into the current status of the Online-to-Offline (O2O) market, which is emerging as a new business that provides consumers with integrated experiences by linking the online and offline worlds organically.

The 2016 ICT Industry Outlook for Korea is the 15th of its kind published annually by the Korea Information Society Development Institute (KISDI). In this year’s report, we have endeavored to provide more comprehensive and improved information on the Korean ICT industry. We hope that our readers will make full use of the report in their decision-making processes for various purposes, including government policy making and corporate strategy development. We also look forward to your honest and candid opinions about the report.

Thank you.

Dowhan KimPresident

Korea Information Society Development Institute

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MESSAGE FROM THE PRESIDENT

INTRODUCTION

PART I CURRENT STATUS AND OUTLOOK FOR KOREA’S ICT INDUSTRY

1. ICT Industry in General

2. Current State and Outlook by Industry

PART II INTERNATIONAL COMPARISONS OF ICT INDUSTRY COMPETITIVENESS

OF KOREA

1. Achievements and Export Competitiveness of the ICT Industry

2. Investments in Technology Development and Innovation Levels

3. Human Resources Environment

4. Financial and Entrepreneurial Environment

5. Levels of ICT Infrastructure and Its Utilization

6. Industry-Friendly Policies and Legislation

PART III TRENDS OF ONLINE-TO-OFFLINE (O2O) COMMERCE IN AND

OUT OF KOREA

1. Concept of O2O and Background of its Emergence

2. O2O-Related Short-Range Communication Technology and Payment Methods

3. Global and Domestic O2O Trends

CONCLUSION

REFERENCES

Contents

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List of Tables

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Production in the ICT Sector

Export and Import Forecasts for ICT Equipment

Communications Services

Broadcasting Service Revenues

Terrestrial Broadcasting Service Revenues

Paid Broadcasting Services Revenues

Cumulative Subscribers for Satellite Broadcasting Services

Program Providers’ Revenues

IPTV Broadcasting Revenues

Communications Equipment Production and Exports

Mobile Handset Production and Exports (including Components)

Mobile Phone Exports

Broadcasting Equipment Production and Exports

Digital TV Production and Exports

Information Equipment Production and Exports

Electronic Component Production and Exports

Semiconductor Production and Exports

Display Panel Production, Exports and Imports

Software Production

Software Exports

Number of SCI Papers in 2013: High-Ranking Countries

Korea’s Rankings in ICT Development Index, 2013~2015

Examples of NFC-Based Application Services

Top and Bottom Businesses in the Japanese O2O Market

O2O Services in Korea and their Evolution (Example)

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List of Figures

[Figure 1.1]

[Figure 1.2]

[Figure 1.3]

[Figure 1.4]

[Figure 1.5]

[Figure 1.6]

[Figure 1.7]

[Figure 1.8]

[Figure 1.9]

[Figure 2.1]

[Figure 2.2]

[Figure 2.3]

[Figure 2.4]

[Figure 2.5]

[Figure 2.6]

[Figure 2.7]

[Figure 2.8]

[Figure 2.9]

[Figure 2.10]

[Figure 2.11]

[Figure 2.12]

[Figure 2.13]

[Figure 2.14]

[Figure 2.15]

[Figure 2.16]

[Figure 2.17]

[Figure 2.18]

[Figure 2.19]

[Figure 2.20]

[Figure 2.21]

[Figure 2.22]

[Figure 2.23]

[Figure 2.24]

[Figure 2.25]

[Figure 2.26]

Trends of Subscriptions for Fixed Telephony Services

Subscriptions and Penetration Rates for Broadband Network Services

Subscriptions for Mobile Phone Services

Trends of Mobile Data Traffic per Subscriber

Terrestrial Broadcasting Advertising Revenues

Cable Broadcasting Service Subscribers

IPTV Subscribers

IPTV Market Shares by Service Providers

Global Market Share of Major Smartphone Manufacturers

Share of ICT Sector in Total Value Added, 2013

Evolution of ICT Sector Value Added, 2007 and 2013

Employment in the ICT Sector and Sub-sectors, 2013

World Exports of ICT Goods, 2001, 2007 and 2013

OECD and Major Exporters of ICT Services, 2001, 2007 and 2013

ICT and Total Business Expenditure in R&D Intensities, 2013

Business R&D Expenditures in the ICT Sector, 2013

ICT-Related Patents, 2000~2002 and 2010~2012

SCI Citation Counts per Paper

Technological Cooperation between Companies, 2015

Knowledge Transfer between Companies and Universities, 2015

Availability of Skilled Labor, 2015

Availability of Qualified Engineers, 2015

Information Technology Skills

Brain Drain as a Hindrance to Competitiveness, 2015

Venture Capital, 2015

Credit, 2015

Number of Days to Start a Business, 2014

Startup Procedures, 2014

Broadband Connectivity by Size, 2010 and 2014

Enterprises with a Website or Homepage by Size, 2009 and 2014

Enterprises Using Cloud Computing Services by Size, 2014

Diffusion of Online Purchases including via Handheld Devices, 2007 and 2014

Scientific Research Legislation, 2015

Corporate Tax Rate on Profit, 2015

Legal and Regulatory Framework, 2015

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List of Figures

[Figure 2.27]

[Figure 3.1]

[Figure 3.2]

[Figure 3.3]

[Figure 3.4]

[Figure 3.5]

[Figure 3.6]

[Figure 3.7]

[Figure 3.8]

Ease of Doing Business, 2014

Concept of Online to Offline (O2O) Commerce

World Shipments of NFC-Enabled Smartphones

Uses of Beacons

Beacon vs. NFC

Apple iBeacon

Mobile Payment Market Forecasts, Worldwide (2012~2017)

Japan’s O2O Market Size

Size of the Potential Korean O2O Market

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Introduction

This report consists of three parts. Part I classifies the ICT industry into communications services, broadcasting services, broadcasting and communications convergence services, ICT equipment, and software and outlines each of the five sectors with a focus on their current status and outlook. Taking a closer look at each sector, communications services are classified further into fixed communications services, broadband services, and wireless communications services. Revenue projections for each sub-sector are also offered. Broadcasting services are categorized into terrestrial broadcasting, paid broadcasting, and program provider services, and subscriber and revenue estimates are provided for each segment. In the broadcasting and communications convergence services domain, we will look into IPTV broadcasting services. For ICT equipment, projections on production and exports are presented for major product categories: communication equipments, broadcasting equipment, information equipment, electronic components. Finally, production and export forecasts of software products are provided.

Part II provides comparisons between Korea and other developed countries in various areas considered closely related to ICT competitiveness, including ICT infrastructure, infrastructure utilization, and applicable laws and regulations, in order to figure out Korea’s competitive standing regarding ICTs. Strengths and weaknesses in Korea’s ICT industry commonly identified in objective evaluations by various international institutions are also highlighted to seek improvement opportunities.

Part III looks into the Online-to-Offline (O2O) industry, which is emerging as a new growth engine for the ICT industry both in and out of Korea. Prevailing definitions and technologies of O2O are offered. The current status, outlook and corporate trends of the domestic and global O2O markets are also assessed to understand their implications on Korea’s efforts to invigorate its O2O industry and become a leader in the global market.

Current Status and Outlook for Korea’s ICT Industry¹)

Part I

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1.1. Production

Production in the ICT sector in 2015 is estimated to have increased by 1.3% year on year to 444.6 trillion won. The communications service industry is expected to report a revenue drop relative to the previous year as revenue from fixed telephony has fallen during the year due to the substitution of mobile calls for fixed-line calls as well as decreases in broadband network service sales caused by increasing collective consumption. The reason for the downturn can also be found in falling revenue from mobile telephony due to temporary effects arising from the process of migrating to new price plans. On the other hand, the overall revenue from broadcasting services is likely to post a year-on-year growth as revenue from terrestrial broadcasting services has increased owing to rising revenues from TV broadcasting license fees as well as retransmission and terrestrial program sales, while program providers’ home shopping sales and program sales have also grown. In the ICT equipment market, demand for major equipment and devices including network equipment, smartphones, computers and peripherals, and display panels has declined, except for smartphone components, driving the growth rate lower than in the previous year. The software market, meanwhile, is likely to have experienced continuous growth mostly in IT system management and support services.

Production in the ICT sector in 2016 is projected to grow by 1.6% year on year to 451.7 trillion won. In the communications services market, total revenue for wireless communications services is projected to rise as migration to data-oriented and LTE price plans continue, although the downward trend for wired communications services is expected to continue. The broadcasting services industry is forecast to achieve growth as the tendency of ad revenues from terrestrial broadcasting to decrease is expected to slow down thanks to the Rio 2016 Olympics as well as the deregulation of the advertising industry, whereas home shopping sales by program providers as well as retransmission sales and program sales will grow as subscribers for pay channels increase. In the ICT equipment market, smartphones, semiconductors and display panels are projected to continue its slow growth trend due to sluggish demand, despite recovering domestic consumption for digital TVs. In the meantime, software production is predicted to grow as the IoT, big data, and cloud computing markets grow.

1) This part is based on a summary of a paper published by Jung Hyuk et el. (December 2015).

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Table 1.1 Production in the ICT Sector (In KRW trillions, %)

1.2. Exports

Exports of ICT equipment in 2015 are estimated to have decreased by 1.9% year on year to USD172.9 billion. In the mobile handsets segment accounting for about 90% of communications equipment exports, total exports are expected to record a growth rate similar to that of the previous year on the strength of Korean companies’ aggressive offensives into emerging markets by putting mid-/low-priced models on the front. The broadcasting equipment industry is expected to show a downward trend as the export performance of digital TV, which accounts for more than 60% of its exports, plummeted against the backdrop of the structural stagnation of demand for televisions, the economic slide in Europe, and stagnant exports to emerging markets, along with price drops due to the expansion of overseas production and fiercer competition. The components industry is expected to report decreased exports because of falls in memory prices as well as semiconductor companies’ shift to exports of mobile phone components, whereas exports of display panels are also likely to have been reduced in value not only by declining

Source: Korea Association of Information and Telecommunication (KAIT) data, except for the 2014 figures for broadcasting services (where data from Ministry of Science, ICT and Future Planning (MSIP) and Korea Communications Commission (KCC) was used for terrestrial broadcasting, paid broadcasting and PP services, while program production and other broadcasting services is based on KAIT data). KISDI projections for 2015~2016.

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demand for TVs but also falling display panel prices due to excess supply from Chinese competitors. On the software front, the industry is expected to have continued growing thanks to the high performance of large IT service companies that expanded overseas operations in earnest in the aftermath of the Software Industry Promotion Act.

