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Kakao in chaebol dilemma

Internet giant, named ‘big business group’ by FTC, faces more restrictions than benefits

In July last year, when President Park Geun-hye invited 17 business leaders to Cheong Wa Dae for a luncheon meeting, people within the Internet industry felt they were now living in a different world.

Among the high-profile figures from conglomerates such as Samsung and Hyundai were heads of Naver and Kakao, the nation’s top two Internet companies and the most successful venture firms. 

President Park Geun-hye (right) listens to Kakao board chairman Kim Beom-soo on the company’s Internet-based support programs for traditional markets in Jejudo Island in June last year. (Yonhap)
President Park Geun-hye (right) listens to Kakao board chairman Kim Beom-soo on the company’s Internet-based support programs for traditional markets in Jejudo Island in June last year. (Yonhap)

But months later this week, industry people are scratching their heads after Kakao became the first Internet company to be listed on the government’s antitrust watch list.

Kakao denied any immediate business impact, saying: “We have anticipated the designation. We will continue to focus on what we have been doing.”

But industry watchers were concerned about imposing rules on the technology-driven company that were originally aimed at monitoring the excessive business expansion of family-run conglomerates, or cheabol.

“Kakao now faces more than 30 restrictions,” said Lee Byoung-ki, a senior analyst at Korea Economic Research Institute. “Some impact seems unavoidable at a time when the company is increasingly diversifying its business portfolio.”

Kakao has become a successful company operating the immensely popular mobile messenger app KakaoTalk. Currently, there are more than 150 million KakaoTalk users around the world.

More recently, the company is pushing hard its online-to-offline services such as Kakao Taxi, Kakao Driver and Kakao Hair Shop. It aims to connect all services via its own mobile platform in the longer term and until then it is willing to lose money, offering most of the services free of charge.

Since its merger with Internet portal Daum in 2014, Kakao’s assets increased to 3 trillion won ($2.6 billion). Following acquisitions of the navigation app Kimgisa (60 billion won) and the MeLon operator Loen Entertainment (1.87 trillion won), its total assets have surged to some 5.1 trillion won.

Under the nation’s fair trade laws, companies with assets of 5 trillion won or more are included into the “big business group” and are subject to heightened surveillance on equity investments and shareholders in affiliates.

But with Kakao’s joining, questions are being raised about the designation and the logic behind it.

Last year, Kakao posted an operating profit of 880 billion won, compared to Samsung Electronics’ 23.34 trillion won and Hyundai Motor’s 6.61 trillion won -- two companies topping the watch list.

Even though Naver’s revenue was more than triple that of Kakao last year, the rival company was not included on the list because it generates almost half its profits overseas. The FTC rules are not applied to assets held outside the country.

“Considering overall financial statements may be a better way to gauge the company’s size but current laws consider assets owned within the country only,” said Hwang Se-woon, researcher at Korea Capital Market Institute.

Another key issue is Kakao Bank.

Kakao is leading a consortium consisting of 11 banks and tech firms to launch the nation’s first Internet-only bank. Because local laws ban a company from owning a bank, a bill has been submitted to allow an exception for online banks.

But the exception doesn’t apply to a “big business group” company.

“The idea behind Internet-only bank is injecting venture spirit into the financial sector. Unless Kakao plays a key role, the purpose is meaningless,” Lee, the analyst, said.

Lee pointed out, among other things, that Kakao’s case could send a negative signal throughout the whole Internet industry.

“There will be more similar cases in the future. It would be absurd to control the ever-evolving Internet industry with decades-old laws,” he said.

By Lee Ji-yoon (