The World of Pay TV

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Media/Telecom Service
The world of pay TV
Pay TV: Important to both media and telecom industries
As part of the media industry’s value chain, pay-TV operators provide broadcast services
and distribute content. Thanks to their monthly (fixed-sum) subscription systems, pay-
TV service providers enjoy steady cash flows, just as telecom companies (which use
similar fee structures) do. The pay TV business model, therefore, helps ensure stability
amid the media industry’s rapid changes.
We have noted the growing importance of media businesses within the telecom service
industry. Faced with stagnant population growth, domestic media and telecom firms
have had to actively diversify their subscriber-based businesses to ensure additional
growth. Fortunately, the switch from analog to digital broadcasting has allowed such
firms to diversify their sources of revenue, including VOD revenue from pay-TV
subscribers, and N-screen subscription and mobile data revenue from wireless
subscribers.
Time for a turnaround
In Korea, pay-TV service providers’ combined net profit has trended down steadily for
the past three years, as intense competition for new subscribers amid the transition to
digital broadcasting has resulted in lower ARPU and higher costs. However, it is worth
remembering that in the US, pay-TV operators—whose ARPU increased only modestly
during the digital conversion—saw a sharp increase in ARPU and accelerated cash flow
after the digital transition ended and the industry consolidated via M&As.
We believe the Korean pay-TV industry has reached a positive inflection point. The
digital transition is coming to an end, and corporate M&As and policy support could
provide a tailwind for the industry, helping to ease market competition. Moreover,
business models are diversifying, and earnings are anticipated to expand YoY on a low
base of comparison (due to one-off expenses recognized last year).
Maintain Overweight; Key recommendations are SK Telecom and KT Skylife
We maintain our Overweight stance on media and telecom services. Our key
recommendations are SK Telecom (SKT) and KT Skylife, which stand to benefit,
respectively, from growing personalization and improving picture quality in TV
broadcasts, and which also offer attractive dividends. Considering SKT’s plan to own SK
Broadband in its entirety, mobile momentum is likely to drive its media business. As for
KT Skylife, we raise our target price in light of expected positive changes in the business
environment after uncertainties lift. We also raise our target price for KTH and
Nasmedia, which are aiding the expansion of the pay-TV business.
Overweight (Maintain)
Industry Report
April 23, 2015
Daewoo Securities Co., Ltd.
[Telecom Service / Media]
Jee-hyun Moon
+822-768-3615
jeehyun.moon@dwsec.com
Market value of pay-TV operators expected to increase, backed by improving domestic
pay-TV business environment and earnings recovery
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined
Source: Company data, KDB Daewoo Securities Research
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion
- Marketing expenses
- Fall in ARPU with expansion of bundled products
- KT Skylife: One-off lawsuit cost
- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end
- Slowing fall in ARPU
- Removal of one-off costs
- More room for dividends with FCF
recovery

2
April 23, 2015
KDB Daewoo Securities Research
C O N T E N T S
Pay TV set to turn around 3
1. The most stable business model in the media space 3
2. Investment strategy: Time to consider overweighting pay-TV service providers 5
Industry trends at home and abroad 6
1. Slowly changing market 6
2. Consolidation: Still too many players 8
3. Switch to digital broadcasting nearing completion 11
4. Platform revenue: Leveraging tool 13
5. Regulatory and policy issues 15
Domestic market outlook 17
1. Consolidation: Four conglomerates to be dominant 17
2. Digital broadcasting: Mobile is key 19
3. Business models: Diversification 22
4. Expectations for policy tailwinds 26
5. Potential expansion of foreign capital 27
Valuation 28
1. Valuation gap with global peers narrowing 28
2. Expectations for dividends 29
Key Recommendations 30
SK Telecom (017670 KS) 31
KT Skylife (053210 KS) 39
CJ HelloVision (037560 KS) 44
KT (030200 KS) 48
LG Uplus (032640 KS) 52
KT Hitel (036030 KQ) 56
Nasmedia (089600 KQ) 59

3
April 23, 2015
Pay TV set to turn around
1. The most stable business model in the media space
(1) Digital conversion bringing new opportunities
Pay TV offers the most stable business model in the media segment. Pay-TV operators use
infrastructure (cable or internet networks) and distribution platforms to deliver content to
viewers. Monthly subscription systems (using fixed-term contracts) allow pay-TV operators to
enjoy stable revenue irrespective of changes in market conditions (a characteristic they share with
telecom service providers).
Currently, most monthly subscribers tend to use their subscriptions in combination with pay-per-
view (PPV). In the analog age, monthly subscriptions were the dominant source of revenue and
business growth, along with fees charged to home-shopping companies and commissions
collected from advertisers.
Now, the transition to digital broadcasting is offering more business opportunities to pay-TV
service providers. Besides monthly subscriptions, VOD revenue is growing (up to 20% of total
broadcast revenue for CJ HelloVision last year). Increasingly, VOD platforms are generating
revenue from related advertising, and there has also been a rise in T-commerce (data
broadcasting–based transactions). Alongside this business diversification, domestic pay-TV stocks
are rebounding gradually after the sluggishness caused by the digital transition and intensified
competition.
Figure 1. Relative share performances of global pay-TV operators: Korea has just joined the trend
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 2. Domestic pay-TV value chain and business model
Source: KDB Daewoo Securities Research
40
60
80
100
120
140
1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15
(1/2014=100) CJ HelloVision (KR) KT Skylife (KR)
Charter (US) Time Warner Cable (US)
Comcast (US) DirecTV (US)
Dish Network (US) Sky Perfect JSAT (JP)
Production/
programming
Device
Content provider
- Terrestrial
- Program provider
Cost Revenue
Subscriber
Revenue Revenue
Advertisers
Home shopping/
T-commerce
operators
Pay TV
- Cable SOs
- Satellite TV operators
- IPTV operators (telcos)
- OTT operators
Service/distribution
Program
usage fee
Service
usage fee
Trans-
mission
fees
Ad
costs

4
April 23, 2015
(2) Adapting to rapid changes in the media environment
With regard to consumer behavior and media, two major trends currently driving the industry are
personalized broadcasting services and improvement in TV picture quality.
Regarding personalization, media companies face a growing need to cover demand from both
individuals (using mobile media) and households (using TV). CJ HelloVision is taking the lead in
this area with Tving, an over-the-top (OTT) video service. Telcos that provide IPTV services are
also starting to offer mobile IPTV services.
TV makers that had been focused on hardware innovations such as 3D TV and smart TV are now
turning their attention back to picture quality. According to DisplaySearch, UHD TVs will get on
the path to commoditization, with annual sales volume projected to account for 10% of total TV
sales globally this year. Given the probable launch of UHD broadcasting, the government is
considering allocating licenses in the 700MHz frequency band to both broadcasters and telcos. In
addition, domestic terrestrial channels plan to increase production of UHD content this year, and
CJ E&M and KT Skylife are launching UHD-only channels.
Amid such changes in the business environment, traditional performance measures like market
share are becoming less relevant as boundaries between media segments blur. While cable system
operators (SOs) concentrated on expanding their market shares, telcos penetrated into the IPTV
segment and added mobile services to their portfolios.
Accordingly, media firms and telcos need to pay attention to trends in consumers’ inclinations
and lifestyles. For such companies, even more important than gaining market share from
competition is gaining the “life share” of consumers—i.e., the extent to which consumers are
exposed to a company’s media and content in their day-to-day lives.
In the pay-TV industry, both the quantity and quality of users’ experiences will increase in
significance. To broaden the extent of such experiences, companies may begin to expand their
footholds beyond TV to mobile media. To improve quality, we believe they will have to expand
VOD content offerings and UHD services.
Figure 3. Instead of market share, content producers’ “life share” of consumers now holds the key
Firm Firm
Market share “Life share”
Firm
FirmFirm
Firm Firm
FirmFirm
FirmFirm

5
April 23, 2015
2. Investment strategy: Time to consider overweighting pay-TV service providers
(1) Earnings normalization + benefits from changing industry paradigm
Major domestic pay-TV firms have seen their combined net profit shrink YoY for three straight
years. As the transition to digital TVs accelerated from 50% to 70%, companies increased
investments, which led to a rise in depreciation costs. Amid intensifying competition for
subscribers, companies’ ARPU declined while marketing expenses climbed. Furthermore, one-off
costs in 2014 dragged down pay-TV firms’ net profit to the lowest level in three years.
However, we expect both the market environment and earnings to improve this year. With the
transition to digital TV now in the final stage, pay-TV operators should see additional business
opportunities emerge, while their investment burden should ease going forward. The government
plans to introduce regulations on pay-TV bundled products (pay TV + telecom services), which will
likely help increase Korea’s pay-TV ARPU, which is currently the lowest level in the world.
Earnings are projected to improve this year due to the dissipation of one-off factors, the addition
of new revenue sources, and progress in the consolidation of the pay-TV industry. Furthermore,
as media firms’ free cash flow improves, they will likely be able to pay out larger dividends in a
more stable manner, as telecom plays do.
We advise investors to overweight media and telecom services firms that offer pay-TV services,
and present SKT and KT Skylife as our top picks. SKT is likely to benefit from the growing
personalization in TV broadcast services. With SKT planning to buy out the stake in SK Broadband
it does not currently own, mobile momentum is likely to drive its media business. Meanwhile, KT
Skylife stands to benefit from improving TV picture quality. The introduction of UHD set-top
boxes (scheduled for 1H15), the launch of dish convergence solutions (DCS), and increasing
platform revenue are anticipated to provide newfound momentum for the company. Both
companies are also attractive dividend plays.
We forecast CJ HelloVision to see sharp earnings growth this year on the back of a low base of
comparison (due to one-off costs, including an asset charge, recorded in 2014) and decreasing
MVNO losses. KTH and Nasmedia also merit attention, as they are aiding the expansion of the
pay-TV business.
Figure 4. Major pay-TV companies’ combined net profit and market value trend and forecast
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined; KT Skylife recognized one-off lawsuit cost in 3Q14
Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
Table 1. Domestic pay-TV industry
Production and programing Service and distribution OTT Additional revenue
SK Telecom
IPTV Btv
(subsidiary SK Broadband)
B tv Mobile
Subsidiary SK Broadband
(T-commerce)
Hoppin (subsidiary SK Planet)
CJ HelloVision Affiliate CJ E&M Cable SO Tving Parent CJ O Shopping
KT Skylife Subsidiary Skylife TV Satellite
LG Uplus IPTV tv G Uplus HDTV
KT IPTV Olleh TV Olleh tv mobile Subsidiary KTH (VOD, T-commerce)
Subsidiary Nasmedia (ad rep)
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion
- Marketing expenses
- Fall in ARPU with expansion of bundled products
- KT Skylife: One-off lawsuit cost
- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end
- Slowing fall in ARPU
- Removal of one-off costs
- More room for dividends with FCF
recovery