Exports of ICT equipment in 2016 are projected to inch down by 0.1% year on year to reach USD172.8 billion. Although exports of digital TVs are expected to grow driven by high value-added product groups, communications equipment exports will likely decline in terms of growth rate on account of slowing demand for network equipment and smartphones due to delayed global economic recovery as well as competition among global manufacturers. Furthermore, semiconductors and display panels are likely to face price drops due to slowing downstream demand and oversupply. These factors are predicted to combine to push down the overall export value. For software, its exports are likely to grow as IT service providers increase exports through businesses based on big data and Internet-of-Things (IoT) platforms.

1.2. Exports

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Table 1.2 Export and Import Forecasts for ICT Equipment (In USD 100 millions, %)

2014 2015 20162013~2014Change %

2014~2015Change %

2015~2016Change %

ICT Total

Exports 176.2 172.9 172.8 2.1% △1.9% △0.1%

Imports 88.2 91.3 94.5 7.8% 3.6% 3.4%

Balance 88.1 81.6 78.3 △3.1% △7.4% △4.0%

Communications equipment

Exports 29.5 31.8 32.3 7.9% 7.8% 1.5%

Imports 10.6 13.0 15.1 60.2% 22.5% 16.1%

Balance 18.9 18.8 17.2 △8.9% △0.4% △8.7%

Broadcasting equipment

Exports 9.9 8.6 9.0 △7.2% △13.4% 4.9%

Imports 3.0 3.4 3.6 5.1% 16.0% 3.7%

Balance 6.9 5.1 5.4 △11.6% △26.0% 5.7%

Information equipment

Exports 7.0 7.0 7.2 △1.5% 0.1% 1.6%

Imports 9.7 9.0 9.0 7.3% △7.6% △0.3%

Balance △2.7 △2.0 △1.8 40.2% △27.7% △7.0%

Components

Exports 106.8 104.1 103.4 1.4% △2.5% △0.6%

Imports 50.5 50.9 51.2 1.2% 0.7% 0.7%

Balance 56.2 53.2 52.2 1.6% △5.4% △1.9%

Application and infrastructure

equipment

Exports 22.3 20.7 20.2 3.4% △7.4% △2.3%

Imports 14.1 14.8 15.3 8.8% 4.7% 3.8%

Balance 8.2 5.9 4.8 △4.8% △28.3% △17.7%

Magneto-optical media

Exports 0.8 0.8 0.8 8.4% 1.2% 1.5%

Imports 0.2 0.2 0.2 △40.5% 9.7% 5.2%

Balance 0.5 0.5 0.5 61.6% △2.3% △0.2%

Source: Institute for Information and Communications Technology Promotion (IITP) data, and KISDI projections for 2015~2016


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2.1. Communications Services

Table 1.3 Communications Services (In KRW trillions, %)

　

Revenue from communications services in 2015 is estimated at 44.5 trillion won, a 1.1% drop from the previous year. The overall revenue of fixed communications services is expected to decrease because of diminishing revenue from fixed telephony, which is the result of the substitution of mobile calls for fixed-line calls in addition to falling sales of broadband network services with increasing collective consumption. The wireless communications services industry is likely to post a lower total revenue on account of temporary effects arising from the process of migrating to new price plans.

Revenue from communications services in 2016 is forecast to inch up by 1.5% year over year to 45.2 trillion won. While the downward movement of wired communications services is expected to continue, the total revenue for wireless communications services is projected to increase as the migration to data-oriented and LTE price plans enter a stable phase.

Note: ( ) indicates YoY growth rates.Source: KAIT data for 2014, and KISDI projections for 2015 and beyond

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◼ Fixed TelephonyNegative growth will likely continue into the second half of the year not only

because subscribers keep falling with the expansion of unlimited on/off-net voice call plans for mobile phones but also because telephone call volumes continue to fall. Despite the shrinking landline subscriber base, the total number of phone service subscriptions had continued to go up slightly up until 2013, thanks to increasing subscriptions for Internet phone services. Starting from 2014, however, even Internet phone subscriptions also took a downward turn. Key players in this market are coping with faltering sales by offering new price plans, but revenue increases from this approach are likely to be more than offset by revenue decreases caused by reductions in subscribers and call volumes.

◼ Broadband Network ServicesSubscription growth remains stagnant in the saturated market of broadband network

services, and tariff competition has been intensifying among service providers offering discounts for contracted/bundled products. These factors are likely to limit the growth in this sector. Although the market is nearing saturation and growth remains stagnant with the penetration rate (in terms of subscriptions against the estimated number of households) already exceeding 100%, a slight but continuous growth has been observed thanks to the popularity of Internet-based services including IPTV. In the meantime, KT accounts for 53.6% of the IPTV market among other IPTV service providers as of the


Figure 1.1 Trends of Subscriptions for Fixed Telephony Services

(In ten thousand subscribers, %)

Source: MSIP, “Wired Communications Services Statistics”

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third quarter of 2015 as it has continued to increase its subscriber base by bundling its OTS (Olleh TV Skylife) service with its other wired and wireless services. However, its market share has been declining gradually due to the rising competition in the market.

The number of subscribers is likely to remain on a moderate growth path owing to the growing number of one- or two-member households, the increasing population of SOHOs, and the wider availability of Internet-based services. The expansion of unlimited price plans for mobile Internet services may cause broadband network service subscriptions to decline, but it is unlikely to have a great impact because mobile Internet platforms pose constraints to the use of Internet-based services such as IPTV and Smart TV. Although there is a steady stream of new demand for broadband network services, the expansion of the market will inevitably be limited as it matures, and revenue growth is expected to stagnate due to tariff competition through contracted or bundled product offers, among other things. Meanwhile, major network operators initiated commercial Giga-Internet services, which are anticipated to help drive up Internet service revenues, provided that they are followed by the expansion of content.

Figure 1.2 Subscriptions and Penetration Rates for Broadband Network Services

2.1. Communications Services

Source: MSIP and Statistics Korea

(In ten thousand subscribers, %)

Figure 1.1 Trends of Subscriptions for Fixed Telephony Services

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◼ Mobile TelephonyThe mobile phone market is considered to have already been saturated in terms of

subscriptions (the penetration rate at 113.5% as of December 2014), but subscriptions are expected to grow further, thanks to invigorated sales of low-priced mobile phones with cheaper price plans, the introduction of data-oriented price plans and LTE-A services, and the growing use of smartphones and tablet computers.

Revenue-reducing factors including the proliferation of alternative voice and text services, the growing popularity of lower-priced phones with lower tariffs, and increasing subscriptions to new price plans are expected to outweigh the effect of continued LTE subscription growths that generate relatively higher ARPUs and thereby

lead to higher total revenue.

Subscribers of 2G services will likely continue to decrease, shifting the weight of mobile service subscriptions towards LTE and 3G services. Data-oriented price plans are expected to be invigorated steadily, giving rise to various forms of data-based price plans and boosting revenue as a result.


Source: KISDI(2015), “Communications Market Competition Assessment”

(In ten thousand subscribers)

Figure 1.3 Subscriptions for Mobile Phone Services

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2.2. Broadcasting Services

Table 1.4 Broadcasting Service Revenues(In KRW trillion, %)

　


Source: KISDI (2015), “Communications Market Competition Assessment”

Note: ( ) indicates YoY growth rates.Source: MSIP and KCC (2015), “Broadcasting Industry Fact Finding Reports for 2015,” except for the figures for program production and

other broadcasting services, which are based on KAIT data. KISDI projections for 2015 and beyond.

Figure 1.4 Trends of Mobile Data Traffic per Subscriber

Figure 1.3 Subscriptions for Mobile Phone Services

(In TB)

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Revenue from broadcasting services in 2015 is estimated to have climbed by 2.3% year on year to 14,498.5 billion won. Breaking it down by industry segment, revenue from terrestrial broadcasting services remained on a downward path, but is expected to grow slightly owing to increasing revenue from TV broadcasting license fees as well as retransmission and terrestrial program sales. As for paid broadcasting services, cable broadcasting is likely to suffer negative growth with the subscriber base shirinking due to fiercer competition among paid broadcasting media. In the case of program providers, home shopping sales and program sales will likely continue to grow, although advertisement revenue has continued to decline.

Revenue from broadcasting services in 2016 is forecast to reach 14,828 billion won, a 2.3% growth from the previous year. The downward tendency of ad revenue from terrestrial broadcasting is expected to slow down, thanks to the Rio 2016 Olympics as well as the deregulation of the advertising industry. On the other hand, cable television is likely to maintain its negative growth trend as revenue from broadcasting license fees continues to fall with shrinking subscriptions. Overall, the industry is expected to witness growth in home shopping sales by program providers as well as in retransmission sales and program sales as subscribers for pay channels increase.

◼ Terrestrial Broadcasting

Table 1.5 Terrestrial Broadcasting Service Revenues (In KRW 100 millions, %)

2014 2015 2016

Revenue 40,153(2.8%) 41,219(2.7%) 42,363(2.8%)

Revenue from terrestrial broadcasting services in 2015 is estimated to have risen by 2.7% from the previous year to 4,121.9 billion won. Advertising revenue from terrestrial broadcasting services is on the continuous decrease due to intensifying competition among broadcasters as well as the stagnant domestic economy. On the other hand, increases in retransmission and program sales triggered by growing subscriptions for pay channels have contributed to an increase in revenue from terrestrial broadcasting services.


Note: 1. ( ) indicates YoY growth rates. 2. Terrestrial TV, radio and terrestrial DMB are included.Source: MSIP and KCC (2015), “Broadcasting Industry Fact Finding Reports for 2015.” KISDI projections for 2015 and beyond.

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Revenue from terrestrial broadcasting services in 2016 is projected to reach 4,236.3 billion won, up by 2.8% from the previous year. The 2016 Summer Olympics to be hosted in Rio de Janeiro, Brazil, as well as the deregulation of TV advertising including the introduction of a more relaxed regulation on the total amount of advertising, will have a positive impact on terrestrial advertisement revenue. In addition, retransmission and program sales boosted by the growing paid broadcasting market as well as the increasing number of VoD and mobile TV users will drive up broadcasting license fee revenue.

◼ Paid Broadcasting Services

Table 1.6 Paid Broadcasting Services Revenues (In KRW 100 millions, %)


Note: 1. Cable broadcasting, relay cable and satellite broadcasting services are included. 2. ( ) indicates YoY growth rates.Source: MSIP and KCC (2015), “Broadcasting Industry Fact Finding Reports for 2015.” KISDI projections for 2015 and beyond.

