Lee Hyun spends much of her day in front of a PC messaging friends, playing games, shopping, and decorating her personal home page. Although she rarely picks up her cell phone during those hours surfing the Web, her phone bill has ballooned lately -- to more than $150. Why? Because when she wants to pay for something online, she usually punches in her phone number instead of a credit card. "It's a great way to buy inexpensive stuff," says 26-year-old Lee. These days her monthly phone bill includes some $100 in online purchases.
It's a service nearly half of Lee's compatriots have come to depend on. Some 23 million Koreans use one of five competing cell-phone systems to make payments ranging from a few cents to $120. This year Koreans are expected to charge nearly $1 billion using the services, up from just $290 million in 2002.
"Cell phones have proven to be an essential payment tool," says Park Sung Chan, CEO of Danal Co., which pioneered the industry. In April, Danal plans to launch a similar operation with China Mobile (CHL), the mainland's largest carrier. Next up: Japan, Southeast Asia, and, ultimately, the U.S., where both Danal and its chief rival, Mobilians, are eyeing the market.
DIGITAL BALL GOWNS. Danal started five years ago with a creative approach to one of the thorniest problems of e-commerce: how to securely make small payments for goods and services. In a country where almost everyone owns a cell phone, the answer was simple. Danal struck early deals with Korean mobile carriers, which agreed to collect money on behalf of online merchants. Today, Danal and Mobilians together control some 90% of the market.
Here's how it works: A customer buying, say, a downloadable song on her PC enters her cell-phone number and national identification number into the seller's Web site. After a computer verifies that the two numbers match, a code is sent to the phone as a text message. The customer turns back to the PC, punches the code into the Web site, gets the song, and the sum is added to the phone bill.
Although it's more expensive for merchants than credit cards, they say the convenience for buyers is worth the extra cost. Phone companies take a 5% cut, and the authenticating companies get up to 3%. Credit-card companies typically charge 3.5%.
BIGGER BUCKS. "Despite the higher service fee, we have to offer cell-phone payment because it's the consumer's clear choice," says Choi Dong Jo, a planning manager at NHN Corp., a large online-gaming company. About 60% of payments for NHN's digital content come through cell-phone services, vs. 5% for credit cards.
The services took off as Korean adults started playing games and buying digital accoutrements for personalized pages on social-networking Web sites. These sites often sell avatars -- digital representations of a person -- and accessories such as virtual necklaces, digital ball gowns, or a personalized video for anywhere from a dime to a few dollars.
The companies are moving into the physical realm, too. Online merchants now let Koreans charge books and clothes to their cell phones. Such larger purchases were impossible in the past because of a $20 monthly limit on charges, but that has recently been bumped up to $120. Last year, Danal started letting users pay cable-TV bills, and it will soon add newspaper subscription fees.
PROFIT DIP. It's a profitable formula. Danal, which also sells music, games, and video clips for mobile gadgets, earned $7.7 million on sales of $66.6 million last year, up from a profit of $5 million on sales of $54.4 million in 2004.
Danal's shares have more than tripled since its July, 2004, listing in Seoul. Mobilians says its profit fell to $2.8 million on sales of $31.1 million in 2005, vs. $4.8 million on sales of $30 million in 2004, as some companies it had provided the service to went belly-up. But analysts expect Mobilians' profit to rise by more than 30% in 2006.
How big could the market be? Wherever there's a Web -- and a cell phone -- is fair game.