6
April 23, 2015
Industry trends at home and abroad
1. Slowly changing market
(1) Market shakeup: Entry of telcos into pay TV via IPTV
The domestic pay-TV market has experienced two major developments over the past decade:
digital conversion and the entry of telcos.
During the era of analog broadcasting, cable SOs occupied monopolistic positions in their local
operating areas, allowing them to generate stable revenues and profits. As the conversion to
digital broadcasting accelerated, however, cable SOs incurred additional investments and
expenses due to the provision of set-top boxes and the payment of retransmission fees to
terrestrial broadcasters. In the process, cable SOs with weak capital bases were merged together
or acquired by multi-system operators (MSOs).
Changes in the pay-TV market accelerated in 2007, when telcos entered the market via the IPTV
business. This caused the market’s digital conversion to pick up speed, as IPTV services are a form
of digital broadcasting using internet networks. It also caused competition to intensify, as IPTV
services were offered nationwide whereas cable SOs’ operations were restricted to local areas.
When telcos first introduced IPTV, it was in the form of bundled products for existing broadband
internet customers. As such, KT was the first to see its IPTV market share climb, given its higher
fixed-line market share. Now, with the bundling of both fixed-line and wireless products, SK
Broadband and LG Uplus are also gaining market share.
Figure 5. In the domestic market, 8 years was needed to reach 60% pay-TV digital conversion vs. 3
years to reach 60% LTE conversion
Source: MSIP, KCC, KCTA, KISDI, KDB Daewoo Securities Research
Figure 6. Average annual number of subscribers (by technology type) in domestic pay-TV market
Notes: Redundancy caused by OTS (bundling of KT IPTV and KT Skylife) not removed
62%
74%
2%
63%
0%
20%
40%
60%
80%
05 06 07 08 09 10 11 12 13 14
Digital conversion rate
LTE conversion rate
0
5
10
15
20
25
30
05 06 07 08 09 10 11 12 13 14
(mn persons)
IPTV (+18% over the past 3 years)
Satellite (+4% over the past 3 years)
Cable SO (-0.5% over the past 3 years)

7
April 23, 2015
(2) Pay-TV ARPU has grown in overseas markets
With the digital conversion nearly complete, pay-TV ARPU is likely to climb, as the advanced
equipment required for digital broadcasting should enhance service quality. In the domestic pay-
TV market, monthly fixed-rate subscription fees for digital broadcasting range between W9,000
and W15,000, while those for analog broadcasting stand at W4,000-W5,000.
According to Informa data quoted by the Ministry of Science, ICT and Future Planning, Korea has
a monthly average pay-TV ARPU of around US$7, which is far lower than those of the US
(US$87), Australia (US$70), Japan (US$56), and even Indonesia (US$12).
Of note, in the US pay-TV market—which completed the digital conversion before Korea, in
2010—ARPU has been rising since 2011. In the Korean market, digital conversion is still
underway. As of end-2014, the overall conversion ratio reached 74%, while the SO market
conversion ratio stood at only 49%. CJ HelloVision, a major cable SO, saw a drop in average
revenue per subscriber (ARPS) despite the acceleration of digital conversion, as bundling
discounts increased due to higher competition for subscribers. However, we expect ARPU to pick
up going forward, aided by the completion of digital conversion and the government’s policy
support.
Figure 7. Pay-TV monthly ARPU by country: Korea has the lowest level
Source: MSIP, Informa, Bloomberg, KDB Daewoo Securities Research
Figure 8. Time Warner Cable’s pay-TV ARPU and share price Figure 9. CJ HelloVision’s pay-TV ARPS and share price
Source: Bloomberg, Thomson Reuters, KDB Daewoo Securities Research Notes: ARPS (average revenue per subscriber) refers to total service revenue
from one subscriber to CJ HelloVision, including broadband, VoIP, etc.
Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
0
20
40
60
80
100
Korea US Australia Japan Singapore Hong Kong Indonesia
(US$)
10
20
30
40
50
70
72
74
76
78
1Q11 1Q12 1Q13 1Q14
(US$bn)(US$)
Pay-TV ARPU (L)
Market cap (R)
Overall uptrend
400
700
1,000
1,300
1,600
12,000
12,600
13,200
13,800
14,400
1Q11 1Q12 1Q13 1Q14
(Wbn)(W) Pay-TV ARPS (L)
Market cap (R)
Digital conversion competition

8
April 23, 2015
2. Consolidation: Still too many players
(1) There is still room for consolidation in the domestic market
A government license is required to engage in the pay-TV business, as it is an infrastructure-based
service similar to telecom services. Although pay-TV operators are protected by the government,
they cannot easily expand overseas.
As such, to achieve profitability, deregulation and integration are necessary. Regulatory easing is
important in light of the limited size of the domestic market. If pay-TV operators were to become
larger, they would be able to achieve economies of scale from their network investments while
exercising higher bargaining powers in dealing with content providers and home shopping
channels.
The number of domestic pay-TV operators fell from 35 in 2005 to 19 in 2014 due to M&As. During
this period, CJ HelloVision was able to increase its subscriber base thanks to M&As.
The government has already taken some deregulatory measures. Under the revised broadcasting
law (which passed cabinet approval in January 2014), the market share cap for SOs was increased
to one-third of the entire pay-TV market, from one-third of the cable SO market. This revision
should allow for larger-scale M&A deals in the market.
As of now, roughly 10 domestic cable SOs are not affiliated with conglomerates. And among
multiple-system operators (MSOs), C&M is currently available for sale. We believe M&A deals will
boost the enterprise value of buyers.
Figure 10. M&As between cable SOs led to fall in number of domestic pay-TV companies
Source: 2014 Broadcasting Industry Survey, KCTA, KDB Daewoo Securities Research
Figure 11. Acquisition of cable SOs was critical to CJ HelloVision’s growth in subscribers
0
1
2
3
4
5
1,500
2,000
2,500
3,000
3,500
4,000
4,500
05 06 07 08 09 10 11 12 13 14
(no.)('000 persons)
Number of SO M&As (R)
Broadcast subscribers (L)
21
20
25 23 23
21
18 19
11 10
0
10
20
30
40
05 06 07 08 09 10 11 12 13 14
(no.) IPTV operators
Satellite TV operators
Cable SOs
Cable MSOs

9
April 23, 2015
(2) The US pay-TV market: A case of successful consolidation
We believe the US pay-TV market underwent successful consolidation. In that market, cable SOs
are a more dominant presence than IPTV service providers (i.e., telecom companies). Two giants,
Comcast and Time Warner Cable, attempted a merger deal in early 2014, though this deal did not
go through, given the FCC’s worries about monopoly. Nevertheless, M&A moves are still ongoing.
Charter acquired Bright House (and may be weighing additional M&A deals), while AT&T is
working to acquire DirecTV. Other cable service providers are also believed to be considering M&A
deals.
In 2009, Time Warner Cable was split off from Time Warner. Although Time Warner Cable
experienced sluggish earnings shortly after the split, its earnings have been growing since 2011,
mostly driven by M&A deals.
These robust M&A deals are partially attributable to the heavy retransmission fees paid to
broadcasters. Indeed, terrestrial broadcasters (e.g., CBS) and channel operators (e.g., Time
Warner ad Disney) charge pay-TV platforms per-subscriber fees, and the fees are raised often in
spite of slow subscriber growth. For that reason, pay-TV platforms have sought expansion as a
means to increase their negotiating power.
In 2012, Korea’s three terrestrial broadcasters also began charging digital pay-TV platforms
subscriber fees (approximately W280 per subscriber). They plan to renegotiate fees against cable
MSOs and IPTV service providers. In response, we believe pay-TV service providers could seek
M&As, just as US peers did.
Figure 12. M&As, share price, and earnings of US pay-TV operator Time Warner Cable
Source: Thomson Reuters, WSJ, KDB Daewoo Securities Research
Figure 13. Rising content-related costs, including retransmission fees, was one factor leading to
pay-TV consolidation in the US
Source: Bloomberg, KDB Daewoo Securities Research
0
2
4
6
8
0
40
80
120
160
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
(US$)(US$)
Time Warner Cable EPS (R)
Time Warner Cable share price (L) Acquired Insight
Acquired
NaviSite
Announced plan to merge
with Comcast
Acquired
DukeNet
0
2
4
6
8
10
13 14 15F 16F 17F 18F
(US$bn)
Cable SO retransmission fees
Satellite retransmission fees
Telco retransmission fees

10
April 23, 2015
Figure 14. US pay-TV industry’s “Big Four” emerged after 20 years of integration
Source: WSJ, KDB Daewoo Securities Research
Figure 15. Total market value of major US pay-TV stocks
0
35
70
105
140
1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15
(US$bn)
Comcast
Time Warner Cable
Charter
Small-scale M&As
Period of large M&As
2012 digital conversion: Over 90%
2014: Comcast and Time Warner Cable announced merger
Medium to large-scale M&As begun in earnest
2005 digital conversion: 50%

11
April 23, 2015
3. Switch to digital broadcasting nearing completion
(1) Digital switch to be completed in two years
In Korea, more than 50% of pay-TV service providers switched to digital broadcasting in 2011,
and the proportion exceeded 70% in 2014. As for cable SOs, nearly 50% of companies went
digital last year. We believe the switch will be complete in two years.
Cable SOs’ digital transition accelerated in 2007, as telecom companies expanded into IPTV
services. In 2010, the move picked up further speed, as KT launched Olleh TV Skylife (OTS)
bundled products (IPTV Olleh TV service + Skylife service).
During 2010-2011, the transition was robust, as MSOs willing to go digital (e.g., CJ HelloVision)
aggressively sought M&As. In addition, the smooth subscriber acquisition of late entrants (e.g., SK
Broadband) played a role in accelerating the digital transition. Since 2013, SK Broadband has
maintained monthly net subscriber additions of around 50,000 people.
Figure 16. Digital conversion in domestic pay-TV market has reached over 70%
Notes: Cable SO, satellite, and IPTV combined
Source: KCC, KDB Daewoo Securities Research
Figure 17. Change in number of analog/digital subscribers in domestic cable SO market: Digital
conversion has reached around 50%
Source: KCTA, KDB Daewoo Securities Research
12%
15%
23%
31%
37%
46%
54%
62%
69%
74%
0%
20%
40%
60%
80%
05 06 07 08 09 10 11 12 13 14
Digital conversion rate in pay TV
Entry into IPTV
KT pursues OTS
in earnest
M&As
between
cable SOs
Expansion in SK Broadband's net
subscriber additions
0
10
20
30
40
50
60
0
4
8
12
16
05 06 07 08 09 10 11 12 13 14
(%)(mn persons) Subscribers to analog cable (L) Subscribers to digital cable (L)
Digital conversion rate (R)

12
April 23, 2015
(2) In the US, OTT services have proliferated following completion of digital conversion
After the US pay-TV market finished the digital conversion (between 2010 and 2011), over-the-
top (OTT) services became available. The Korean market, on the other hand, is experiencing both
the digital conversion and the spread of OTT services simultaneously.
In the US, pay-TV ARPU did not climb markedly when the digital conversion sped up between
2006 and 2009. During that period, ARPU was weighed by high discounts on contracts amid
intense competition for subscribers among market players. However, ARPU began to rise notably
in 2011, when the digital conversion ratio reached nearly 90%. Korea is also likely to see the
downward pressure on ARPU ease when the digital conversion reaches its final stage.
OTT is currently a major buzzword in the US pay-TV market, as the number of N-screen service
subscribers is on the rise. OTT services refer to delivery of audio, video, and other media over the
internet without the involvement of an MSO in the control or distribution of content. Of note,
while converting to digital broadcasting, pay-TV operators also built broadband internet
infrastructure to enhance their pay-TV services, but this infrastructure created an environment
where independent OTT services proliferated in the market (an example of an external effect).
In the US, OTT services are currently having an enormous impact on the pay-TV market. For
conventional pay-TV services, the monthly fixed-rate scheme stands at US$125 (vs. US$80 when
including discounts for contract plans), whereas Netflix, a major US OTT service provider, offers
its services for only about US$10 per month. The situation in the Korean market is different in
that 1) the rate difference between conventional digital pay TV and OTT services is only modest,
and 2) the digital conversion and the proliferation of OTT services are progressing simultaneously
Figure 18. Pay-TV APRU in the US increased as digital conversion neared completion, after falling
during period of accelerating conversion
Source: KCC, Thomas et al. (2011), Bloomberg, Broadbandtvnews.com, KDB Daewoo Securities Research
Figure 19. Rapid growth in OTT-subscribing households represents both a threat and an
opportunity for the existing US pay-TV market
58%
66%
87%
89%
40
50
60
70
80
90
100
40
50
60
70
80
90
100
04 05 06 07 08 09 10 11 12 13 14
(US$)(%)
Avg. pay-TV ARPU (R)
Digital conversion rate (L)
As digital conversion
accelerated,
ARPU fell
As digital
conversion neared
completion,
ARPU rose
0
4
8
12
16
20
11 12 13 14 15F 16F 17F 18F
(mn households)
US households with OTT subscriptions