Figure 1.5 Terrestrial Broadcasting Advertising Revenues

(In KRW 100 millions)

Note: Terrestrial TV, radio and terrestrial DMB are included.Source: MSIP and KCC, “Broadcasting Industry Fact Finding Reports” for each year

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Revenue from paid broadcasting services in 2015 is estimated at 2,812.2 billion won, down by 3.1% from the previous year. Breaking it down by segment, cable television is expected to post a 2.1% year-on-year drop in revenue as rising competition among pay channels has brought down subscriptions. Revenue from satellite broadcasting services is expected to maintain a level similar to that of the previous year

as growth in subscriptions slowed due to slipping OTS subscriptions.

Table 1.7 Cumulative Subscribers for Satellite Broadcasting Services(In thousands)

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Satellite broadcasting total 4,204 4,230 4,245 4,261 4,262 4,292 4,312

OTS (Olleh TV Skylife) 2,267 2,298 2,334 2,339 2,321 2,305 2,271

Skylife only 1,937 1,932 1,911 1,922 1,941 1,988 2,041


Source: Korea Cable Television and Telecommunications Association

Figure 1.6 Cable Broadcasting Service Subscribers

(In thousands)

Source: KT’s Investor Relations data

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Revenue from paid broadcasting services in 2016 is projected to decline by 2.8% year over year to 2,732.8 billion won. For cable broadcasting services, the growth rate of broadcasting license fee income is predicted to drop into the -10% range due to the dwindling subscriber base fueled by increasing competition with IPTV. However, gross revenue is forecast to record a -1.8% growth supported by increasing advertisement sales and carriage fees for home shopping channels. In the meantime, satellite broadcasting revenue is predicted to be slow in growth due to the sluggish growth of OTS bundled service offerings.

◼ Program Providers (PP)

Table 1.8 Program Providers’ Revenues (In KRW 100 millions, %)

2014 2015 2016

Revenue 63,067(3.8%) 65,323(3.6%) 67,712(3.7%)

Revenue from Program Provider (PP) services in 2015 is estimated to have increased 3.6% year on year to 6,532.3 billion won. In the first half of the year, diminishing domestic consumption dragged down home shopping sales, and the upward revenue trend decelerated as a result of sluggish advertising revenue due to the weakening economy.

Revenue from PP services in 2016 is predicted to rise by 3.7% year on year to 6,771.2 billion won. The increase of IPTV subscribers and the continued migration of analog cable subscribers to digital cable are expected to raise income from license fee distribution, while the continuous growth of home shopping sales will boost revenue.


Figure 1.6 Cable Broadcasting Service Subscribers

Note: ( ) indicates YoY growth rates.Source: MSIP and KCC (2015), “Broadcasting Industry Fact Finding Reports for 2015.” KISDI projections for 2015 and beyond.

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2.3. Broadcasting and Communications Convergence Services

◼ IPTV Broadcasting

Table 1.9 IPTV Broadcasting Revenues(In KRW 100 millions, %)

2014 2015 2016

Revenue 14,984(33.2%) 18,062(20.5%) 20,470(13.3%)

Revenue from IPTV broadcasting services in 2015 is estimated to have soared by 20.5% from the previous year to 1,806.2 billion won. The IPTV segment is likely to record a high growth rate backed by a marked increase in subscribers opting for fixed-mobile bundled products. As of the third quarter of 2015, IPTV subscribers number about 11,940 thousand, recording an 18.1% growth over the same period in the previous year. Meanwhile, KT accounts for 53.6% of the IPTV market among the service providers as of the third quarter of 2015 as it has continued to increase its subscriber base by bundling its OTS (Olleh TV Skylife) service with its other wired and wireless services. However, its market share has been declining gradually due to intensifying competition.

Revenue from IPTV broadcasting services in 2016 is forecast to jump by 13.3% year on year to 2,047 billion won. Subscriber growth is likely to continue, boosted by the offering of fixed-mobile bundled services and the launch of the smart set-top box.


Note: ( ) indicates YoY growth rates.Source: MISP and KCC (2015), “Broadcasting Industry Fact Finding Reports for 2015.” KISDI projections for 2015 and beyond.

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2.3. Broadcasting and Communications Convergence Services

Note: 1. KT’s OTS (Olleh TV Skylife) is included. 2. For LGU+, the data is based on household subscriptions.Source: Investor Relations data of KT, SK Broadband and LG U+, respectively.

Note: 1. KT’s OTS (Olleh TV Skylife) is included.Source: Investor Relations data of KT, SK Broadband and LG U+, respectively. KT Skylife’s Investor Relations data for OTS.

Figure 1.7 IPTV Subscribers

Figure 1.8 IPTV Market Shares by Service Providers

(In thousands)

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2.4. ICT Equipment

2.4.1. Communications Equipment

Table 1.10 Communications Equipment Production and Exports (Production in KRW 100 millions, exports and imports in USD millions, %)

Production of communications equipment in 2015 is estimated at 72,260.2 billion won, an increase of 2.7% on the previous year. Reductions in investments by network operators in the wake of the completion of nationwide LTE-A networks in 2015 as well as offensives launched by Chinese manufacturers have likely caused network equipment production to contract. However, Korean companies have been raising their overseas production of smartphones as part of efforts to enhance cost competitiveness amid slowing worldwide demand for smartphones and rising competition. This will likely lead to the expansion of domestic production of parts and assemblies, ultimately bringing up the overall domestic production of communications equipment by a small margin.

Exports of communications equipment in 2015 are estimated to have increased by 7.8% from the previous year to USD31.795 billion. Network equipment exports are likely to have fallen due to reductions in global LTE investments in 2015 and the weakened global competitiveness of Korean network equipment manufacturers. In the mobile handsets segment accounting for about 90% of communications equipment exports, however, total exports are expected to record a growth rate similar to that of the previous year on the strength of Korean companies’ aggressive offensives into emerging markets by putting up mid/low-priced models on the front.


Note: 2015 figures are based on October data for production and November data for exports. Source: KAIT data for production and National IT Industry Promotion Agency (NIPA) data for exports

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Production of communications equipment in 2016 is projected to grow by 1.3% year on year to 73,228.5 billion won. In 2016, global communications service providers are expected to increase investments in anticipation of a worldwide economic turnaround as well as the national project for building a wireless disaster and safety network in Korea. Nevertheless, the downward tendency of demand for mobile handsets, which take up 70% of communications equipment production, is likely to persist, weakening the upward trend of domestic production.

Exports of communications equipment in 2016 are predicted to go up by 1.5% year on year to USD32.260 billion. Slowing demand for communications equipment due to delayed global economic recovery and competition among global manufacturers in 2016 is expected to push down the growth rate of exports, but the positive growth trajectory is likely to be maintained thanks to Korean companies’ aggressive move into overseas markets.

◼ Mobile Handsets

Table 1.11 Mobile Handset Production and Exports (including Components) (Production in KRW 100 millions, exports and imports in USD millions, %)

2014 2015 2016

Production489,168(0.8%)

501,984(2.6%)

508,206(1.2%)

Exports26,439(6.3%)

29,039(9.8%)

29,526(1.7%)

Imports7,252

(85.9%)9,617

(32.6%)11,545

(20.1%)

Balance25,647(5.2%)

19,421(1.2%)

17,981(∆7.4%)

2.4. ICT Equipment

Note: 2015 figures are based on October data for production and November data for exports. Source: KAIT data for production and NIPA data for exports

30


Production of mobile handsets in 2015 is estimated to have risen by 2.6% from the previous year to 50,198.4 billion won. While demand for smartphones continued to stagnate in advanced markets, the Chinese smartphone market, which had been driving the growth of the worldwide mobile phone market, also took the downward path. However, production of mobile handsets including mobile phone parts is likely to have increased in Korea because Korean companies have pushed up the share of overseas production and consequently domestic production of mobile phone components in order to ensure price competitiveness amid decreasing global demand for mobile phones and growing competition.

Exports of mobile handsets in 2015 are estimated to have jumped by 9.8% compared to the previous year to USD29.039 billion. The widespread use of smartphones has narrowed the performance gap among products offered by different manufacturers. As a result, while Apple held its ground in the premium smartphone segment, Chinese, Indian and other local manufacturers mounted impressive offensives in the markets for feature phones and mid- and low-priced smartphones, cutting down Korean counterparts’ share in the world markets. However, exports of components to overseas production sites including China and Vietnam subsequent to the growing overseas production of Samsung Electronics’ mid/low-priced models (J and A series) are considered to have pushed up

total mobile phone exports.

Figure 1.9 Global Market Share of Major Smartphone Manufacturers

Source: Adopted from Gartner’s data (November 2015)

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Table 1.12 Mobile Phone Exports (In USD 100 millions, year-on-year change %)

Production of mobile handsets in 2016 is expected to reach 50,820.6 billion won, a growth of 1.2% on the previous year. Although smartphones have been so far leading growth in mobile handset production, there will be a full-scale slowdown in smartphone production as overseas production expands further for the purpose of ensuring price competitiveness and localization to keep up with rising demand for mid- and low-priced phones. Consequently, the growth rate of mobile handset production is expected to decrease.

Exports of mobile handsets in 2016 are forecast to amount to USD29.526 billion, recording a year-on-year growth of 1.7%. Korean companies have been facing fiercer competition in world markets: from Apple in advanced economies where demand has been weakening further; from Apple and Chinese companies in the Chinese market; and from local and Chinese competitors in India, a new growth market. Nevertheless, mobile handset exports are expected to continue the rising trend, though by a small margin, as Korean companies improve product competitiveness by equipping even lower-priced models with high specifications, while increasing exports of components to meet demand arising from expanding overseas production aimed at profitability.

2.4. ICT Equipment

Figure 1.9 Global Market Share of Major Smartphone Manufacturers

Source: MSIP

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2.4.2. Broadcasting Equipment

Table 1.13 Broadcasting Equipment Production and Exports (Production in KRW 100 millions, exports and imports in USD millions, %)

Production of broadcasting equipment in 2015 is estimated to have fallen by 4.1% from the previous year to 14,645.7 billion won. As with the nature of media equipment, the industry was hit hard by the economic downturn in Korea. Coupled with this, digital TV production that accounts for more than 50% of broadcasting equipment production also suffered structural demand stagnation. Consequently, the total production of broadcasting equipment is likely to post negative growth for the year.

