[INTERVIEW] KT seeks to change from dull telecom firm into fun platform

KT Chief Financial Officer Kim Young-jin responds to questions during a recent interview with The Korea Times at its headquarters in Gwanghwamun, downtown Seoul. Korea Times photo by Shim Hyun-chul

Company sees deepening collaboration with Netflix

By Kim Yoo-chul

Old-fashioned business models and aversion to risks have left Korean telecom companies lagging behind rivals in a cutthroat competition to innovate.

The country's telecommunications industry is already saturated, while increasing costs, stiff regulatory obligations and challenges in delivering promising technologies such as 5G and even 6G connectivity have taken the luster off the once promising sector.

From a profit standpoint, intensifying competition for customers forcing telecoms to offer bigger subsidies has been eroding margins and decreasing capital available to pursue innovations. Because there are virtually no new customers and little differentiation in pricing, returns on investments have been lackluster.

It's not an easy task for the country's top telecom companies to pursue digital transformation. Such a process includes a highly-integrated strategy, firm leadership commitment, richness in content, clear metrics and advanced technology architecture, according to experts.

Making such changes even more difficult are telecom companies' decades-old business models upon which they already invested heavily in networks.

But KT, the country's dominant fixed-line operator, hopes to break away from the pack.

"What differentiates KT the most is the company's better stock price performance compared to main local peers especially since the beginning of this year," the company's Chief Financial Officer (CFO) Kim Young-jin said in a recent interview with The Korea Times at its headquarters in Seoul.

KT shares have risen over 25 percent so far this year, according to Korea Exchange (KRX) data. KT ranked fourth in terms of the number of shares foreign investors bought during the first eight months of this year, while the company ranked ninth in terms of the amount institutional investors purchased during the same period, according to the KRX.

"The continued steady increase in KT's stock price is due to foreign investors' backing and appreciation of the company's efforts to seek business diversification as a provider of platform-based digital and content services. We are very positive about continuing to grow profits and revenues in targeted businesses we identified as sustainable," Kim added.

The common perception was that the complexity of both fixed and mobile networking domains would make a digital transformation harder. However, its finance chief said KT is accelerating the pursuit of two integrated types of transformation: slow-motion transformation and sprinted transformation.

The main point of the slow-motion transformation is that this type of change is usually seen when leaders implement a new vision with the passage of time required for actual execution.

Korea's telecom industry officials acknowledge the fact that they need to find new business models. Telecom companies have networks and this trait is actually helping them play a critical role in the digital economy as their existing core assets and data could support various emerging sectors, such as cloud, artificial intelligence (AI) and digital finance.

According to Kim, KT is very focused on the direction of becoming a digitally-driven organization, which is a time-consuming process. However, he said this is the necessary step in response to growing internal needs in conjunction with its sprinted transformation initiative. An example of a sprinted transformation includes the initiation of a new strategic initiative.

How does KT's content, digital platform work?

The actual strategic value of a digital platform is to pool the service offerings from multiple supplier bases and use shared orchestration, monetization and even application tools to provide new service bundles.

The CFO is well versed in such metrics and stressed that the company is well-positioned to offer digital and content-oriented platforms.

KT plans to invest at least $21 billion over the next five years to develop its digital capabilities, expand content and adopt AI technologies. By 2025, it aims to achieve a 50:50 telecom to non-telecom revenue ratio. Since March 2020, the company has invested 1.9 trillion won for strategic investments in digital finance, media content and robotics businesses.

The senior executive said given KT's extensive digital and fixed-line infrastructure, it is confident it will report 2 trillion won in revenue from its cloud computing business, which the company identified as one of its next growth engines, by 2026 from 450 billion won in 2021.

There are some dark clouds on the horizon as developed economies are suffering from a high level of inflation and Korea is not an exception from that trend.

Analysts said KT's operating expenses, which include fixed labor and services offered costs, will continue to increase during the remainder of this year.

But the CFO said the effects of these variables on the firm's profitability should only be temporary.

This image released by Netflix shows the main promotion for "Extraordinary Attorney Woo," showing that the drama has topped the list of 10 most-viewed non-English dramas from July 11-July 17, 2022. Korea Times file

"Rising interest rates and inflation have become the global trend and yes, KT will be affected by these external challenges. However, I think these factors could have a short-term impact on the company's profits," Kim said without elaborating further.

At the same time, the executive said the company hopes to widen the scope of its strategic partnership with Netflix. Behind the focus is the booming popularity of the drama, "Extraordinary Attorney Woo," which was co-produced by KT's content subsidiary, KT Studio Genie. KT invested around 13.2 billion won into the 16-episode drama, while Netflix is said to have paid 10 billion won for the broadcasting rights.

The drama was listed in the top five in Netflix's global ranking. It also topped the list in nine different countries including Japan, Taiwan, Thailand, Indonesia and Vietnam, while it also appeared on the U.S. top 10 list recently.

While this drama isn't a Netflix original, its popularity saw KT and its content affiliates benefit from Netflix's global distribution in conjunction with the U.S.-based streaming giant's strategy to distribute localized content internationally. Netflix is moving forward with its signature "glocalization of entertainment" initiative.

"The point is how we deliver well-made, in-house content to target audiences both locally and internationally through various channels," said the CFO, adding that KT Studio Genie plans to produce at least five more original content items this year.

Korean entertainment conglomerate CJ ENM recently inked a deal to invest in the KT content affiliate. The agreement calls for CJ Group's media affiliate to obtain the rights to content produced by the KT unit. In return, Studio Genie will strengthen CJ's TV channels tvN and OCN, as well as TVing, which aims to rival Netflix as the country's top streaming service.

But Kim declined to elaborate on the planned initial public offerings (IPOs) of its cloud and content businesses, as well as internet-only K bank.

"When it comes to the specifics of K bank's IPO, yes, I am fully aware of market concerns over the possibility of postponing the company's planned IPO due to growing uncertainties. K bank is qualified both in terms of growth potential and competitiveness as all key numbers, including number of customers, balance of deposits and loans grew, leading to higher profit."

The CFO added that KT is in the process of "regrouping" its units, aimed at maximizing value. "We will regroup our affiliates based on strengths and similarities." KT has increased its year-end dividend payout ratio to 5.9 percent.