13
April 23, 2015
4. Platform revenue: Leveraging tool
(1) Home shopping and VOD models have taken root in Korea
In the pay-TV market, platform revenue plays a key role in earnings growth. For pay-TV operators,
achieving an ample subscriber base allows not only higher network efficiency and stronger
bargaining power in equipment purchasing—thus achieving economies of scale—but also the
creation of more revenue sources, including platform revenue.
Given the relatively low service rates that domestic pay-TV operators charge subscribers, they
need additional revenue from home shopping channels or advertisers. In the domestic market,
home shopping retransmission fees have taken root as a major platform revenue source since the
era of analog broadcasting. In particular, between 2010 and 2012, competition among home
shopping channels to secure so-called “golden channels” caused a sharp rise in retransmission fee
revenue.
As this two-sided market started to expand, any expansion in ARPU was limited, and pay-TV
operators did not need to raise ARPU. The digital conversion, however, has created additional
revenue opportunities, including VOD, in the direct consumer billing market. Since 2013, indirect
consumer billing growth (which includes home shopping revenues) has weakened, while the direct
consumer billing market has seen accelerated growth, suggesting that overall platform revenues
are growing.
Figure 20. Domestic home shopping transmission fee revenue: Significant variable for pay-TV
companies’ earnings
Notes: Accumulated pay-TV households (not accounting for redundancy due to OTS bundling)
Source: 2014 Broadcasting Industry Survey, KCC, KDB Daewoo Securities Research
Figure 21. Domestic pay-TV VOD market seeing double-digit growth every year
Source: KISDI, Nasmedia, Home Choice, KDB Daewoo Securities Research
10,000
15,000
20,000
25,000
30,000
0
200
400
600
800
05 06 07 08 09 10 11 12 13
(W)(Wbn)
Home shopping transmission fees (L)
Home shopping transmission fee revenue/no. of pay-TV households (R)
0
5
10
15
20
25
0
100
200
300
400
500
600
2011 2012 2013 2014
(%)(Wbn)
Cable VOD sales (L)
IPTV VOD sales (L)
VOD utilization rate (R)

14
April 23, 2015
(2) Global trend: Increasing domestic platform revenue and expanding overseas via OTT
Overseas pay-TV firms are also endeavoring to increase platform revenue. Major US pay-TV firms’
platform revenues are composed of ad and e-commerce revenues. Until the end of 2011, ad
revenue exceeded e-commerce revenue, but starting in 2012, e-commerce revenue grew at a
CAGR of 28% and by 2014 was double the amount of ad revenue. The situation in the Korean
market is similar, as revenue related to home shopping channels has outstripped ad revenue.
PCCW, a Hong Kong-based company that engages in telecom services (HKT) and media
businesses, has recently been expanding its platform business overseas via OTT. In March of this
year, PCCW acquired Vuclip, a global mobile VOD service provider based in the US.
Pay-TV businesses based on offline infrastructure are limited in their ability to expand overseas, as
such services are governed by licensing rules in each country. However, OTT is a platform
business that can leverage existing infrastructure, allowing pay-TV firms to advance into global
markets rapidly via the internet and mobile connections. Assuming it is possible to resolve
broadcast copyright issues between countries, OTT services will likely expand platform revenue
globally.
Figure 22. Major US pay-TV companies have seen increase in platform revenue with increasing
focus on commerce
Notes: Comcast, Time Warner Cable, and Charter combined
Figure 23. PCCW seeking media business expansion through OTT platform
Notes: Vuclip, a mobile VOD service based in California, has coverage in India, Indonesia, Thailand, the UAE, etc.
0
3
6
9
12
10 11 12 13 14
(US$bn)
Ad revenue (CAGR 4%)
Commerce revenue (CAGR 28%)

15
April 23, 2015
5. Regulatory and policy issues
(1) Combined market share rule: The most important regulatory issue at present
The restriction on combined subscriber market share is currently the most important regulatory
issue in the domestic pay-TV market. It is likely to have the greatest impact on KT Group, which
has highest subscriber market share.
The enforcement decree of the Internet Multimedia Broadcasting Business Act (also dubbed the
IPTV act) has been revised to restrict the subscriber market share of a pay-TV operator—based on
the combined number of subscribers to all its pay-TV services—to no more than one-third. The
combined subscriber market share of KT’s parent-based IPTV business and subsidiary KT Skylife
will exceed the new cap (unless redundancy is removed as discussed below). The previous
regulation imposed separate restrictions on the subscriber market shares of KT’s IPTV business
and KT Skylife.
In enforcing the market share restriction, an important issue is how to count the number of
subscribers. KT has redundant subscribers due to OTS products (IPTV service bundled with
satellite broadcasting). Currently, the pay-TV subscriber figures of KT and KT Skylife include OTS
subscribers.
We think the current circumstances are not necessarily dismal for KT and KT Skylife. Under the
revised Internet Multimedia Broadcasting Business Act, the market share restrictions will be in
effect for only three years before authorities reassess the rules and decide whether to change
them. And it is unlikely that OTS subscribers will be counted redundantly. Based on the number of
set-top boxes, we estimate that KT’s pay-TV market share will come out to approximately 29%,
well below the one-third threshold.
Table 2. Key provisions of the Internet Multimedia Broadcasting Business Act (revised)
Details
Chapter 3 Facilitation of fair competition
Article 13 (Restrictions on market share, etc.)
Clause 1
The number of subscribers to a single internet multimedia service provider shall not exceed one-third of
the combined subscribers to all pay-TV service providers, including cable operators, satellite TV services,
and broadband service providers. <Amended 2/29/2008, 3/23/2013, 3/27/2015>
Clause 2
If Clause 1 is breached, the Minister of the Ministry of Science, ICT and Future Planning (MSIP) shall
issue an order for correction and set a deadline of within six months. <Amended 2/29/2008,
3/23/2013>
Clause 3
Operators subject to correction orders under Clause 2 shall make necessary changes before the
deadline.
Clause 4
In counting the number of subscribers, the MSIP minister may exclude mountainous areas and islands
that receive only satellite broadcasting (under Clause 1 ) <New 3/27/2015>
Clause 5 Counting the number of subscribers under Clause 1 is based on a presidential decree <New 3/27/2015>
Notes: Provisions will be in effect for three years before reassessment
Source: National Assembly, KDB Daewoo Securities Research
Figure 24. KT Group subscribers (to be subject to combined market share restrictions)
0
2,000
4,000
6,000
8,000
10 11 12 13 14
('000 persons)
KT Skylife only
OTS bundling
KT IPTV only

16
April 23, 2015
(2) Net neutrality is a heated issue overseas
In overseas pay-TV markets, net neutrality—the principle that internet service providers and
governments should treat all internet data equally, not discriminating based on content, mode of
communication, service, platform, or user—is emerging as an important issue.
Network providers (i.e., pay-TV service providers and telcos) are against this principle, as strict
enforcement of net neutrality would likely cause an increase in network costs and investment
burden. Indeed, given that most fixed-line subscriptions are based on unlimited data plans, if
some subscribers or specific services use data especially heavily, it could cause traffic disruptions
without additional charges.
In February 2015, the US Federal Communications Commission (FCC) approved open internet
rules (slated to take effect in June 2015). Under the rules, broadband internet services (including
pay-TV services) will be reclassified as telecom services. This will give the FCC the authority to
regulate internet service providers.
The net neutrality policy will benefit internet companies and content providers such as over-the-
top (OTT) companies, whereas pay-TV and cable service providers will inevitably be hit hard.
Considering that US pay-TV service providers’ broadband internet services have shown robust
revenue growth for the past four years, the implications of net neutrality appear to be especially
gloomy for them.
Those voicing support for the government’s stance include major US internet giants such as
Google and Facebook, which are expanding overseas. If net neutrality is guaranteed in their home
country, it might be used as a reference in overseas markets. Indeed, some European countries
once considered introducing usage-based internet pricing due to the heavy traffic to US-based
services (e.g., YouTube).
Figure 25. US FCC now supports net neutrality: Negative to pay-TV
Notes: Tom Wheeler, chairman of FCC, approving open internet order
Figure 26. High-speed data has recently had a significant effect in driving growth of major US pay-
TV companies
-4
0
4
8
12
2010 2011 2012 2013
(%, YoY) High-speed data General cable Digital cable
Phone Commerce and other Broadcasting service

17
April 23, 2015
Domestic market outlook
1. Consolidation: Four conglomerates to be dominant
(1) KT, CJ, SK, and Taekwang worth watching
We believe the domestic pay-TV market is likely to undergo consolidation, with four
conglomerates—KT, CJ, SK, and Taekwang—anticipated to dominate the market.
KT boasts the largest number of pay-TV subscribers, followed by CJ, Taekwang, and SK. As of end-
2014, KT had 7.77mn subscribers (including both IPTV and Skylife subscribers), compared to
4.21mn for CJ HelloVision, 3.3mn for T-Broad, and 2.83mn for SK Broadband. SK Broadband
recorded the strongest subscriber growth, followed by KT, CJ HelloVision, and T-Broad. Net
subscriber additions have increased more quickly for IPTV services than for cable services.
Notably, KT and CJ have the most extensive value chains in the broadcasting business.
KT has the largest subscriber base. It holds Skylife TV (a second-tier subsidiary engaged in
production and programming). KT (IPTV), KT Skylife (digital satellite broadcasting), and the Olleh
TV mobile unit (OTT) are distributing content. Recently, Skylife has expanded the Skylife TV
business.
CJ has the strongest competitiveness in content, with the program producer CJ E&M. CJ
HelloVision holds cable SOs and Tving (an online/mobile distributor). CJ E&M and CJ HelloVision
have assumed the leading positions in the cable content and platform segments, respectively.
Recently, the content business (CJ E&M) has shown more promising growth potential than the
platform business (CJ HelloVision).
Taekwang holds T-Cast (a cable channel operator with 10 channels, including E-Channel) and T-
Broad (a service provider and content distributor). The company expanded into the OTT market in
March 2015 by launching the T-Broad mobile TV app.
SK—unlike the three conglomerates just mentioned—does not have a program producer under
its umbrella. SK Telecom sold off a program producer, while SK Broadband is prohibited from
directly operating channels under the IPTV law. On the other hand, SK is showing the quickest
growth in the service/distribution segment. SK Broadband is enjoying the strongest net
subscriber additions for IPTV services, and the mobile app is also enjoying robust traffic based on
SKT’s mobile subscriber base.
Figure 27. Healthy subscriber numbers for domestic “Big Four” pay-TV companies
Notes: In calculating KT figure, redundancy was removed (OTS subscribers counted only once)
Source: KCTA, company data, KDB Daewoo Securities Research
+12%
+4%
-1%
+35%
0
2,000
4,000
6,000
8,000
KT, KT Skylife CJ HelloVision Tbroad SK Broadband
('000 persons)
Number of subscribers in 2014
Number of subscribers in 2013