Exports of broadcasting equipment in 2015 are estimated to have retreated by 13.4% from a year earlier to USD85.6 billion. Total broadcasting equipment exports are expected to post a significant drop as the export performance of digital TVs, which account for more than 60% of broadcasting equipment exports, plummeted, recording a negative growth of 25.8%.

Production of broadcasting equipment in 2016 is forecast to rise by 2.8% year on year to 15,056.8 billion won. Slowly-recovering exports and rebounding domestic demand are expected to turn the production around in 2016. A slight growth in production can also be attributed to the base effect from the market slowdown in 2015. Demand for digital TVs, though stagnant now, is also likely to grow slightly as sharp price drops of large-screen televisions will trigger replacement demand and awareness of the differential effects of new products such as OLED and UHD TV.

Note: 2015 figures are estimates based on October data (for production) and November data (for exports). Source: KAIT data for production and NIPA data for exports

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2.4. ICT Equipment

Exports of broadcasting equipment in 2016 are projected to grow to USD89.8 billion, up by 4.9% on the previous year. In 2016, mild growth is expected thanks to improving demand in the North American market and growing exports of components mostly for high value-added product groups as well as the impact of the low base effect of the previous year.

◼ Digital TV

Table 1.14 Digital TV Production and Exports(Production in KRW 100 millions, exports and imports in USD millions, %)

Production of digital TVs in 2015 is estimated to have dropped by 8.2% year on year to 7,323.8 billion won. Global demand for digital TVs is likely to have stagnated because of the economic downturn and lack of new marketing initiatives. Moreover, the lack of differential effects of UHD and Quantum Dot TV products and a delay in the popularization of OLED TVs has reduced the replacement demand for digital TVs.

Exports of digital TVs in 2015 are estimated to have shrunk by 26.1% year over year to USD5.01 billion. Exports are likely to record a declining growth rate for the year due to the structural stagnation of demand for televisions, the economic slide in Europe, and stagnant exports to emerging markets, combined with price drops due to the expansion of overseas production and fiercer competition. Korean manufacturers are expected to retain their market shares thanks to price competitiveness secured by their high-level technological capabilities and the vertical integration of core components. Nonetheless, the tendency toward falling prices is expected to continue with Chinese manufacturers entering the market.


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Production of digital TVs in 2016 is forecast to climb slightly owing to major sports events including the Rio 2016 Olympics to be held in the first half of the year in Brazil and UEFA Euro 2016 as well as the base effects from 2015. Although these sports events may not have a big positive impact on the production due to the falling replacement demand, the base effects following the negative growth in 2015 are expected to nudge up the production growth rate for 2016.

Exports of digital TVs in 2016 are projected to reach USD5.45 billion, an increase of 8.7% on the previous year. In 2016, export performance is expected to show signs of recovery as demand in the North American market is expected to improve and exports of components (mostly for high value-added product groups) are projected to increase. Although the global market is expected to expand, the export value is likely to remain stagnant because the percentage of overseas production is high.

2.4.3. Information Equipment

Table 1.15 Information Equipment Production and Exports (Production in KRW 100 millions, exports and imports in USD millions, %)

　


Note: 2015 figures are estimates based on October data (for production) and November data (for exports).Source: KAIT data for production and NIPA data for exports

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2.4. ICT Equipment

Production of information equipment in 2015 is estimated to have plunged by 20.1% from the previous year to 8,774.6 billion won. In terms of worldwide shipments of computing devices in 2015, the global market contracted on account of shrinking demand for traditional desktop PCs and ultra mobile computers (ultrabooks, 2-in-1 laptops and tablet PCs) as well as falling prices.

Exports of information equipment in 2015 are estimated at USD7.04 billion, up by 0.1% from a year earlier. Computer exports are likely to have slackened as manufacturers have increased their overseas production as a way to cope with diminishing global demand for PCs and the recent price drops of tablet PCs. When it comes to peripherals, printers and monitors did not fare well, but increasing exports of SSDs and other auxiliary memory devices appear to have led the upward trend of the industry.

Production of information equipment in 2016 is projected to decrease by 0.2% year on year to 8,754.3 billion won. In 2016, worldwide shipments of computing devices are expected to grow in line with rising demand for ultra mobile computers. On the other hand, the global market is likely to contract in size due to continued price declines.

Exports of information equipment in 2016 are forecast to rise by 1.6% year on year to USD7.15 billion. Although the expansion of overseas production following the recent price falls of tablet PCs is pushing down mobile computer exports, rising demand for ultra mobile products is expected to push them back up.

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2.4.4. Electronic Components

Table 1.16 Electronic Component Production and Exports(Production in KRW 100 millions, exports and imports in USD millions)

Production of electronic components in 2015 is estimated to have inched up to 189,826.7 billion won, a year-on-year increase of 0.8%. Despite falling prices caused by oversupply, Korean companies are expected to have maintained a stable growth trend as they retained their market shares on the strength of higher technological competitiveness than their competitors. Weak demand for PCs brought down DRAM prices, and the downward trend of display panel prices is likely to have persisted amid increasing supply subsequent to production expansion by Chinese competitors. Nevertheless, the industry is expected to post relatively good results for the year as Korean companies successfully maintained their competitive edges in technology to stay at the top of the market.

Exports of electronic components in 2015 are estimated to have fallen by 2.5% year on year to USD104.1 billion. The semiconductor industry is expected to report decreased exports for the third and fourth quarters consecutively relative to those of 2014 because of falls in memory prices as well as system semiconductor companies’ shift towards exports of mobile phone components. The export value is likely to have reduced not only by declining demand for TVs but also by falling display panel prices due to excess supply from Chinese competitors.

Source: KAIT data for production and IITP data for exports and imports. KISDI projections for 2015 and beyond.

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2.4. ICT Equipment

Production of electronic components in 2016 is expected to inch down by 0.1% from the previous year to 189,686.9 billion won. With the global ICT market slowing down, Korean manufacturers are likely to respond to price drops caused by production expansion by Chinese competitors by controlling their production volumes, which is expected to reduce the production value by a small margin.

Exports of electronic components in 2016 are projected to decrease by 0.6% year on year to USD103.4 billion. Slow demand for consumer electronics such as smartphones and televisions coupled with falling prices due to excess supply is expected to lead to reductions in electronic component export values.

◼ Semiconductors

Table 1.17 Semiconductor Production and Exports (Production in KRW 100 millions, exports and imports in USD millions, %)

　


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Production of semiconductors in 2015 is estimated to have grown by 2.1% from the previous year to 76,667.0 billion won. The world’s semiconductor market performed poorly with the stagnant global demand for ICTs in the second half of 2015. Consequently, the growth of domestic production is likely to have contracted.

Exports of semiconductors in 2015 are estimated at USD62.9 billion with a 0.4% year-on-year growth rate. The semiconductor industry is expected to report decreased exports for the third and fourth quarters consecutively relative to those of 2014 because of falls in memory prices as well as system semiconductor companies’ shift towards exports of mobile phone components.

Production of semiconductors in 2016 is expected to inch up by 0.2% from a year earlier to 76,809.8 billion won. The growth rate of domestic production is predicted to go down as the worldwide semiconductor market is expected to slow down compared to the previous year due to the poor performance of memory semiconductors.

Exports of semiconductors in 2016 are projected to decrease by 0.3% from the previous year to USD62.7 billion. In 2016, Korean semiconductor manufacturers are expected to retain their shares of the memory market thanks to their high technological competitiveness. Nevertheless, exports are likely to decline slightly due to across-the-board price decreases for memory products. Memory semiconductor prices are likely to continue their weak trend until the first half of 2016, due to low demand relative to supply. However, the memory semiconductor market is currently based on a monopoly/oligopoly structure, and major suppliers are expected to stabilize prices through supply control while continuing their technological efforts to cut down on costs. On the part of system semiconductors, exports will likely increase by a small margin, driven by application processors (APs) for mobile devices, CMOS image sensors (CIS’s) for dual cameras and display driver ICs (DDIs) for displays.

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2.4. ICT Equipment

◼ Display Panels

Table 1.18 Display Panel Production, Exports and Imports(Production in KRW 100 millions, exports and imports in USD millions)

　

Production of display panels in 2015 is estimated to have declined by 7.2% year on year to 75,194.4 billion won. The favorable trend that continued from the second half of 2014 to the first half of 2015 was turned around by price drops that could be attributed to intensive production by Chinese companies and falling demand for TVs. This will likely result in a reduction in the production value for the year.

Exports of display panels in 2015 are estimated to have fallen by 6.8% year on year to USD32.5 billion. Korean companies started full-scale operations of their Generation-8 LCD production plants in China, while Chinese counterparts increased their production volumes. These factors are considered to have contributed to the poor export performance.

Production of display panels in 2016 is forecast to fall by 1.6% year on year to 73,991.3 billion won. Although LCD panel prices are likely to continue falling, the impact of major sports events scheduled for 2016 (e.g., UEFA Euro 2016 and Rio 2016 Olympics) and the base effect of the previous year are expected to decelerate the downward movement.

Source: KAIT data for production and IITP data for exports and exports. KISDI projections for 2015 and beyond.

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Exports of display panels in 2016 are projected to go down by 5.0% year on year to USD30.8 billion. Although the adoption of the OLED panel for TVs and smartphones will expand, the uncertainty in the recovery of demand for LCD TVs is still high, and LCD prices are bound to fall under the weight of oversupply. Overall, the export value is expected to fall in the coming year.

2.5. Software

Table 1.19 Software Production (In KRW billions, %)

2014 2015 2016

Software packages6,602

(1.9%)6,868

(4.0%)7,157

(4.2%)

IT services29,759 (2.5%)

31,747 (6.7%)

33,397 (5.2%)

Software total36,360 (2.4%)

38,615 (6.2%)

40,554 (5.0%)

Table 1.20 Software Exports (In KRW billions, %)

2014 2015 2016

Software packages2,640

(25.4%)2,856

(8.2%)3,067

(7.4%)

IT services2,688

(28.8%)3,392

(26.2%)4,335

(27.8%)

Software total5,327

(27.1%)6,248

(17.3%)7,403

(18.5%)

Note: 2015 figures are estimates based on October data (for both production and exports).Source: KAIT data for production and KEA data for exports

Note: 2015 figures are estimates based on October data (for both production and exports).Source: KAIT data for production and Korea Electronics Association (KEA) data for exports

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2.5. Software

Production of software in 2015 is estimated to have jumped by 6.2% compared to a year earlier to 38.6 trillion won. Packaged software production is estimated at 68.7 trillion won, posting a 4% year-on-year growth rate, while IT services production is expected to report 31.7 trillion won at a growth rate of 6.7%.

Exports of software in 2015 are estimated to have increased by 17.3% year on year to USD6.25 billion. Despite a lower growth rate for the ‘IT consulting and system integration (SI)’ segment, the ‘IT system management and support services’ segment is expected to have recorded a high growth rate, leading growth in the overall IT services industry. This can be attributed to the fact that large IT service companies that had expanded overseas operations in earnest in the aftermath of the Software Industry Promotion Act achieved high growth rates between 29% and 35% for the period between 2012 and 2014.

Software production in 2016 is expected to rise by 5.0% from the previous year to 40.6 trillion won. Demand for software is also predicted to grow as the IoT, big data, and cloud computing markets grow.

Software exports are forecast to grow by 18.5% in 2016. Software exports will increase as packaged software firms strengthen their efforts to export their products and IT service providers increase exports in their business that is based on big data and Internet-of-Things (IoT) platforms.

International Comparisons of ICT Industry Competitiveness of Korea

Part II

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To figure out Korea’s competitive position in the ICT industry, this part provides comparisons between Korea and other developed economies in the following six areas: achievements and export competitiveness of the ICT industry, investments in technology development and innovation levels, human resources environment, financial and entrepreneurial environment, ICT infrastructure levels, and industry-friendly policies and laws.

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In 2013, the ICT industry in the OECD member countries accounted for 5.5% of total value added. IT and other information services topped the list of ICT sectors with the highest value added, followed by telecommunications; computer, electronic and optical products; and software publishing. Country-wise, Korea headed the list at 10.7%, which is almost double the OECD average. Korea showed the strongest specialization in IT equipment (computer, electronic and optical products) at 7.4% of total value added, which is higher than even the share of Japan’s entire ICT sector to total value-added. Japan ranked in second place at 7.0% in terms of total ICT value added. This proves that the Korean ICT industry is equipment-oriented.

Korea moved from second place among the OECD countries in 2007 to first in 2013 in terms of the ICT industry’s share of total value added, with the number growing by 0.32 pp. On the contrary, Finland suffered the biggest drop as it slid from the top spot in 2007 to eighth place in the wake of the fall of Nokia, which had been leading its ICT sector.

Note: As a percentage of total value addedSource: OECD (2015)

Figure 2.1 Share of ICT Sector in Total Value Added, 2013

(In %)

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Next, employment in the ICT industry accounted for 2.85% of total employment in the OECD countries in 2013. Korea (4.32%) came in second place after Ireland (5.14%) in terms of employment by the ICT industry. A closer look at ICT employment by sector shows that Korea has a far higher share of employment in computer, electronic and optical products than the other member countries, as is the case with value added.


Note: As a percentage of total value addedSource: OECD (2015)

Figure 2.2 Evolution of ICT Sector Value Added, 2007 and 2013

(In %)

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World exports of manufactured ICT goods more than doubled, growing from about USD800 billion in 2001 to over USD1.6 trillion in 2013. However, the share of ICT goods in exports showed variations across countries. The shares of Japan and the United States in world exports of ICT goods more than halved from 2001 to 2013, while the share of China, a non-OECD member, grew from 6.1% to 32%, indicating the shifting weights among major ICT goods exporters. Having a closer look at the OECD countries, Korea is the only economy to increase its share of the world market for ICT goods over the same period, while the rest of the countries faced overall reductions in their market shares.

Note: As a percentage of total employmentSource: OECD (2015)

Figure 2.2 Evolution of ICT Sector Value Added, 2007 and 2013 Figure 2.3 Employment in the ICT Sector and Sub-sectors, 2013

(In %)

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International trade in ICT services grew much faster than that of ICT goods, increasing almost fourfold between 2001 and 2013. The share of computer and information services out of world exports of services, in particular, increased from 3.4% in 2001 to 5.8% in 2013. A few economies dominate a significant share in global exports of ICT services, with some major shifts observed in recent years. As of 2013, Ireland is the leading exporter of ICT services, particularly computer and information services. China, a non-OECD economy, is also becoming a major exporter of ICT services along with Germany, the United Kingdom and the United States. Despite its fourth place in total ICT exports, the U.S. was the top exporter of telecommunications services. On the other hand, Korea posted a far lower share of ICT service exports relative to ICT goods exports, with percentages of ICT service exports at 0.48%, 0.38% and 0.48% in 2001, 2007 and 2011, respectively. The reason for such low shares of IT service exports could be attributed to the fact that Korea’s ICT industry is heavily dependent on hardware and manufacturing sectors as is the case with its share of total value added and total employment, which is mainly supported by the computer, electronic and optical product sector.


Source: OECD (2015)

Figure 2.4 World Exports of ICT Goods, 2001, 2007 and 2013

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Note: Percentage shares of total world exportsSource: OECD (2015)

Figure 2.4 World Exports of ICT Goods, 2001, 2007 and 2013 Figure 2.5 OECD and Major Exporters of ICT Services, 2001, 2007 and 2013

Magnified

53

In the OECD area, the ICT industry accounts for almost 33% of total business expenditure on research and development (BERD) and 0.5% of GDP as of 2013. Korea’s ICT BERD relative to GDP was the highest at 1.77%, with its ICT industry accounting for about 54% of total BERD. As shown in Figure 2.7, however, Korea’s ICT BERD is concentrated in ICT manufacturing.


Note: As a percentage of GDPSource: OECD (2015)

Figure 2.6 ICT and Total Business Expenditure in R&D Intensities, 2013

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Korea’s innovation activities in ICTs, measured by ICT R&D and patents, turned out to be active. In the OECD area, ICT-related patents accounted for 37% of all applications, a decrease of 2.8 percentage points from the 2000~2002 level, while Korea’s ICT patent applications moved up slightly from 42.5% in 2000~2002 to 47.8% in 2010~2012, taking top rank among the OECD countries.


Figure 2.7 Business R&D Expenditures in the ICT Sector, 2013

Figure 2.8 ICT-Related Patents, 2000~2002 and 2010~2012

Note: As a percentage of total ICT patent applicationsSource: OECD (2015)

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Although its international R&D ranking based on the number of SCI papers is high, Korea’s qualitative level does not match its quantitative ranking. Korea produced a total of 51,051 SCI papers in 2013, taking 12th place among all other countries in the world. It represents a 3.4% increase in the number of papers published and a two-place drop in the ranking compared to 2012 as the share of Korean papers to the total number of papers published in the world decreased marginally from 2.75% in 2012 to 2.73% in 2013.

Table 2.1 Number of SCI Papers in 2013: High-Ranking Countries

Country2012 2013

Number of Papers, Percentage Change

(YoY, %)Number of Papers Ranking Share

(%)Number of

Papers Ranking Share(%)

U.S. 373,224 1 20.80 378,625 1 20.22 1.45

China 187,766 2 10.47 219,281 2 11.71 16.78

U.K. 104,714 3 5.84 109,026 3 5.82 4.12

Germany 100,048 4 5.58 102,271 4 5.46 2.22

Japan 77,827 5 4.34 78,447 5 4.19 0.80

France 69,316 6 3.86 70,732 6 3.78 2.04

Canada 61,342 7 3.42 62,804 7 3.35 2.38

Italy 58,450 8 3.26 61,963 8 3.31 6.01

Spain 53,967 9 3.01 55,096 9 2.94 2.09

Australia 48,965 11 2.73 53,296 10 2.85 8.85

Korea 49,374 10 2.75 51,051 12 2.73 3.40

Figure 2.7 Business R&D Expenditures in the ICT Sector, 2013

Figure 2.8 ICT-Related Patents, 2000~2002 and 2010~2012

Note: SCI refers to Science Citation Index. This citation index, which is updated by Thomson Reuters Corporation every year, lists indexes of papers published in academic journals in the science and technology fields. The database covers various categories including materials science, engineering, computer science, pharmacology and toxicology, microbiology, chemistry, physics, and biology and biochemistry.

Source: Korea Institute of Science and Technology Evaluation and Planning (KISTEP) (2015)

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SCI citation counts per paper, which are considered as a qualitative measure of a paper, are 4.55 for the 2009~2013 period, ranking Korea in 32nd place. This is a far cry from the countrys’ quantitative standing.

It turns out that strong cooperation among R&D players has not been facilitated to a large extent in Korea. In a 2015 survey, Korea was ranked 25th among a total of 34 OECD countries surveyed on cooperation between companies. On the indicator of technology transfers between companies and universities, Korea came in 17th place among the 34 countries surveyed, joining the middle ranks. This shows that Korea has failed to fully create an open environment for technological development and commercialization through cooperation among R&D organizations.


Note: Citations per paper on a five-year rolling cycle are determined by accumulating citations from the year of publication and averaging citation counts for every five-year rolling period up until 2013. The rankings here refer to Korea’s ranks among the top 50 countries in terms of the number of papers on each five-year cycle.

Source: KISTEP (2015)

Figure 2.9 SCI Citation Counts per Paper

57

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (technological cooperation between companies)Source: Adapted from the IMD database

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Knowledge transfer is highly developed between companies and universities.)

Source: Adapted from the IMD database

Figure 2.9 SCI Citation Counts per Paper

Figure 2.10 Technological Cooperation between Companies, 2015

Figure 2.11 Knowledge Transfer between Companies and Universities, 2015

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According to an international survey conducted by the International Institute for Management Development (IMD), Korea turns out to be in the middle to low ranks among the OECD countries in terms of the human resources environment. On the questions on the availability of skilled labor, qualified engineers and information technology skills, Korea ranked in 17th, 21st and 14th place, respectively, among the 34 OECD countries surveyed in 2015. Furthermore, the country is highly likely to experience brain drain and, as a result, to face a shortage of highly skilled labor. The 2015 IMD survey ranked Korea only in 27th place on the brain drain indicator.

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Skilled labor is readily available.)Source: Adapted from the IMD database

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Qualified engineers are available in your labor market.)Source: Adapted from the IMD database

Figure 2.12 Availability of Skilled Labor, 2015

Figure 2.13 Availability of Qualified Engineers, 2015


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Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Information technology skills are readily available.)Source: Adapted from the IMD database

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Brain drain (well-educated and skilled people) does not hinder competitiveness in economy.)