18
April 23, 2015
Figure 28. Broadcast business value chain of “Big Four” domestic pay-TV companies
(2) M&A of C&M
The sale of C&M will likely mark the beginning of Korea’s pay-TV industry consolidation. C&M, an
MSO with 2.37mn subscribers, was put up for sale in January 2014, after the enforcement decree
of the Broadcasting Act was revised (lifting limits on cable SOs’ market share expansion and
eliminating zone restrictions).
C&M is currently 93.81% held by Kookmin Cable Investment (KCI), which was established by
private equity firms MBK Partners and Macquarie. The firm has several subsidiaries (cable SOs)
operating mostly in Seoul and the neighboring Gyeonggi province, and recently added several
cable channels and entertainment and production businesses via its April acquisition of iHQ. In
March, only foreign companies submitted letters of intent because of the high offering price.
However, we believe C&M’s business lineup makes it an attractive M&A target for domestic cable
TV operators, as the eventual buyer will be able to secure subscriber bases in the Seoul capital
area as well as add the content business.
Table 3. C&M’s 2014 consolidated earnings and subsidiaries (%, Wmn)
Consolidated Assets Liabilities Capital
Operating
revenue
Net profit
C&M 1,155,312 905,511 249,801 609,372 39,057
Subsidiary
Owner-
ship
Assets Liabilities Capital
Operating
revenue
Net profit
CU Media 73.25 101,631 25,355 76,276 68,578 7,617
Gyeonggi NCS 100 492 1 491 - 4
Nowon CATV 100 5,015 3,063 1,952 - -125
C&M Media One 100 2,199 6,227 -4,028 8,035 -1,031
C&M Teleworks 100 2,261 6,747 -4,485 10,485 -1,301
C&M Eastern Gyeonggi CATV 100 21,029 4,639 16,390 16,033 643
C&M Gangnam CATV 84.97 123,098 16,734 106,364 63,697 10,341
IHQ 58.86 61,133 26,590 34,543 35,946 -5,721
CU Media’s subsidiary
Owner-
ship
Assets Liabilities Capital
Operating
revenue
Net profit
AXN Korea 51 9,638 5,987 3,651 7,816 -3,146
Notes: Acquired stake in IHQ in Apr. 2015; 2014 figures reported on a non-consolidated basis
Source: FSS, company data, KDB Daewoo Securities Research
Production
Production Programming Services Distribution
Terrestrial
Satellite
OTT
IPTV
SO
DMB
Distribution
Content
consumption
Devices

19
April 23, 2015
2. Digital broadcasting: Mobile is key
(1) OTT has yet to take off full swing
OTT services (N-screen) emerged as a game changer in the US pay-TV market following the
completion of that country’s digital transition. We believe Korean pay-TV operators will also need
to brace for the growth of the mobile platform in digital broadcasting.
OTT has not yet begun full-swing growth in Korea. Currently, mobile platforms in Korea offer
exactly the same video content that can be enjoyed at home, but we now see a growing need for
mobile-specific strategies.
Among N-screen services available in the domestic market, Tving—the first to hit the market—is
believed to have the largest subscriber base. Among Android users, however, mobile IPTV services
had more unique users (as of March 2015), possibly thanks to the large number of telcos’ existing
mobile subscribers. Telcos offer such services at a discount for existing customers via bundling,
and we believe they are better positioned to launch mobile-specific services given their
experience in the wireless business.
In the US, the emergence of OTT had a damaging impact on existing pay-TV services due to its
unrivalled price competitiveness. Given that Korea’s pay-TV ARPU is already low, however, OTT is
likely to have a muted impact on the domestic market, and should simply become another source
of revenue. And it should generate more and more revenue as service coverage widens (from
indoors to outdoors/on-the-go, and from households to single-person households and individual
subscribers).
Figure 29. Subscribers and monthly unique visitors to domestic N-screen apps (including mobile
IPTV)
Notes: Number of subscribers includes free subscribers (as of Jan.16
th
); Monthly unique visitors is based
on Android app traffic in Mar. 2015; pooq is built in mobile IPTV, B tv mobile, U+HDTV, Olleh tv mobile, as PIP
Source: Digital Times, Koreanclick, KDB Daewoo Securities Research
Figure 30. Mobile OTT likely to become new revenue source
Source: KISDI, company data, KDB Daewoo Securities Research
TV
54%
PC
17%
Smartphone
25%
Tablet PC
4%
Media used to watch VOD
General household
(ARPU about W10,000)
Single household,
outdoor/mobile
environment
(ARPU W3,000-W10,000)
Hellovision
0
2
4
6
8
Tving Hoppin pooq Btv mobile U+HDTV Olleh TV mobile
CJ HelloVision SK Telecom
(SK Planet)
Content Alliance
Platform
SK Telecom
(SK Broadband)
LG Uplus KT
(mn persons)
Number of subscribers Monthly unique visitors

20
April 23, 2015
(2) Global OTT strategies: Netflix is a global success
OTT service providers can expand overseas with relative ease, as the business does not require
licenses or its own network infrastructure. Netflix, an internet streaming-media service
headquartered in the US, operates in around 50 countries, having recently added Cuba, Australia,
and New Zealand. It plans to expand into other countries, including China and Japan, next year,
and hopes to increase its coverage to 200 countries by end-2016.
Netflix’s stronger-than-anticipated net subscriber addition (4.88mn) in 1Q15 has sent the stock
higher. At the initial stage of growth, Netflix attracted customers with cheap prices. However, its
strategy is evolving, as evidenced by the in-house production of the hugely popular show House
of Cards. Now, an increasing number of viewers are purchasing subscriptions for Netflix’s
exclusive content, and not simply because of its cheap price or high-quality streaming. The strong
subscriber numbers in 1Q—driven mainly by the addition of exclusive content—has stoked
particularly strong demand for Netflix’s stock given that subscriber growth slowed last year.
In April, the traditional media company Time Warner launched a new streaming service called
HBO Now (after debuting the service via Apple in March). HBO is one of the most popular cable
TV channels in the US, airing shows such as Game of Thrones. Although a monthly subscription to
HBO Now is roughly US$7 more expensive than Netflix, we are upbeat on the new service given
the growing importance of content in the OTT business.
Figure 31. Netflix’s number of subscribers and total market value
Notes: 1Q15 subscriber data based on end-1Q; Total market cap as of 1Q earning release
Source: Netflix, Thomson Reuters, KDB Daewoo Securities Research
Figure 32. Netflix’s coverage distribution: Entry into Asia planned for next year
0
10
20
30
40
0
10
20
30
40
50
60
70
2011 2012 2013 2014 1Q15
(US$bn)(mn persons)
Free streaming subscribers (L)
Paid streaming subscribers (L)
Netflix market value (R)

21
April 23, 2015
(3) Telcos expand into OTT
Aside from traditional media and internet service providers, an increasing number of telcos are
also expanding into OTT around the globe. Korean telcos—which were the first to introduce LTE
services—have taken the lead once again, becoming the first telcos to release OTT services,
including mobile IPTV (where content can be viewed over an LTE network). Foreign telcos
followed suit, with Singtel (early this year), PCCW (March) and Deutsche Telekom (March)
acquiring or launching OTT services. European carriers and SoftBank of Japan also moved
proactively to tap into the OTT market at the end of last year.
While telecom carriers have been reluctant to introduce OTT over their fixed-line networks, citing
net neutrality, they seem more open to mobile-based OTT, given the possibility of additional
revenue generation. Indeed, telcos can charge for such data use in addition to monthly
subscriptions. Moreover, as mobile data is charged on a pay-per-use basis, mobile-based OTT is
relatively free from net neutrality concerns.
Table 4. Status of foreign telcos’ OTT video service releases
Date Telco Service Details
Mar. 2015 PCCW (HK) Vuclip Acquired global mobile VOD service Vuclip; Expanding coverage to
Asia, Middle East, etc.Mar. 2015 Deutsche Telekom VideoRise Offering VideoRise in partnership with global program provider
VubiquityJan. 2015 Singtel HOOQ Released service in Asia after establishing JV with Sony and Warner
Bros.Dec. 2014 Tele2 Russia Tele2 TV Released N-screen TV app for mobile devices in Russia
Dec. 2014 Cellcom Israel Cellcom TV Offering Cellcom TV in partnership with Vubiquity
Dec. 2014 T-Mobile Czech Nangu.TV Expanded existing partnership with OTT Nangu.TV
Nov. 2014 Softbank (JP) BB TV Next Operated by subsidiary TV Bank; Planning to expand to 50 channels
(from current 12) by spring 2016Source: News reports, KDB Daewoo Securities Research
Figure 33. Domestic mobile video market growth being driven mainly by telcos’ OTT services
Notes: Based on monthly total service hours on Android app
Source: Koreanclick, KDB Daewoo Securities Research
Figure 34. LTE conversion has been an important factor for domestic telco’s ARPU growth;
Demand for mobile video expected to rise further
Notes: Sum of monthly total service hours for Mobile IPTV B tv mobile, Olleh TV mobile and U+HDTV Android app ; ARPU is
conversion of quarterly average to monthly basis
Source: SK telecom, KT, LG Uplus, Koreanclick, KDB Daewoo Securities Research
0
100
200
300
400
500
600
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(mn min.) SKT B tv mobile LGU U+ HDTV
KT Olleh TV mobile CAP pooq for Android
SK Planet T store VOD CJ HelloVision Tving
SK Planet Hoppin
Top three
telco OTTs
0
100
200
300
400
32,000
33,000
34,000
35,000
36,000
37,000
38,000
13.4 13.7 13.10 14.1 14.4 14.7 14.10 15.1
(mn min.)(W)
Avg. total usage time of three major telcos' IPTV (R)
Three major telcos' average ARPU (L)

22
April 23, 2015
3. Business models: Diversification
(1) Platform business to add revenue
We believe domestic pay-TV companies are actively diversifying their business models. The domestic
market, despite its relatively small size, is a useful test bed for various pay-TV business models, given
the abundance of trend-conscious customers and the large number of companies.
In particular, we note the growth of the platform business, which directly affects pay-TV earnings. For
pay-TV operators, having a platform business means having an additional source of revenue from
existing businesses, such as T-commerce (from the home shopping business) and VOD ads (VOD
business).
First, the IPTV VOD ad market is growing rapidly. Compared to general TV ads, advertising via IPTV
VOD content allows advertisers to carry out more targeted ads to more active and engaged viewers.
After growing slowly from 2009 to 2012, the market has been expanding sharply since 2013.
In 2013, telcos operating IPTV channels and cable SOs providing VOD services agreed to extend the
holdback period—after which VOD content becomes free—from one to three weeks; this was done to
accommodate requests by terrestrial broadcasters for VOD price hikes. This policy change has been
one of the major drivers for the IPTV VOD market growth, as it pushed up demand for paid VOD, and
IPTV channels introduced various monthly subscription schemes. Accordingly, advertising via IPTV VOD
saw improved reach.
In 2014, while the overall ad market stagnated amid the aftermath of the ferry accident and the
economic slowdown, the IPTV ad market grew markedly. In our view, the environment remains
favorable for IPTV ads in 2015. Demand has strengthened since 2H14, with ad slots at three IPTVs
having been sold out since last July. As of end-2014, the number of IPTV-subscribing households
exceeded the 10mn mark. In addition, the average spending per advertiser is on the rise, which is
boosting expectations for higher ad rates at IPTVs. Nasmedia, as a leading new media rep, stands to
enjoy the greatest benefit from the growing IPTV VOD ad market.
Figure 35. IPTV VOD pre-loading ads draw attention from viewers
Source: KT Mhouse, Nasmedia, KDB Daewoo Securities Research
Figure 36. High growth in IPTV ad billings ; IPTV ads sold out since July 2014
Notes: Three major IPTV companies combined
Source: Nasmedia, KDB Daewoo Securities Research
0
20
40
60
80
100
09 10 11 12 13 14 15F
(Wbn)
Volume of IPTV ads handled
IPTV ad slots of three
major operators sold out
since July
Olleh TV: Only one or two ads before the program
Ads 1 Ads 2 Ads 3 Ads 4
No. of
ads
Terrestrial/cable: Many ads placed before the program