Figure 2.14 Information Technology Skills

Figure 2.15 Brain Drain as a Hindrance to Competitiveness, 2015

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According to IMD surveys, compared with other OECD countries, Korea provides a higher level of administrative support, whereas it has an inadequate fund-raising environment. In a survey on loan and venture capital availability, the IMD ranked Korea low, 27th place out of the 34 OECD countries surveyed for both criteria. This indicates that it is not easy to raise funds for new businesses in Korea. On the other hand, in terms of the administrative environment to facilitate the process of starting a new business, Korea has quicker and simpler procedures placed in fourth and fourth place for Days to Start a Business and Procedures to Start a Business, respectively.

Figure 2.17 Credit, 2015

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Venture capital is easily available for business.)Source: Adapted from the IMD database

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Credit is easily available for business.)Source: Adapted from the IMD database

Figure 2.14 Information Technology Skills

Figure 2.15 Brain Drain as a Hindrance to Competitiveness, 2015

Figure 2.16 Venture Capital, 2015


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Figure 2.18 Number of Days to Start a Business, 2014

Figure 2.19 Startup Procedures, 2014

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It is indicated that Korea’s ICT infrastructure remains the best in the world. As a result of a comprehensive assessment conducted by the International Telecommunication Union (ITU) on the ICT infrastructure level including ICT access, use and skills of 167 countries around the world, Korea reclaimed the first place in 2015, after heading the list in both 2012 and 2013 and stepping down by one place in 2014.

Table 2.2 Korea’s Rankings in ICT Development Index, 2013 ~ 2015

2013 2014 2015

Rank Rank Rank

ICT Development Index (Overall) 1 2 1

ICT Access 11 8 9

• Fixed-telephone subscriptions per 100 inhabitants 1 3 4

• Mobile-cellular telephone subscriptions per 100 inhabitants 70 79 71

• International Internet bandwidth (bit/s) per Internet user 63 82 71

• Percentage of households with a computer 21 28 37

• Percentage of households with Internet access 1 1 1

ICT Use 2 3 4

• Internet users per 100 inhabitants 15 17 15

• Fixed broadband Internet subscriptions per 100 inhabitants 5 6 6

• Wireless broadband subscriptions per 100 inhabitants 5 9 13

ICT Skills 1 2 2

• Gross enrollments: Secondary 48 51 54

• Gross enrollments: Tertiary 1 2 2

• Adult literacy rate 15 20 22


Note: The total number of countries surveyed was 157 in 2013, 166 in 2014, and 167 in 2015.Source: e-Nara Index (http://www.index.go.kr/)

Figure 2.18 Number of Days to Start a Business, 2014

Figure 2.19 Startup Procedures, 2014

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The following comparisons on ICT infrastructure usage levels can be made between Korea and other OECD countries on the business and individual levels. Let us look at businesses first.

When measured against broadband connectivity, Korea has the third highest connection with a similar penetration level to that of Finland (100%) and the Netherlands (99.6%). In terms of broadband connectivity by business size, there is practically no difference among enterprises, from large to small, as they are equipped with a high level of broadband connectivity. On the other hand, in terms of enterprises with a web presence, Korea reported 61.3%, far below the OECD average of 76.2%. In particular, 90% or more of large-sized enterprises (with 250 or more employees) had a website in 26 OECD countries, indicating little difference among the member states. On the contrary, a considerable gap was found for smaller businesses. For small-sized enterprises (with 10 to 49 employed) and medium-sized enterprises (50 to 249), the number is at 90% or above in Denmark, Finland and Switzerland, while it is at 58.0% and 77.7%, respectively, in Korea, showing a significant divide. It should be noted that the website or homepage usage rate in Korea recorded a meager growth of 1.6 percentage points for five years after 2009, while the uptake in the OECD area increased by about 6.9 pp.

Source: OECD (2015)

Figure 2.20 Broadband Connectivity by Size, 2010 and 2014

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Next, in terms of cloud computing services, about 22.1% of OECD enterprises use them as of 2014. Uptake is over 40% in Finland (50.8%), Iceland (43.1%) and Italy (40.1%), while only about 10.4% of all Korean companies use such services. Even among large businesses with 250 or more employees, uptake is at 27.1%, much lower than the OECD average (37.7%).

Source: OECD (2015)

Source: OECD (2015)

Figure 2.21 Enterprises with a Website or Homepage by Size, 2009 and 2014

Figure 2.22 Enterprises Using Cloud Computing Services by Size, 2014Figure 2.20 Broadband Connectivity by Size, 2010 and 2014

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Meanwhile, the following have been found on the uptake of ICT infrastructure by individuals, based on their e-commerce activities over the Internet through a fixed or mobile connection. In 2014, 51.8% of individuals in Korea made online purchases, the 18th highest among the OECD countries and is similar to the OECD average (50.0%). However, the percentage of individuals having ordered via a handheld device was the second highest at 18.7% after the U.K. (19.1%).

Figure 2.23 Diffusion of Online Purchases including via Handheld Devices, 2007 and 2014

Note: Individuals having ordered goods or services online as a percentage of all individualsSource: OECD (2015)

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When it comes to the level of electronic government, a barometer for the progress of the government’s ICT initiatives, Korea is ranked very highly in the world.

Next, regarding policies to help the ICT industry to advance further, it is not easy to make uniform comparisons because they vary significantly in meaning and level among different countries. Also, most of the policies, although introduced to foster the industry, are meant to support overall industrial development rather than specifically targeting the ICT industry. For this reason, this chapter focuses its attention on international surveys that serve as the basis of industrial promotion.

First, on an indicator representing the environment that supports technology development, Korea was not rated highly. On the survey question of “laws relating to scientific research do encourage innovation,” the country was placed among the middle players (21st place out of 34 countries surveyed).

6. Industry-Friendly Policies and Legislation²)

2) It is very difficult to evaluate policy levels of different countries, and it is virtually impossible to make genuinely objective comparisons.The reasons are that, in most cases, there are no objective and quantitative measures to asssess the formulation, implementation and evaluation of a policy, and that evaluation criteria, too, may vary substantially depending on th goals and inherent values of the policy. In this regard, this chapter compares the levels of policies and legal systems designed to secure competitiveness in the ICT industry by using international surveys (IMD and WEF) and some of quantitative data available. Since the analysis herein is based mostly on survey results, more caution is advised in interpreting the results than those produced with other methods.

Figure 2.23 Diffusion of Online Purchases including via Handheld Devices, 2007 and 2014

Figure 2.24 Scientific Research Legislation, 2015

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Laws relating to scientific research encourage innovation)Source: Adapted from the IMD database

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6. Industry-Friendly Policies and Legislation

Second, corporate tax rates on domestic companies are at a maximum of 22% as of the reference year (2015). It is 14th lowest out of 34 countries surveyed, which positions Korea in the middle ranks. For the legal framework and environment that strengthens corporate competitiveness and the extent of laws and regulations in place in this respect, Korea was rated low, ranked 27th and 25th out of 34 OECD countries surveyed, respectively.

Figure 2.25 Corporate Tax Rate on Profit, 2015

Figure 2.26 Legal and Regulatory Framework, 2015

Note: Maximum tax rate, calculated on profit before taxSource: Adopted from the IMD database

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (The legal and regulatory framework encourages the competitiveness of enterprises.)

Source: Adopted from the IMD database

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Next, let us look into evaluations of the Korean government’s ICT policies. According to the WEF Report (2015), on the survey question regarding the extent to which the government has a clear ICT plan to improve the country’s national competitiveness, Korea was highly evaluated, taking 15th place out of 143 countries surveyed3). On the indicator of the government’s policies to promote the use of ICTs, Korea was ranked 11th place among the 143 countries surveyed4), whereas it came in 24th place on the question of how developed laws relating to the use of ICTs (e.g., e-commerce, digital signatures and consumer protection) are5).

Note: IMD WCY Executive Opinion Survey based on an index from 0 to 10 (Ease of doing business is supported by regulations.)Source: Adopted from the IMD database

Figure 2.27 Ease of Doing Business, 2014

Figure 2.25 Corporate Tax Rate on Profit, 2015

Figure 2.26 Legal and Regulatory Framework, 2015

3) Survey question: “To what extent does the government have a clear inplementation plan for utilizing ICTs to improve your country’s overall competitiveness” (WEF, 2015)

4) Survey question: “In your country, how successful is the government in promoting the use of information and communication technologies (ICTs)?” (WEF, 2015)

5) Survey question: “How developed are your country,s laws relating to the use of ICTs (e.g., electronic commerce, digital signatures,

consumer protection?” (WEF, 2015)

Trends of Online-to-Offline (O2O) Commerce in and out of Korea

Part III

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In its early days, “O2O” meant a general online-to-offline business model that attracts digital shoppers through online sites and supports them at brick-and-mortar stores by using ICT technologies. For example, retailers and service providers can send discount coupons to consumers when they come close to their offline stores using near-field communication (NFC) or location-based (LB) technologies to bring potential customers in. Furthermore, they can come up with effective marketing ideas through an analysis of the data gathered and accumulated from customers attracted this way6). More benefits can be awarded to loyal customers based on information on visiting customers, and other customer management practices can be fine-tuned further. These advantages brought O2O into the spotlight as a means to increase profits for offline stores.

In the initial stage of the PC-based online market environment, the growth of electronic commerce was largely driven by search ads and open markets based on extensive data. Around this time, e-commerce was available only through PCs installed at fixed locations, making it very hard to entice online shoppers to visit offline stores. This created a clear boundary between electronic and offline commerce. However, the advent of smartphones that enable users to shop online while on the move served as a catalyst for change in the e-commerce market. Going beyond the limitations of past marketing practices focusing on consumers in fixed locations, companies can now engage in more aggressive marketing initiatives to attract consumers, for example, by delivering digital coupons to people around their physical stores.

However, O2O has been extended from its narrower concept of bringing online shoppers into offline stores to the current concept of mutual support in both directions. It now refers to both online-to-offline and offline-to-online connections.


6) Allowed only if consumers have agreed to the use of their personal information. It is illegal for a business operator to use such information arbitrarily.

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Figure 3.1 Concept of Online to Offline (O2O) Commerce

Source: IITP (December 2014)

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Figure 3.1 Concept of Online to Offline (O2O) Commerce

7) A device that consists of an ultra-small chip carrying product data and an antenna transmitting data wireless.


2.1. Short-Range Communication Technology

Advances in short-range wireless communication technologies and the emergence of easy-to-use mobile payment systems have facilitated the development of O2O services. NFC and Beacon, which are low-power short-range communication technologies, in particular, are cited as key drivers for O2O services. Let us look into the two main technological enablers.