23
April 23, 2015
The T-commerce market is beginning to pick up. With T-commerce, which is based on data
broadcasting technology, existing home shopping channels can be transmitted through both
analog and digital systems in real-time, as programs are aired. As the Ministry of Science, ICT, and
Future Planning withdrew plans to control T-commerce in December 2014, T-commerce
programs can be broadcast through VOD and in real-time, similar to home shopping programs.
Pay-TV operators, which receive commissions for transmitting home-shopping programs, will also
be able to receive commissions from T-commerce channels going forward. Currently, five non-
home shopping companies—KTH, SK Broadband, i-digital, Dream Commerce (Hwasung
Industrial), and TV Flea Market—as well as five home shopping channels (GS Home Shopping, CJ
O Shopping, Hyundai Home Shopping, Lotte Home Shopping, and NS Home Shopping) hold T-
commerce licenses.
Among those, the companies that have already launched T-commerce channels are mostly non-
retail firms: KTH (channel name: K Shopping), i-digital (Shopping & T), Dream Commerce (Dream
& Shopping), and SK Broadband (B shopping). Shinsegae is expected to acquire a stake in Dream
Commerce. If retailers affiliated with large conglomerates enter the T-commerce business, the
market’s growth should accelerate.
As of now, the T-commerce market is in the early stage of growth. Going forward, all of the
companies that hold T-commerce licenses can be expected to enter the market. After the
commoditization of services, channel operators will likely seek to expand coverage, pushing up
billings and transmission commissions for pay-TV companies. Pay-TV operators should see an
uptrend in transmission rates if an increase in billings leads to revenue growth, and if a rise in the
number of shopping channels sparks competition for better channel numbers.
Figure 37. T-commerce market has ample room for growth
Notes: Based on 2014; T-commerce has expanded channels to other platforms besides KT since 2015
Source: Korea On-Line Shopping Association, MSIP, KCTA, KDB Daewoo Securities Research
(2) Beefing up the content business
Besides the traditional platform business, pay-TV companies are now also turning to content in an
effort to widen their subscriber bases. For such firms, strengthening the content business can
help secure new sources of revenue. Such efforts could also serve as preemptive action ahead of
the expected increase in content costs.
Faced with last year’s sharp slowdown in net subscriber growth amid intensifying competition
and rising regulatory risks, KT Skylife began to beef up the content lineup at its operating
subsidiary, Skylife TV. In addition, to strengthen brand identity, the company rebranded channel
names to start with “Sky.”
Skylife TV increased the number of channels from seven to 11, including one—Sky Sports—that
has managed to secure broadcasting rights from the Korea Baseball Organization (KBO). Using
the technical advantages of satellite broadcasting, the company plans to raise the number of
UHD channels to three. In addition, through cooperation with KTH, the company will likely be
able to make VOD services available through all internet service providers. Previously, VOD
services were provided only to bundled-product (KT’s IPTV and KT Skylife’s satellite) subscribers.
31,960
41.1
77,728
13,140
40.6 32,396
9,290
29.7 31,305
170
7.8
2,185
Annual transaction value (Wbn) Platform users and households
(mn persons)
Annual transaction value/users
(W)
PC internet Mobile
Home shopping (live broadcasting) T-commerce (data broadcasting)

24
April 23, 2015
Meanwhile, a potential increase in content costs is emerging as a major threat to domestic pay-TV
operators. Since terrestrial broadcasters and pay-TV operators agreed on retransmission fees (per
digital subscriber) for real-time content in 2012, digital subscribers incurred additional content
costs. Retransmission fees could be raised again once the contract expires. By strengthening the
content business, pay-TV companies should be able to secure additional sources of revenue,
including ads and license fees, and improve its bargaining power in negotiations with
broadcasters.
Figure 38. KT Skylife plans to increase the number of UHD channels to three by producing its own
UHD content
Source: Skylife TV, KDB Daewoo Securities Research
Figure 39. Increase in content costs could prompt pay-TV operators to begin content production
Notes: TV license fees only (except for program sales or additional revenue, etc.); KBS TV license fee (charged to viewers, not
pay-TV operators) are also included
Source: KCC, KDB Daewoo Securities Research
12
15
23
31
37
46
54
62
69
74
0
20
40
60
80
40
50
60
70
80
05 06 07 08 09 10 11 12 13 14
(%)(%) Pay-TV digital conversion rate (R)
Terrestrial+PP broadcasing fee/CATV (SO+satellite) broadcasting fee (L)
Terrestrial broadcasters and cable
companies argue over
retransmission fees
IPTV entry
Plan to have three UHD channels

25
April 23, 2015
(3) Sophistication of subscription models
Pay-TV operators are also seeking to expand revenue by strengthening existing businesses, which
includes efforts to make content subscription models more sophisticated. As broadcasting
services are intangible experience goods, well-designed payment models are required for content
to generate revenue. With Korea’s pay-TV ARPU at very low levels compared to global peers,
domestic broadcasting service providers need to come up with models that lead to less resistance
from consumers and encourage content consumption.
As mentioned previously, in 2013, telcos operating IPTV and cable SOs providing VOD services, at
the request of terrestrial broadcasters, extended the holdback period of VOD and raised content
prices to boost content revenue. Such measures gave rise to resistance from consumers. In an
effort to capture demand from viewers who were hesitant to purchase VOD content and seeking
more cost-efficient ways to consume content, pay-TV firms introduced fixed-rate monthly
subscription schemes, in which subscribers use an unlimited amount of content at fixed
subscription rates. After the extension of the holdback period of VOD in 2013, there was a sharp
rise in subscribers to fixed-rate monthly fee schemes.
Of note, the pattern of digital content consumption is shifting from downloading to streaming—
a shift already witnessed in the music market. In our view, a greater variety of monthly
subscription schemes is necessary for video content to attract more subscribers. Pay-TV
operators have already introduced subscription services for individual channels, as well as various
packages for specific content (e.g., movies, US TV shows, etc.). They have also launched products
targeting certain age groups. Going forward, we might also see products packaged by genre.
Figure 40. Price of VOD (W1,200) vs. monthly subscription (W4,900): Monthly subscriptions
encouraged by showing subscription price next to unit price
Source: Tving, Company data, KDB Daewoo Securities Research
Figure 41. Viewers are increasingly streaming rather than downloading videos
Notes: 2014 figures are based on KDB Daewoo estimates
Source: Company data, Parliament, Nasmedia, KDB Daewoo Securities Research
0
350
700
1,050
1,400
0
30
60
90
120
2011 2012 2013 2014
('000 persons)(Wbn) IPTV monthly plan revenue (L)
IPTV monthly plan subscribers (R)
Watching behavior shifting from download to streaming;
Diversification of monthly plan types spurs subscriptions:
- Domestic broadcasting channel classification
(terrestrial, CJ E&M, JTBC)
- Film-dedicated
- US drama-dedicated
- Tailored to age, genre, etc.
W4,900 W1,200

26
April 23, 2015
4. Expectations for policy tailwinds
(1) Regulations on bundled products to accelerate ARPU normalization
The government is currently working to revise regulations on telecom-pay TV product bundling
under a framework of comprehensive measures to develop the broadcasting industry. The KCC
plans to finalize the rule in 2H. The government believes improvement in ARPU for pay-TV
platforms will be key for the broadcasting industry’s development, as any increase in ARPU should
flow to content providers (terrestrial broadcasters and PPs).
New regulations on bundled products could include a ban on excessive discounts. Currently, MSIP
does not allow discount rates for bundled products to exceed 30% of the price of individual
products. A ban on excessive discounts would signal the ministry’s intention to remove downside
pressure to ARPU and induce a steady rise in ARPU going forward. Easing price-cut competition
would also lead to a decrease in marketing costs for companies.
Table 5. Revision to Notice on Telecommunication Bundled Products
Subject Details
KCC
Set forth details on prohibited acts regarding bundled products; Expected to be announced
in May-June. Task force teams to be assigned to investigate breaches.
MSIP
Task force teams to be assigned to study the strengthening market power of dominant
players (to set forth pre-approval conditions)
SK Telecom
Oppose new regulations on bundled products (bundling allows the firm to offer products at
cheaper prices)
KT, LG Uplus
Largely favor the new regulation; SKT’s wireless market power affects the wired segment
competition
Cable SOs Favor new regulations
Source: Media press, KDB Daewoo Securities Research
Figure 42. Telco’s IPTV and broadband subscriber trend
Source: Company data, MSIP, KCC, KDB Daewoo Securities Research
Figure 43. CJ HelloVision’s ARPS trend: Decreased amid competition for new subscribers, but likely
to rise if bundled product regulations are introduced
Notes:ARPS(averagerevenuepersubscriber)referstototalservicerevenuefromonesubscribertoCJHelloVision,includingbroadband,VoIP,etc.
20
30
40
50
60
70
11,000
12,000
13,000
14,000
15,000
1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
(%)(W)
Pay-TV ARPS (L)
Broadcasting digital conversion rate (R)
- ARPU fell as digital conversion accelerated
Discounts on bundled products likely increased due to
intensified competition for subscribers
- Positive impact expected if excessive discounts are banned
0
20
40
60
80
0
5
10
15
20
08 09 10 11 12 13 14
(%)(mn persons)
IPTV subscribers (L)
Telco broadband subscribers (L)
IPTV/broadband subscribers (R)

27
April 23, 2015
5. Potential expansion of foreign capital
(1) Foreign ownership in pay-TV services remains restricted
With firms and private funds from overseas bidding to acquire C&M, the possibility of foreign capital
expanding in the domestic pay-TV market has emerged. In particular, since the US-Korea FTA provisions
related to the media service segment took effect in March, market watchers have paid keen attention to
whether the cap on foreign ownership will increase.
For now, foreign stakes in domestic pay-TV service providers remain capped at 49%. Under the US-Korea
FTA, regulations affecting pay-TV services (including pay-TV offered through cable SOs, satellite TV, and
IPTV) remain unchanged, or have been left for future negotiation. It seems unlikely that a foreign firm will
acquire Kookmin Cable Investment’s (KCI) entire stake (93.81%) in C&M.
Table 6. Foreign capital-related clauses of domestic broadcasting laws
Broadcasting law
Details Impact
Article 14 Investments by foreign capital
Clause 1 Terrestrial broadcasters and public radio broadcasters shall not attract investments
from foreign governments/institutions, foreigners, and entities in which foreign
governments/institutions have a stake exceeding a certain proportion. However,
subject to KCC approval, they may receive investments from foreign entities meant to
promote education, physical activities, religious activities, and charities. <Amended
2/29/2008, 3/23/2013>
Attract foreign capital
Clause 2 Multi-channel operators and relay cable operators shall not attract, respectively, stakes
exceeding 20% and 10% from foreign governments/institutions, foreigners, and
entities in which foreign governments/institutions have a stake exceeding a certain
proportion.
Protect management control from
foreign capital
Clause 3 SOs, satellite broadcasters, program providers, and network operators shall not attract
stakes exceeding 49% from foreign governments/institutions, foreigners, and entities
in which foreign governments/institutions have a stake exceeding a certain proportion.
foreign capital
Internet multimedia
broadcasting law
Details Impact
Article 9 Restrictions on foreign ownership
Clause 1 Foreign governments/institutions, foreigners, and entities in which foreign
governments/institutions or foreigners have more than a 15% stake shall not own a
stake exceeding 49% in internet multimedia broadcast providers. <Amended,
12/30/2014>
foreign capital
Source: Korea Ministry of Government Legislation, KDB Daewoo Securities Research
Table 7. US-Korea FTA media-related provisions (took effect on March 15th
, 2015)
Domestic services
Details Impact
Terrestrial broadcasters,
satellite broadcasters, cable SOs
No changes in foreign ownership and broadcast quotas Neutral
Telecom/broadcasting
convergence services
No change to convergence (e.g., IPTV) services Neutral
Cable program providers Some regulations will be eased, as follows: PP market competition is likely to
intensify.
Foreign stakes in Korean program providers will still be capped at 49% in the case of
direct investments. However, foreigners that make indirect investments via a Korean
company will be allowed to own up to 100% (currently 50%) of Korean program
providers, excluding news providers, multi-content providers, and home shopping
channel operators.
US global media groups could
expand into Korea.
The ceiling on the proportion of foreign programs carried by program providers will
be eased. Program providers are currently required to have domestic content
account for at least 35% of animated programs and 25% of movies. The required
ratios will be lowered to 30% and 20%, respectively.
The number of foreign programs
could expand.
The quota will be lifted to 80% from 60% for any single country’s programs. The number of US programs
could expand.
Digital content Digital audio-video content services remain unregulated to promote competition.
However, the government might intervene if access to domestic audio-video content
is difficult.
US global media groups could
expand into Korea.
Source: Ministry of Trade, Industry and Energy, KDB Daewoo Securities Research

28
April 23, 2015
Valuation
1. Valuation gap with global peers narrowing
(1) Valuation discount easing
Domestic pay-TV stocks traded at a discount to global peers last year, as they struggled with an
industry slump, one-off negatives, and uncertainties (e.g., regulatory risks).
On the other hand, overseas peers traded at a premium, buoyed by: 1) eased investment burden
following the completion of the digital transition, and 2) expectations for excess profits following
market consolidation. Some stocks are generating a dividend yield of more than 3% thanks to
stable free cash flow.
With domestic stocks picking up, however, the valuation gap has been narrowing. Nevertheless,
CJ HelloVision and KT Skylife still seem undervalued relative to global peers. Factoring in P/E,
ROE, and dividend yield, we believe KT Skylife is the most attractive among pay-TV stocks.
Table 8. Global pay-TV platforms (cable SO, satellite) profitability and valuation (Wbn, %, x)
Name of company
Total
mkt. cap
OP margin P/E P/B EV/EBITDA ROE Dividend
yield14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F
CJ HelloVision (Korea) 925 8.0 9.3 9.7 28.6 12.0 10.4 0.8 0.9 0.9 4.3 4.0 3.5 3.0 8.2 8.7 0.6
KT Skylife 918 12.5 14.0 14.2 15.8 13.9 13.0 2.0 1.9 1.7 5.4 4.9 4.5 13.2 14.4 13.8 2.1
Hyundai HCN 568 18.5 18.9 19.0 12.9 12.9 12.4 1.0 1.0 0.9 3.0 3.7 3.6 8.5 8.4 8.1 0.8
Sky Perfect JSAT (Japan) 2,432 12.6 13.0 13.9 19.3 16.4 14.7 1.2 1.2 1.1 4.6 5.6 5.1 6.6 7.6 8.4 1.5
Comcast (US) 160,026 21.7 22.4 22.6 20.0 18.2 16.1 2.8 2.7 2.5 8.4 8.0 7.5 16.2 15.3 16.0 1.7
Time Warner Cable 45,568 20.3 21.0 21.6 19.5 18.6 16.8 5.2 4.3 3.6 8.2 7.5 7.1 27.2 26.9 22.9 2.0
Liberty Global 47,648 12.2 15.0 17.6 - 162.7 63.4 3.1 3.2 3.4 11.5 10.0 9.4 -5.2 1.5 4.9 -
Charter Communications 22,467 10.7 13.9 15.8 - 233.4 63.4 141.8 68.9 - 12.8 12.1 11.1 27.2 26.9 22.9 -
Cablevision 5,502 14.3 14.3 14.8 21.0 22.0 19.7 - - - 7.7 7.2 7.0 - -4.3 -4.2 3.3
DirecTV (US) 47,552 15.4 16.0 15.9 14.5 14.7 13.8 - - 34.1 7.5 7.1 6.9 - -87.4 139.7 -
Dish Network 34,968 12.5 12.0 11.7 35.0 42.0 40.2 16.0 11.3 8.4 13.3 12.7 12.5 63.2 32.6 24.9 -
Shaw Communications
(Canada)
11,509 27.5 27.1 27.6 15.0 15.6 14.8 2.7 2.5 2.3 8.9 8.1 7.9 17.3 17.0 16.5 4.3
British Sky (UK) 30,510 15.2 12.9 13.8 11.7 20.3 17.0 7.1 6.5 5.5 13.7 13.0 11.0 84.2 42.7 33.7 3.3
Beijing Gehua CATV
(China)
5,631 3.8 12.9 19.9 56.2 43.9 34.3 5.1 4.7 4.2 - 22.5 18.3 9.4 11.0 12.5 0.6
Average 14.7 15.9 17.0 17.8 16.5 14.9 4.3 3.6 3.1 8.4 9.0 8.2 12.3 13.7 13.5 2.0
Note: Skylife and CJ HelloVision figures are KDB Daewoo Securities estimates; Excluded outlying values when calculating average; Dividend yield is based on 2015 KDB
Daewoo Securities estimate
Figure 44. Pay-TV forward P/E trend Figure 45. Pay-TV forward EPS consensus revision trend
Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
5
10
15
20
25
30
35
4/14 6/14 8/14 10/14 12/14 2/15 4/15
(x) CJ HelloVision
KT Skylife
SK Broadband
Time Warner Cable
Comcast
DirecTV
Sky Perfect JSAT
Korean pay-TV stocks breaking away
from undervaluation
20
40
60
80
100
120
140
160
14.4 14.6 14.8 14.10 14.12 15.2 15.4
(-1Y=100) CJ HelloVision KT Skylife
SK Broadband Time Warner Cable
Comcast DirecTV
Sky Perfect JSAT
Korean pay-TV stocks adjusting upward this year

29
April 23, 2015
2. Expectations for dividends
(1) Steady dividend plays could trade at a premium
Like telecom stocks, pay-TV stocks are generating stable dividend yields, as their business models
are not vulnerable to the economy. Steady dividend payout should provide support for these
stocks. Overseas telecom stocks often trade at a premium owing to high dividend yields.
US-based Comcast saw a full-swing improvement in free cash flow as the country’s digital
transition neared completion. Since then, the company’s dividend yield has remained at roughly
2%.
Currently, KT Skylife is generating a dividend yield of around 2%, partly in order to help its parent
company KT make up for deteriorating cash flow. Last year, KT Skylife maintained a dividend
payout ratio of 30% despite a decline in operating profit (caused by one-off expenses associated
with an international lawsuit and a requirement to switch standard-definition subscribers to high-
definition broadcasting). With the dissipation of one-off factors, dividend yields are likely to be
stable.
Among telecom stocks that operate IPTV businesses, SKT appears the most attractive in terms of
dividend yields (mid-3% level). In addition, we note the possibility that SKT might buy back shares
to acquire the remaining stake in SK Broadband.
Figure 46. Comcast paid out steady dividends with recovery of FCF at the end of digital conversion
Notes: FCF per share is applied with 12-month forward estimate
Figure 47. KT Skylife started to pay out dividends as subscriber growth (since 2012) helped FCF
recover
Notes: FCF per share is applied with 12-month forward estimate
0
2
4
6
8
0.0
0.5
1.0
1.5
2.0
2.5
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14
(US$)(%)
Comcast FCF per share (R)
Comcast dividend yield (L)
Dividend payout begins
- FCF per share recovers
amid end of digital conversion
and industry integration
0
1,000
2,000
3,000
4,000
5,000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1Q11 1Q12 1Q13 1Q14 1Q15
(W)(%)
KT Skylife FCF per share (R)
KT Skylife dividend yield (L)
Dividend payout begins
-FCF per share
recovers as earnings
increase due to
platform revenue

30
April 23, 2015
Key Recommendations
SK Telecom (017670 KS/Buy) Making inroads into media based on mobile leadership
 Pay TV: Mobile leadership to drive the media business
 Focusing on mainstay telecom business as well as new businesses
 Valuation: Maintain Buy and TP of W380,000; Top pick in media/telecom
KT Skylife (053210 KS/Buy) Uncertainties are dissipating
 Pay-TV business: UHD and DCS to be the focus
 Earnings forecast: Increase in earnings and dividend payout anticipated
 Valuation: Upgrade to Buy; Raise TP to W24,000
CJ HelloVision (037560 KS/Buy) Combining prudent and bold strategies
 Pay TV: ARPU to normalize; Digital conversion to provide earnings opportunity
 Other business: MVNO to break even
 Valuation: Raise TP to W16,000; Maintain Buy
KT (030200 KS/Buy) The light at the end of the tunnel
 Combined market share regulations: Negative, but largely insignificant
 Financial position to strengthen on proceeds from subsidiary sale (end-May)
 Valuation: Maintain Buy with TP of W40,000
LG Uplus (032640 KS/Buy) Pursuing Netflix-style content strategy based on LTE strength
 Pay TV: Pursuing exclusive mobile content strategy based on LTE strength
 Major business: Net subscriber additions continued in the MNP market
 Valuation: Reiterate Buy and TP of W16,000
KT Hitel (036030 KQ/Buy) Content and commerce businesses key for KT’s media strategy
 Pay TV: Content and commerce businesses to play a key role in KT Group’s media strategy
 Other flagship businesses: Coverage of T-commerce business to expand
 Valuation: Upgrade to Buy; Raise TP to W17,000
Nasmedia (089600 KQ/Buy) Well-positioned to take advantage of current media usage trends
 Pay TV: All of KT’s IPTV ad slots have been sold since June 2014
 Major business: Solid mobile ad revenue growth
 Valuation: Maintain Buy and raise TP to W40,000