2.1.1. Near Field Communication (NFC)

NFC is conceptually an extension of Radio Frequency Identification (RFID)7) technology. Similar to Bluetooth, it is one of the wireless tag technologies that enable wireless communication between devices over short distances. NFC allows data to be transferred between devices within 10 centimeters from and to each other using a contactless close-range wireless communication module operating on the 13.56MHz frequency band. This technology is widely used for food ordering, device-to-device

payment, healthcare, and most actively for mobile payments.

One of the key characteristics of NFC is that it works not only as a tag but also as a tag reader and even a writer that puts data into a tag because it can operate a device with a built-in tag in an active mode. Moreover, devices can communicate by contact alone, without separate settings having to be made on them. NFC is highly secure because it is limited to shorter distances than other short-range communication technologies.

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Table 3.1 Examples of NFC-Based Application Services

Classification Forms of Services

Application services enabled by contact

between mobile devices

Payment Make payment

Fund transfer Transfer money by linking online accounts

Name card exchange

Exchange name card information such as contact and e-mail addresses

Pairing Wireless connection to exchange data between devices

Application services for managing

personal information

Personalauthentication

Authenticate access to entrance doors (door locks)

Authenticate users for electronic goods such as laptops, etc.

Access control Remote control for buildings and vehicles

Application services related to data provision and

customized ads

Tourist informationProvide museum and other tourist information (voice and text) as wellas directions

Medical services Manage medical records

Parking Locate a parking space

BookingBuy a ticket by contact with a poster

Public transportation ticketing, etc.

Ads/coupons Run location-based advertisements and offer coupons

Product informationView product information, authenticate genuine goods, track history,and provide manuals and after-sales servicing information

Content purchasing Download content such as e-books and music

Social networking Send data read from a tag straight to a social network

IHS (2014) predicted that global shipments of smartphones equipped with NFC technology would continue to increase. Indicatively, worldwide shipments of NFC-enabled smartphones are forecast to record 120 million units in 2012 and 275 million in 2013 (a year-on-year growth of 128%), and further climb to 416 million in 2014 (a 50% increase from the previous year). These upward trends will continue until they reach the 1.2 billion-unit level in 2018. NFC is used largely for payment systems in the O2O market. With Apple adopting the NFC technology for the mobile payment services in its iPhone 6, the growth of NFC is expected to be accelerating.


Source: Korea Institute for Industrial Economics Policy (2011)

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2.1.2. Beacon

The dictionary definition of ‘beacon’ is a ‘device that sends a signal to the other party or object,’ as a traffic light or a radio transmitter does. ‘Beacon’ in this paper refers to a device that utilizes Bluetooth 4.0 for short-range wireless communication. A beacon sends and receives signals to enable location-based communication over short distances, and it can also transmit and receive pre-determined data when attached to a specific location or object. Furthermore, an Internet of Things (IoT) environment can be created simply by attaching beacons to objects that do not have IoT capabilities.

Figure 3.2 World Shipments of NFC-Enabled Smartphones

Figure 3.3 Uses of Beacons

(In millions of handsets shipped)

Source: IHS Inc. (2014)

2.1. Short-Range Communication Technology

Source: Estimote website

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Beacons are largely used for O2O marketing purposes to entice potential consumers around stores (within 70 meters) to walk in by offering discount coupons or other promotional offers. It should be noted that beacons have the advantage of small margins of error, which ensures accuracy in product information delivered to consumers8), and that their energy consumption is low.

As examples representative of beacon-based O2O services, Apple’s iBeacon and SK Planet’s Syrup can be cited. First, iBeacon is a service that broadcasts information on in-store discounts and offers such information to consumers within reach of its signal, using Bluetooth Low Energy (BLE). Also, when a consumer steps into the store, iBeacon displays information on products available within the store as the customer moves around. SK Planet’s Syrup is also a BLE-based application with membership cards and coupons integrated together. More than 13 million people are using the app in Korea today. When they step into a beacon-installed store, they are alerted about membership cards and coupons accepted by the store. Meanwhile, at a coffee shop, a smartphone app called Syrup Order takes care of the entire process of having to standing in line before the counter, ordering a coffee, taking out a credit card, and making payment.


Figure 3.4 Beacon vs. NFC

Source: Qvoss Lab (2014)

8) Bluetooth 4.0 does not have a great impact on the battery life of a device, such as a smartphone, with its power consumption reduced by up to 90% compared to its older 3.0 version. Moreover, there is no limit to the number of devices that can be connected.

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2.2. Mobile Payment Market

The mobile payment market is expected to keep growing as the O2O market grows. According to Gartner, the global mobile payment market will maintain its steady growth for the next five years (2012~2017), recording an annual average growth rate of 35%. In 2017, worldwide mobile payment transactions are projected to reach $721.4 billion in value, while the number of mobile-payment users worldwide are forecast to reach 450.21 million, with the number of transactions growing to 23.2 billion (Gartner, May 2013).

Figure 3.4 Beacon vs. NFC

Figure 3.5 Apple iBeacon

Source: Lifestream Creations (2014)

2.2. Mobile Payment Market

Figure 3.6 Mobile Payment Market Forecasts, Worldwide (2012~2017)

Source: Gartner (May 2013)

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Juniper Research (2014) predicted that Apple’s adoption of NFC technology in its mobile payment service, Apple Pay, in September 2014 would help drive up the worldwide share of NFC-enabled mobile payment systems dramatically in the future.

The NFC adoption rate in 2010 before O2O services started in earnest was about 8.1% in the overall mobile payment market, but is now expected to grow gradually as Apple chose NFC. By 2017, it is projected that 25 percent of U.S. and European consumers will use NFC for payment (Juniper Research, 2012).

Apple introduced NFC in its mobile payment services despite iBeacon’s ability to support mobile payment on its own. The reason is considered to be Apple’s decision to reduce security concerns including potential personal data leaks. The NFC approach ensures higher security because it makes payment through direct device-to-device contact. It does not require retailers to store card data separately, either, which lowers the risk of leaking personal data. Having been adopted already for not only smartphones but also digital cameras, printers and multi-functional printers, NFC has expanded its coverage and gained considerable ground in data transmission and payment service markets. Apple is now employing a strategy of maximizing the advantages of both technologies by using iBeacon for diverse location-based information, while applying NFC for mobile payment.

Paypal, which is the payment system of eBay, the largest open market in the U.S., is another good example of the use of beacon technology for mobile payment, aside from the above-mentioned Syrup Order. When a Paypal customer enters a beacon-installed store, Paypal automatically displays information about the customer on the merchant’s POS (Point Of Sales)9). Upon billing, payment is made automatically on the customer’s smartphone.

Beacon and NFC are two different technologies, ultimately pursuing two different goals in the O2O market. As shown in the Apple case, they are likely to evolve as complementing each other and need to co-exist by making up for their respective disadvantages.


9) A combination of cash register and computer terminal. It is also called a Point-of-Sale data management system.

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3.1. Japan

Japan’s O2O market is estimated at 24 trillion yen as of 2011 and expected to more than double to 50 trillion yen by 2017 (NRI, 2013). O2O is a considerably big market, especially when taking into consideration that Japan’s B2C (Business to Consumer) e-commerce market is worth about 8.8 trillion yen as of 2011.

The type of business where O2O commerce is the most active in Japan10) turns out to be travel and transportation. 38 percent of consumers are reported to obtain relevant information on the Internet before actually embarking on travel or using a means of transportation. The food business is reported to have the second highest share of the O2O market (27%). On the other hand, the type of business with the lowest percentage of O2O commerce is gas stations (6%).

Figure 3.7 Japan’s O2O Market Size

(In trillion yen)

Source: NRI Knowledge Insight (2013)

10) NRI reports the percentage of consumers who actually make purchases in brick-and-mortar stores referencing information on the Internet.

24.4

29.8

34.9

39.6

43.8

47.6

50.9

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Table 3.2 Top and Bottom Businesses in the Japanese O2O Market

Businesses with a high share of O2O commerce Businesses with a low share of O2O commerce

Rank 1Travel and

transportation38% Rank 1 Gas stations 6%

Rank 2 Food 27% Rank 2 Medicine 12%

Rank 3Hobbies and entertainment

26% Rank 3 Beauty services 13%

NTT Docomo is one of the most representative O2O business operators in Japan. As the No. 1 mobile network operator in Japan, NTT Docomo has been offering “Shot Platform” in partnership with offline stores since February 2013. This O2O service started with about 170 stores mostly in Tokyo and was expanded to 800 within six months. Shot Platform not only sends users specific information on stores near their current locations based on location data from their smartphones, but also recommends stores and offers discount coupons and points tailored to their age and gender. It particularly gives points to users just for visiting specific stores, which can be traded with a gift voucher. NTT charges each store 10 thousand yen a month for using the platform and a fee of 30 yen per customer check-in.

An O2O approach utilizing Mobile Instant Messaging (MIM) is also attracting attention. Mobile messaging app Line, which has more than five million subscribers in Japan, delivers discount coupons to its users in partnership with O2O businesses. Lawson, a convenience store franchise chain in Japan, recently sent 1.5 million Line subscribers 50% discount coupons, and about 100,000 of them visited Lawson stores in three days.

3.2. China

As of 2012, as many as 43% of smartphone subscribers in China use mobile shopping services, and O2O users are estimated at 135 million. The market was reported to have grown by 75.5% from the previous year to 98.68 billion yuan in 2012. Considering its rapid growth trends, the Chinese O2O market is projected to reach a maximum of 418.85 billion yuan by 2015 (iiMedia research 2013, Moobuu 2013).

Source: NRI Knowledge Insight (2013)

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3.2. China

As the O2O market grows drastically, a number of enterprises in China engaged in a variety of businesses have entered the market. It should be particularly noted that all of the BAT (Baidu, Alibaba and Tencent) companies, the most influential online media giants in China, have advanced into the O2O market.

Baidu is expanding its O2O business focusing on Baidu Local Express, a marketing solution platform for regional service providers, as well as Baidu Map, Ctrip (online travel agency) and Qunar, while building on Nuomi, a social commerce site, as its core platform.

The Chinese e-commerce giant Alibaba has not only occupied the O2O market by entering it at the initial stage of market formation but also is equipped with a payment

system called Zhifubao (also known as its English name Alipay). Zhifubao is an escrow11)

service provider affiliated with Alibaba and is currently the largest payment system in China. Zhifubao holds the consumer’s fund for payment and sends it to the seller only after the transaction is completed without problems.

In the meantime, Tencent, one of the biggest Internet portal companies in China, also entered the O2O market through Weixin (WeChat in English) in September 2013. Weixin is Tencent’s mobile messaging app with a membership of more than 600 million as of September 2013. Tencent has been growing in the O2O market, allying with companies in various fields. For example, it recently teamed up with Wangfujing Department Store to launch a project called “Weixin Shopping.” Under this program, the moment a Weixin user scans the barcode of a product on display at the department store, relevant data is transmitted straight to the platform that sells the product and an order is placed for it. The company also partnered with McDonalds and Intime Department Store to create Weixin accounts and provide online shopping services for them. Tencent has a payment system (called Caifutong, whose English name is Tenpay) for Weixin, too. It is convenient to use: When a customer scans a QR code at a store, relevant data is sent to the store’s Weixin account, and the user has only to key in his/her password to make payment.

11) A service designed to protect trades. A third party serves as an intermediary to help commercial transactions run smoothly when there is no credit relationship between buyer and seller.

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3.3. United States

The leader in the U.S. O2O market is the e-commerce company Amazon. Having recently launched its O2O business, the leading online service provider supports the consumption process from end to end. “Fire Phone” unveiled by Amazon has a feature called “Firefly.” The user can view all the information on a product including its price and seller by taking a photo of the product using the five front-facing cameras of the phone and can buy it straight from Amazon. Furthermore, the user can pick up a product that they bought from Amazon at an “offline pickup locker” without having to wait for delivery. “Dash,” another O2O service offered by Amazon, starts its service from the moment when you feel that you need to buy a product: Say the name of a product that you want to an IoT device or scan its barcode, and the product will be stored under your online account. “Dash Button” is an IoT terminal linked to household items consumed and replenished frequently, such as detergent. You can place an order for a desired product under your online account simply by pressing the button. Amazon’s Dash is a more state-of-the-art O2O service that is delivered through integration with IoT technology. In addition to this, Amazon launched “Amazon Payment,” an online payment service system similar to Paypal, last year. Amazon Payment allows customers to send or deposit money as well as to make payment at shopping malls or e-commerce websites using their Amazon accounts. Amazon also unveiled a mobile payment system called “Amazon Local Register.” The company provided local merchants with the mobile app and card reader to accept credit card payments.

Next, “Uber” is cited as a representative of the sharing economy. Uber enables individual consumers to share their offline assets such as cars and houses with others. Initiated in the U.S. in August 2009, this mobile app allows smartphone users to call a car such as a taxi. Once you register your destination on the mobile app, an Uber-registered car nearby picks you up. The passenger pays for the ride, just like a taxi fare, using a registered payment method including credit cards. In the meantime, Google has been integrating diverse O2O services by adding the largest online restaurant booking service in the US, “Open Table,” to its Google Maps as well as Uber as one of their transportation options under Directions on Google Maps.

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3.4. Korea

3.4. Korea

KT Economic Research Institute estimates Korea’s offline commerce at about 300 trillion won and its online commerce at about 44 trillion won, including its mobile commerce worth 15 trillion won, as of 2014. Defining the intersection of online and offline commerce markets as an O2O market, the institute also predicts that the Korean O2O market will expand to 300 trillion won a year as advances in mobile and IoT technologies drive up the online market and the growth of the intersecting O2O market as a result.

With a variety of companies−existing merchant companies such as discount stores and department stores and, Internet platform providers such as Daum Kakao and Naver, as well as startups−entering the market, the Korean O2O market has evolved from its initial phase of connecting offline stores with consumers via delivery apps to advanced forms of services that not only provide personalized services but also connect and integrate online and offline worlds together. Let us briefly look at O2O services offered by major companies in Korea.

Figure 3.8 Size of the Potential Korean O2O Market

Source: KT Economic Research Institute (December 2014)

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Examples of offline firms expanding their business channels online include Lotte Department Store and Kyobo Book Centre. Lotte Department Store’s “Smart Coupon” delivers coupons using location data when the prospective customer walks around for shopping in one of their branches, while Lotte Mart’s “Smart Pick” allows a customer to pay for a product online and pick it up at an offline store. Kyobo Book Centre launched a quick book checkout service called Baro Drim, which allows a customer to make a mobile payment for an item at one of its brick-and-mortar bookstores at a cheaper price than its corresponding offline price and acquire it right away on site.

Incumbent platform operators also offer O2O services. Platform operators with a large customer base such as Daum Kakao and Naver can easily provide O2O services by adding offline services to their platforms. Daum Kakao’s flagship O2O service “Kakao Taxi” combines taxi services with its mobile platform. Once you specify your starting point and destination using the Kakao Taxi mobile app and then call a taxi, your location is automatically identified and a taxi is dispatched. It also has a feature that makes it easier and safer to use a taxi: You can send a message containing information on the taxi to a friend. As of September 2015, Kakao Taxi recorded 20 million calls accumulated since its launch in March 2015 and an average of 240,000 calls a day.

Naver started its O2O platform business in full scale through its mobile O2O platform “Shop Window,” which went live officially in December 2014. Only offline businesses can join Shop Window, which consists of three windows: Style window for fashion, Living window for household items, and Fresh window for food. One of the core elements of Naver’s O2O platform business is “Naver Pay.” It allows a user to make payment, load or accumulate points and even send money conveniently and safely using his/her Naver ID. Naver Pay started its commercial service officially in June 2015 with a view to providing users searching for products in the Naver portal site with a seamless shopping experience, taking them all the way through to the payment stage. It encompasses all the features required for e-commerce including credit card payment as well as fund transfer, person-to-person remittance and point accumulation and loading.

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3.4. Korea

Startup companies are making a vigorous entry into the O2O service market, too. For example, a startup called Vendys developed a “meal coupon” app that links companies and their employees with local food service providers. Using the app, employees can use company-loaded points to have a meal at a member restaurant near their company or buy a “Gifticon” (mobile gift voucher) for lunch at a franchise restaurant, such as Starbucks, The Coffee Beans, Burger King or KFC.

Table 3.3 O2O Services in Korea and their Evolution (Example) (In USD trillions, %)

Phase Description

(Initial Phase)Simple link between

offline stores and consumers

• Buy online (via a smartphone app, etc.)→Offline→Delivery to consumer:An early form of O2O services. Examples include food delivery apps, such as “Baedal Minjok (People of Delivery)” and “Yogiyo.”

• Online delivery (of coupons and information such as product recommendations on the social media)→Lead consumers to visit and buy offline

(Phase 2)Offline services used and simple payment methods

available

• Buy online→Get offline services: An example is a call-a-taxi service through a smartphone app, such as “Easy Taxi” and “Kakao Taxi.”

(Phase 3)Connection and

integration of online and offline worlds

• Buy online→Visit offline→(Consumer) picks up a product or service: Examples include SK Planet’s Syrup Order and Starbucks’ Siren Order. At this phase, personalized services are offered. (When you run the app, affiliated stores nearby and their menus are displayed in detail. You place an order and pay for it on the mobile device without visiting a store in person→Alerted when the ordered product or service is ready→You visit the store and pick up the product/service without having to wait.)

• You are in or around an offline store→Your presence is recognized through a beacon, etc.→Online delivery (discount coupons or product information)→Entice you to visit an offline store and make a purchase:Lotte Department Store’s Smart Coupon is an example.

Source: IITP (December 2014)

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Conclusion

In 2015, ICT production and exports are estimated to report low year-over-year

growth rates of about 1.3% and △1.9%, respectively, and the slow growth trends will likely continue into 2016. This is attributed to the structural limitations of Korea’s manufacturing-oriented ICT industry, as indicated in the above chapters by its international comparisons with OECD economies, in addition to the effects of the insecure global economic climate. In the case of the former, in particular, while the global ICT industry has been moving toward creating value added by offering new forms of services based on varying combinations of hardware and software applications, Korea has failed to respond agilely and thus has yet to create new markets. On the other hand, in the equipment and components area where it had superior strengths, Korea can no longer maintain high growth as it is confronted with stronger competition from latecomers in the saturating markets.

Despite these changes in the ICT industry paradigm, the development of Korea’s ICT services industry has stalled, compared with ICT manufacturing, due to its weaker competitiveness in software and content. Consequently, its production and employment are still inconsiderable. Advances in production technologies for ICT manufacturing and the relocation of production bases to overseas sites have reinforced the importance of ICT services in domestic production and job creation. Under these circumstances, ICT services tend to be affected more by internal factors than external, unlike ICT manufacturing that is heavily dependent on external influences. With uncertainties in external circumstances growing higher, the ICT services industry is expected to contribute to economic stabilization once it grows to a certain size. For this reason, a more flexible legal and institutional environment needs to be created to ensure the balanced growth of the ICT industry by facilitating growth of ICT services. It should be accompanied by plans to improve the understanding of the direction of technological changes and its impact on the society and strengthen efforts to create a variety of new services based on the deepened understanding. Furthermore, the fundamentals of the Korean ICT industry should be strengthened by achieving qualitative enhancement on technological innovation, talent nurturing, and the labor market environment, which are constantly pointed out as vulnerable in international comparisons.

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In this respect, we should pay more attention to O2O commerce. It has the potential of a new growth engine for Korea’s ICT industry, which is currently focused on manufacturing, as it facilitates the creation of diverse businesses in the process of connecting and integrating online and offline services as well as of expanding such businesses from domestic to overseas markets via the Internet. In order to invigorate the O2O market from which significant growth is anticipated, Korea needs to show its interest and support for ICT technologies that will build on the country’s ICT strengths−that is, ICT infrastructure−and create synergy with O2O, such as the IoT and big data. Also, to ensure that diverse ideas will be developed into new businesses, various types of enterprises, particularly startups, should be encouraged to enter the market vigorously and this requires support from the authorities. Lastly, a delicate coordination is required to strike a balance between the need for invigorating the industry and the need for mitigating concerns about personal information protection and security in the course of connecting online and offline transactions in O2O commerce.

Conclusion

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References

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References

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AboutThe Korea Information Society Development Institute

The Korea Information Society Development Institute (KISDI) was established in January 1985 as the only professional research organization specialized in policy studies regarding the information and communications sector. KISDI has conducted extensive research on the trend of the IT industry, and the transformation of the traditional economic structure in the emerging information society. KISDI also carried out studies on a regulatory framework for fair competition in the telecommunications service market. Along with the development of the information and communications sector in Korea, KISDI has contributed to the overall competitiveness of the nation by providing a vision and policy direction to the government in gearing up for the knowledge-based society.

For More Information, Please Contact

Jeong-Eon Kim, Ph.D. in Economics /[email protected]

Jungsook Oh /[email protected]

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