31
April 23, 2015
Pay TV: Mobile leadership to drive the media business
SK Telecom (SKT) stands to enjoy the most benefit from the increasing personalization
of broadcasting services. The company is the biggest telco in Korea, accounting for total
mobile phone subscribers. In addition, the company holds SK Broadband, the fastest-
growing IPTV operator, and B tv mobile, an OTT service provider, under its umbrella. SKT
is also set to take full ownership of SK Broadband on June 9th
.
The media business is gaining increasing importance for telcos. SKT’s IPTV business has
been generating additional revenue sources, including monthly fixed-rate subscription
revenue, VOD ads, and T-commerce. The business also helps the company retain mobile
and fixed-line service subscribers. In addition, mobile OTT services boost data revenue.
Among the various N-screen applications available, an increasing amount of user traffic
is being concentrated in telcos’ mobile IPTV services such as B tv mobile. Accordingly,
SKT is expected to see growth in both the media and telecom businesses going forward.
Focusing on mainstay telecom business as well as new businesses
SKT is focusing on improving the profitability of its mainstay telecom business in 1H.
Although the company’s voluntary retirement program in 1Q should push up costs in the
short term, it should help reduce personnel and other related costs going forward. After
making SK Broadband a wholly-owned subsidiary, the company will likely carry out
organizational and business restructuring for the media business to further improve
efficiency and lower costs.
SKT also plans to spur growth in new businesses. The new CEO hopes to steer the
company toward a leading position in the platform segment. Among major global telcos,
Softbank has been the most aggressive in developing the platform business, having
pursued gradual expansion and M&A strategies based on the belief that telcos need to
focus on platforms to take advantage of the telecom infrastructure. In addition, because
of the nature of OTT platforms, it is relatively easy for them to expand into the global
market. It is worth paying attention to whether SKT’s outreach to the platform business
delivers the anticipated results.
Valuation: Maintain Buy and TP of W380,000; Top pick in media/telecom
We maintain our Buy call on SKT and our target price of W380,000. The short-term
outlook is unfavorable in light of retirement-related costs and the KCC’s expected
imposition of fines and a business suspension. However, the stock is anticipated to
regain attractiveness on the back of earnings recovery in 2H, an additional share
buyback, and larger dividend payout .
SK Telecom (017670 KS)
Making inroads into media based on mobile leadership
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F
Revenue (Wbn) 16,141 16,602 17,164 17,942 18,641 19,203
OP (Wbn) 1,730 2,011 1,825 2,129 2,277 2,293
OP margin (%) 10.7 12.1 10.6 11.9 12.2 11.9
NP (Wbn) 1,152 1,639 1,801 2,119 2,251 2,263
EPS (W) 14,263 20,298 22,307 26,244 27,874 28,022
ROE (%) 9.8 13.0 12.9 13.9 13.5 12.4
P/E (x) 10.7 11.3 12.0 10.5 9.9 9.8
P/B (x) 0.9 1.2 1.3 1.2 1.1 1.0
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Telecom Service
(Maintain) Buy
TargetPrice(12M,W) 380,000
SharePrice(04/23/15,W) 275,000
ExpectedReturn 38%
OP (15F, Wbn) 2,129
Consensus OP (15F, Wbn) 2,186
EPS Growth (15F, %) 17.7
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 10.5
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 22,205
Shares Outstanding (mn) 81
Free Float (%) 62.5
Foreign Ownership (%) 44.3
Beta (12M) 0.43
52-Week Low 203,000
52-Week High 301,000
(%) 1M 6M 12M
Absolute -1.6 2.4 34.8
Relative -7.8 -9.0 24.1
80
100
120
140
160
4.14 8.14 12.14 4.15
SK Telecom KOSPI

32
April 23, 2015
Mobile leadership to drive the media business
The media business is gaining increasing importance for telcos. SKT’s IPTV business has
been generating additional revenue sources, including monthly fixed-rate subscription
revenue, VOD ads, and T-commerce. The business also helps the company retain mobile
and fixed-line service subscribers. In addition, mobile OTT services boost data revenue.
Unlike corporate groups that have pay-TV operators as subsidiaries, SK Group has no
subsidiary in charge of content production and programming. SKT sold a content
production subsidiary, and SK Broadband is banned from having a direct operating
channel under the IPTV Act.
Meanwhile, among major media groups (KT, CJ, Taekwang, and SK), SK Group has been
expanding its presence in the service/distribution segment the most rapidly. SK
Broadband’s Btv is seeing the highest net subscriber increase, and in the OTT service
segment, B tv mobile is enjoying the strongest traffic growth. SK Planet has already
been providing internet-based media services through Hoppin and T-store.
Among the various N-screen applications available, an increasing amount of user traffic
is being concentrated in telcos’ mobile IPTV services such as B tv mobile. Accordingly,
SKT is expected to see growth in both media and telecom businesses going forward.
Figure 48. SKT’s pay-TV value chain
Figure 49. SKT’s media service subscriber trend
Notes: Number of OTT users based on Android app monthly unique users
Source: SK Broadband, Koreanclick, KDB Daewoo Securities Research
Production/
programming
Device
Content
provider
Cost Revenue
Subscriber
Service/distribution
Pay TV
SK Broadband: B tv IPTV, B tv mobile
SK Planet: OTT Hoppin, T store VOD
T-commerce operator
SK Broadband
(cooperation with SK Planet)
Revenue
Program
usage fee
Service usage
fee
Trans-
mission
fees
0
2,000
4,000
6,000
8,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
('000 persons) OTT hoppin unique visitors
OTT T store VOD unique visitors
OTT B tv mobile unique visitors
IPTV B tv subscribers

33
April 23, 2015
Media business to support telco’s core businesses
Aside from traditional media and internet service providers, an increasing number of
telcos are also expanding into OTT around the globe. While telecom carriers have been
reluctant to introduce OTT over their fixed-line networks, citing net neutrality, they
seem more open to mobile-based OTT.
Among Android users, mobile IPTV services had the most unique users as of March 2015.
And SKT’s B tv mobile is one of the leading choices among mobile IPTV users. We believe
the strong traffic to mobile IPTV services is attributable to telcos’ large number of
existing mobile subscribers. Telcos offer such services at a discount for existing
customers via bundling, and we believe they are better positioned to launch mobile-
specific services given their experience in the wireless business.
OTT services allow telcos to charge for data use in addition to monthly subscriptions.
Moreover, as mobile data charges are on a pay-per-use basis, mobile-based OTT is
relatively free from net neutrality concerns. The ease with which customers can be
charged (monthly subscription plus data charges) is another positive.
Telcos can also utilize OTT services to raise ARPU. Once the switch to LTE is complete,
mobile carriers will need to find ways (e.g., mobile video traffic such as OTT) to generate
additional revenue from existing LTE subscribers.
Moreover, OTT can become a useful tool for carriers to expand overseas. PCCW, which
operates telecom (HKT) and media businesses in Hong Kong, recently expanded its
operations to Asia and the Middle East by acquiring an equity stake in Vuclip, a global
mobile VOD service provider.
Table 9. OTT video service released by foreign telcos
Date Telco Service Detail
Mar. 2015 PCCW (HK) Vuclip
Acquired Vuclip, a global mobile VOD service provider; expanding
regional coverage to include Asia and the Middle East
Mar. 2015
Deutsche
Telekom
VideoRise
Offering VideoRise in partnership with Vubiquity,a global
contents program supplier
Jan. 015 Singtel HOOQ Launched services in Asia via a JV with Sony and Warner Bros.
Nov. 2014 Softbank (JP) BB TV Next
Operated by subsidiary TV Bank; planning to expand to 50
channels by next spring
Source: News reports, KDB Daewoo Securities Research
Figure 50. SKT’s ARPU and total time spent on B tv mobile
Notes: Total time spent on B tv mobile based on total monthly service hours spent on Android app;
ARPU is monthly average for each quarter
Source: Company data, Koreanclick, KDB Daewoo Securities Research
0
100
200
300
400
500
600
33,000
34,000
35,000
36,000
37,000
38,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(mn min.)(W)
SKT B tv mobile total usage time
SKT ARPU (L)

34
April 23, 2015
SKT to take full ownership of SK Broadband
On June 9th
, SKT will purchase the 49.44% stake in SK Broadband that it does not own
already, taking full ownership of the subsidiary. SKT will give 0.0168936 SKT treasury
shares for every common stock held by SK Broadband shareholders, at W285,434 for
SKT shares and W4,822 for SK Broadband shares.
For the acquisition, SKT will distribute 2.47mn treasury shares (out of 9.8mn; 12.15% of
total shares issued). Once the acquisition is finalized, the company may buy back
treasury shares to strengthen its managerial control and increase shareholder returns.
The value of SK Broadband’s traditional business (wired network) has declined
significantly, while that of its media business (IPTV) is growing. We see huge growth
potential in the media business, in light of the following: 1) SK Broadband’s media
content can be used on both wired and wireless LTE networks thanks to compatible
copyright (e.g., the B tv mobile service). 2) Media services are often offered via product
bundling (combined with traditional telecom services), helping prevent customer
attrition. 3) The digital transition is likely to lead to higher ARPU, aided by greater VOD
demand and T-commerce. 4) This year, new home shopping companies will begin
operations, and T-commerce, still in its infancy, has much room for growth, generating
platform revenue as well as monthly subscription revenue.
Meanwhile, SKT will need to strengthen its negotiating power to effectively deal with
growing risks in the media industry. SK Broadband’s IPTV business, SKT’s B tv Mobile (in
partnership with SK Broadband), and SK Planet’s Hoppin mostly function as content
distribution platforms, and thus face the risk of higher content prices (due to pressure
from content producers and broadcast stations). Competition from foreign rivals
(Netflix’s OTT platform, Disney’s content, etc.) also poses a risk. We believe SKT’s full
ownership in SK Broadband will help increase its negotiating power.
Table 10. Stock exchange between SKT and SK Broadband
SKT
(Parent company)
SK Broadband
(Wholly-owned
subsidiary)
Base price (W) 285,434 4,822
Share price for merger (W, per share) 285,434 4,822
Exchange ratio 1 0.0168936
Face value (W) 500 5,000
Number of SK Broadband shares currently owned 149,638,354
- Ownership (%) 50.56
Contract date March 23rd March 23rd
Confirmation of shareholder list April 6th April 6th
General shareholders’ meeting N/A April 21st
Submission of dissent April 6-20th April 21st-May 5th
General shareholders’ meeting for share exchange
approval
May 6th May 6th
Appraisal rights Not assigned Assigned May 6- 26th
Exercise price for appraisal right (W) N/A 4,645
Surrender of old shares
Date of exchange/transfer
N/A
June 9th
May 7th-June 8th
June 9th
Number of outstanding shares 80,745,711 295,959,087
Delisting date N/A June 30th
Source: Company data, FSS, FnGuide, KDB Daewoo Securities Research

35
April 23, 2015
Table 11. SK Broadband’s annual earnings (Wbn, %, ‘000 persons)
2012 2013 2013 2014 2015F
Revenue 2,492 2,539 2,539 2,654 2,862
Broadband 935 909 909 861 867
IPTV 220 345 345 477 629
Home phones 257 197 197 161 130
B2B 928 1,028 1,028 1,117 1,196
Other 153 60 60 40 40
Operating profit 82 73 73 58 82
OP margin 3.3 2.9 2.9 2.2 2.9
Net profit 23 12 12 4 34
Net margin 0.9 0.5 0.5 0.2 1.2
YoY
Revenue 8.6 1.9 1.9 4.5 7.8
Broadband -2.8 -2.8 -2.8 -5.3 0.7
IPTV 44.6 56.7 56.7 38.3 31.9
Home phones -8.7 -23.2 -23.2 -18.6 -18.8
B2B 20.2 10.8 10.8 8.6 7.1
Other 19.3 -60.7 -60.7 -34.1 0.0
Operating profit 25.7 -10.7 -10.7 -20.5 41.5
Net profit TTB -46.8 -46.8 -64.9 686.4
Key indicators
Broadband 4,394 4,569 4,569 4,810 5,047
IPTV subscribers 1,445 2,096 2,096 2,829 3,539
Phones subscribers 4,510 4,568 4,568 4,513 4,492
Notes: All figures are based on non-consolidated K-IFRS; 2015F is KDB Daewoo estimates
Figure 51. SK Broadband is increasing its UHD content and offering benefits via product
bundling

36
April 23, 2015
Platform business and corporate value
In unveiling next-generation platform strategies at a press conference in April, SKT
discussed plans to focus on three platforms: 1) lifestyle, 2) media, and 3) IoT services. It
also announced plans to build an open ecosystem based on its telecom infrastructure,
transitioning from the traditional, closed ecosystem of telcos. The announcement shows
SKT’s determination to retain its mobile customers while also expanding customer base
by offering innovative services that meet users’ needs.
1) To promote the lifestyle platform, SKT said it will focus on “three “Cs”—content,
community, and commerce. In addition to its well-established commerce business
through SK Planet’s 11th Street and SK Broadband’s B Shopping, the company is
expected to further develop content and community services.
2) In the media segment, SKT aims to become a comprehensive media services provider.
The company plans to expand the number of mobile and fixed-line service subscribers to
15mn by 2018, almost double the end-2014 level. The acquisition of full ownership in SK
Broadband and SK Planet’s business portfolio adjustment are in line with this goal.
3) In the IoT service area, the company in May plans to launch a smart home service,
whereby home appliances can be controlled using its Mobius platform. For this business,
the company is cooperating with NSOK (SKT’s security subsidiary) and iRiver (a
consumer electronics company).
Among major global telcos, Softbank has been the most aggressive in developing the
platform business, having pursued gradual expansion and M&A strategies based on the
belief that telcos need to focus on platforms to take advantage of the telecom
infrastructure. In addition, because of the nature of OTT platforms, it is relatively easy
for them to expand into the global market. It is worth paying attention to whether SKT’s
outreach to the platform business delivers the anticipated results.
Figure 52. SKT’s next-generation platform strategy
Source: SK Telecom, Seoul finance, KDB Daewoo Securities Research
Figure 53. Softbank is increasing its enterprise value via global platform business
Source: Softbank, KDB Daewoo Securities Research
Next-generation platforms
Lifestyle platform Media platform IoT service platform
Open ecosystem based on telecoms network
Innovative services that satisfy the needs of customers

37
April 23, 2015
Telecom margins to improve; New businesses to take off
SKT is focusing on improving the profitability of its mainstay telecom business in 1H.
Although the company’s voluntary retirement program in 1Q should push up costs in the
short term, cutting surplus staff should help the company reduce personnel and other
related costs going forward. Once SK Broadband becomes a wholly-owned subsidiary,
the company will likely carry out organizational and business restructuring for the media
business to further improve efficiency and lower costs.
SKT also plans to spur growth in new businesses, with platform likely to be the main
focus. New businesses are anticipated to generate over W1tr in revenue this year, up
from W900bn in 2014.
Table 12. Quarterly and annual earnings trends (Wbn, %, ‘000 persons)
1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F
Revenue 4,202 4,305 4,368 4,289 4,287 4,429 4,492 4,734 16,602 17,164 17,942
Parent 3,264 3,265 3,304 3,181 3,246 3,275 3,312 3,506 12,860 13,013 13,339
Wireless 3,037 3,035 3,055 2,926 2,994 3,021 3,035 3,222 12,008 12,053 12,271
New 227 229 249 255 252 254 276 285 852 960 1,067
Subsidiaries 938 1,040 1,064 1,110 1,041 1,154 1,180 1,227 3,742 4,151 4,603
Operating profit 252 546 537 490 514 474 584 557 2,011 1,825 2,129
OP margin 6.0 12.7 12.3 11.4 12.0 10.7 13.0 11.8 12.1 10.6 11.9
Net profit 267 498 531 503 537 483 573 535 1,609 1,799 2,128
Net margin 6.4 11.6 12.2 11.7 12.5 10.9 12.8 11.3 9.7 10.5 11.9
QoQ
Revenue -2.2 2.5 1.5 -1.8 -0.1 3.3 1.4 5.4
Parent -1.6 0.0 1.2 -3.7 2.0 0.9 1.1 5.9
Wireless -1.0 -0.1 0.7 -4.2 2.3 0.9 0.5 6.1
New -8.5 0.9 8.7 2.4 -1.2 0.9 8.7 3.0
Subsidiaries -4.2 10.9 2.3 4.3 -6.2 10.9 2.3 4.0
Operating profit -50.6 116.5 -1.7 -8.7 5.0 -7.9 23.3 -4.7
Net profit -9.0 86.2 6.7 -5.2 6.6 -10.1 18.8 -6.6
YoY
Revenue 3.4 4.6 5.9 -0.1 2.0 2.9 2.9 10.4 1.9 3.4 4.5
Parent 4.9 1.7 2.5 -4.1 -0.6 0.3 0.2 10.2 4.3 1.2 2.5
Wireless 3.4 1.0 1.9 -4.6 -1.4 -0.5 -0.6 10.1 2.7 0.4 1.8
New
29.
7
11.7 11.2 2.8 11.0 11.0 11.0 11.7 33.5 12.7 11.2
Subsidiaries -1.6 14.6 17.9 13.4 11.0 11.0 11.0 10.6 -5.7 10.9 10.9
Operating profit -37.7 0.1 -2.7 -3.8 104.1 -13.2 8.8 13.6 14.3 -9.2 16.6
Net profit -22.7 6.4 5.7 71.4 100.8 -3.0 8.0 6.3 44.2 11.8 18.3
Key indicators
Wireless
subscribers
27,814 27,889 28,403 28,613 28,400 28,596 28,791 29,183 27,352 28,613 29,183
LTE subscribers 14,773 15,381 16,212 16,737 17,295 17,853 18,411 18,969 13,487 16,737 18,969
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Table 13. Earning forecast revisions (Wbn, W, %)
Previous Revised % chg.
Notes
15F 16F 15F 16F 15F 16F
Revenue 17,926 18,559 17,942 18,641 0.1 0.4 -Revised up number of LTE subscribers
Operating profit 2,251 2,260 2,129 2,277 -5.4 0.8 -Reflected voluntary retirement costs and later effects
Net profit 2,207 2,221 2,128 2,260 -3.6 1.8 -Reflected dividend income from SK Hynix and KCC penalty
EPS 27,397 27,577 26,244 27,874 -4.2 1.1
OP margin 12.6 12.2 11.9 12.2
Net margin 12.3 12.0 11.8 12.1
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to accumulation of controlling interests and minority interests;
EPS is based on controlling interests

38
April 23, 2015
SK Telecom (017670 KS/Buy/TP: W380,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F
Revenue 17,164 17,942 18,641 19,203 Current Assets 5,083 6,049 6,583 8,230
Cost of Sales 0 0 0 0 Cash and Cash Equivalents 834 1,359 1,748 3,249
Gross Profit 17,164 17,942 18,641 19,203 AR & Other Receivables 3,083 3,402 3,498 3,603
SG&A Expenses 15,339 15,814 16,364 16,910 Inventories 268 295 307 316
Operating Profit (Adj) 1,825 2,129 2,277 2,293 Other Current Assets 898 993 1,030 1,062
Operating Profit 1,825 2,129 2,277 2,293 Non-Current Assets 22,858 23,936 24,410 24,519
Non-Operating Profit 429 538 555 554 Investments in Associates 6,298 6,951 7,222 7,440
Net Financial Income -264 -232 -192 -131 Property, Plant and Equipment 10,568 10,730 10,737 10,441
Net Gain from Inv in Associates 906 830 850 850 Intangible Assets 4,402 4,552 4,702 4,852
Pretax Profit 2,254 2,667 2,832 2,847 Total Assets 27,941 29,985 30,993 32,750
Income Tax 455 539 572 575 Current Liabilities 5,420 5,863 5,263 5,411
Profit from Continuing Operations 1,799 2,128 2,260 2,272 AP & Other Payables 1,657 1,829 1,901 1,958
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,151 367 367
Net Profit 1,799 2,128 2,260 2,272 Other Current Liabilities 2,612 2,883 2,995 3,086
Controlling Interests 1,801 2,119 2,251 2,263 Non-Current Liabilities 7,273 7,412 7,470 7,516
Non-Controlling Interests -2 9 9 9 Long-Term Financial Liabilities 5,930 5,930 5,930 5,930
Total Comprehensive Profit 1,771 2,128 2,260 2,272 Other Non-Current Liabilities 1,343 1,482 1,540 1,586
Controlling Interests 1,778 2,125 2,256 2,268 Total Liabilities 12,693 13,275 12,733 12,927
Non-Controlling Interests -7 3 4 4 Controlling Interests 14,506 15,959 17,500 19,054
EBITDA 4,717 5,117 5,370 5,489 Capital Stock 45 45 45 45
FCF (Free Cash Flow) 669 1,376 1,555 1,815 Capital Surplus 2,916 2,916 2,916 2,916
EBITDA Margin (%) 27.5 28.5 28.8 28.6 Retained Earnings 14,189 15,641 17,182 18,736
Operating Profit Margin (%) 10.6 11.9 12.2 11.9 Non-Controlling Interests 742 750 760 769
Net Profit Margin (%) 10.5 11.8 12.1 11.8 Stockholders' Equity 15,248 16,709 18,260 19,823
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F
Cash Flows from Op Activities 3,677 4,526 4,655 4,715 P/E (x) 12.0 10.5 9.9 9.8
Net Profit 1,799 2,128 2,260 2,272 P/CF (x) 4.5 4.4 4.2 4.2
Non-Cash Income and Expense 2,979 2,929 3,007 3,052 P/B (x) 1.3 1.2 1.1 1.0
Depreciation 2,892 2,988 3,093 3,196 EV/EBITDA (x) 5.9 5.5 5.0 4.6
Amortization 0 0 0 0 EPS (W) 22,307 26,244 27,874 28,022
Others 87 -59 -86 -144 CFPS (W) 59,177 62,628 65,235 65,941
Chg in Working Capital -707 211 125 71 BPS (W) 206,159 224,145 243,233 262,471
Chg in AR & Other Receivables -221 -248 -103 -83 DPS (W) 9,400 10,000 10,000 10,000
Chg in Inventories 0 -28 -12 -9 Payout ratio (%) 37.1 33.3 31.4 31.2
Chg in AP & Other Payables -335 29 12 10 Dividend Yield (%) 3.5 3.6 3.6 3.6
Income Tax Paid -183 -539 -572 -575 Revenue Growth (%) 3.4 4.5 3.9 3.0
Cash Flows from Inv Activities -3,683 -3,482 -3,325 -3,111 EBITDA Growth (%) -2.6 8.5 4.9 2.2
Chg in PP&E -2,983 -3,150 -3,100 -2,900 Operating Profit Growth (%) -9.2 16.7 7.0 0.7
Chg in Intangible Assets -120 -150 -150 -150 EPS Growth (%) 9.9 17.6 6.2 0.5
Chg in Financial Assets -178 -182 -75 -61 Accounts Receivable Turnover (x) 7.4 7.1 6.9 6.9
Others -402 0 0 0 Inventory Turnover (x) 77.2 63.7 61.9 61.6
Cash Flows from Fin Activities -559 -696 -1,521 -735 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0
Chg in Financial Liabilities 413 0 -784 0 ROA (%) 6.6 7.3 7.4 7.1
Chg in Equity 0 0 0 0 ROE (%) 12.9 13.9 13.5 12.4
Dividends Paid -667 -667 -709 -709 ROIC (%) 10.2 11.4 12.0 12.2
Others -305 -29 -28 -26 Liability to Equity Ratio (%) 83.2 79.4 69.7 65.2
Increase (Decrease) in Cash -564 525 388 1,502 Current Ratio (%) 93.8 103.2 125.1 152.1
Beginning Balance 1,399 834 1,359 1,748 Net Debt to Equity Ratio (%) 36.6 29.8 20.7 11.4
Ending Balance 834 1,359 1,748 3,249 Interest Coverage Ratio (x) 5.6 6.8 7.7 8.2
Source: Company data, KDB Daewoo Securities Research estimates

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