Seoul has led the global regulatory charge against Google and Apple and has local champ Kakao in its sights
By Andrew SALMON
Daniel Tudor is a cheerful man and he has every reason to be: The South Korean government has, simply by passing a piece of legislation, made him 15% richer.
“Of course, I am happy,” said Tudor, a Seoul-based British expatriate entrepreneur as he discussed the recent enactment of Seoul’s so-called Anti-Google Law. “It will benefit my company.”
Tudor is the CEO and co-founder of Kokkiri (“Elephant”) a meditation app firm that boasts 400,000 users. Prior to the passage of the new law – in fact, a revision to an existing act – his firm, like all other app developers, was required to pay 15% of sales in commission to Apple and Google.
No more. App developers in South Korea, even if they run on Apple’s iOS or Google’s Android, can henceforth use their own, or third-party payment systems. That means no more commissions to the big boys, and bigger margins for the little guys.
The National Assembly’s action has been happily received by Tudor and his ilk – the wave of start-up entrepreneurs that the last two Seoul governments have enthusiastically boosted with multiple policies, including freed-up finance, eased loan conditions, incubation assistance and consulting.
And as the first major economy to take such action against the two global platform giants, South Korea’s action has no doubt provided food for thought for lawmakers and regulators in other parts of the world.
Asia vs. platforms?
But Seoul has not confined its assault on big tech to Google and Apple.
One week after the legislation was passed, the country’s star homegrown platform – KakaoCorp, which started as a free messaging service and has since branched out into everything from taxi hailing to online banking – found its dominant position in multiple sectors under discussion by lawmakers. That ignited a stock rout. A week later, it was in regulators’ gunsights.
The company is deep on the defensive.
With its share price having plunging from 154,000 won ($130) on September 7, when lawmakers first spoke up, to 116,500 won on Friday, Kakao announced this week that it was delaying the planned September 29 IPO of its payment service, KakaoPay.
Meanwhile, Kakao’s chairman has reportedly been summoned to attend a National Assembly hearing next month amid the end-of-year parliamentary audit.
While the move against the global big boys had been long brewing, the new focus on local champ Kakao has surprised the market.
It could mark a hardened stance by East Asian governments – home to powerful metal bashing economies, but weaker service sectors – toward digital platforms owned by big tech firms.
Platform companies, such as Google, YouTube, Airbnb and Alipay ease business by enabling interactions between two or more parties. The model, beloved of Silicon Valley, generates value by building up huge networks, but does not actually make stuff.
To Seoul’s west, Beijing has been making global headlines since February with its crackdowns on platforms including AliPay, Didi and Tencent. However, it has kept its hands off tech manufacturing powerhouses like Huawei and SIMIC.
While there is no indication of policy coordination between Seoul and Beijing, Korea’s strategy looks – coincidentally – similar, as it is not just Google, Apple and Kakao. Senior executives from multiple domestic platforms face an upcoming grilling at the National Assembly.
Meanwhile, another senior tech business figure has been enjoying rather different treatment. On August 14, Lee Jae-young, the de facto chief of Korea’s national flagship Samsung, was released from jail, despite not completing his sentence on a white-collar rap.
Lee’s freedom came courtesy of a controversial parole. However, in defiance of the terms of that parole, which bans him from management for five years, he is back in the corporate driving seat, and on September 14 announced a four-year, 40,000-job-creation plan.
His announcement – Lee’s first public appearance since leaving prison – was made in the company of Prime Minister Kim Boo-kyum.
There is abundant clear space between the governance of communist China and democratic South Korea. Even so, the foregoing suggests that it may be Asian governments – which are more comfortable regulating manufacturing sectors, and which hold generally more dirigiste instincts – rather than European or North Americans administrations that will lead the regulation of the platform economy.
“No government is really comfortable dealing with these platform companies as they are new, the services they offer are new, and they span corporate and geographical boundaries,” said Matt Weigand, a Seoul-based PR executive with a tech background. “It looks like the East is taking the ball on this one and running with it.”
Korea’s ‘Anti-Google law’
On August 31, South Korea’s National Assembly passed a revision to the Telecommunications Business Act, imposing curbs on the payment policies of Google and Apple. Those policies require app developers to use only the tech giants’ proprietary payment systems on their mobile operating systems – respectively, Android and iOS.
Apple and Google require developers to pay commissions on these systems. The bill allows developers to use other payment options.
Pressure had been building internationally with regulators in multiple countries scrutinizing the two companies which dominate the mobile OS space globally.
In response, last November, Apple said it would cut its payment commission for small developers with income of less than $1 million in annual sales from 30% to 15%. This March, Google followed suit, also slicing its commission from 30% to 15%.
Korea is the first major economy to take the plunge and legislate against the tech behemoths. Given that the country has customarily benchmarked overseas regulatory models rather than innovating them, this suggests a bold new anti-trust appetite within the ruling Democratic Party of Korea, which holds a super majority in the National Assembly.
“I am a bit surprised as I did not think Korea would be the first country to move on this, though I thought it would happen eventually since regulators all over the world have been looking into it for a while,” Tudor said. “I was thinking this would be something that would first happen in Europe and then other countries would act later.”
The revision, which took effect 15 days after its passage in the Assembly, is designed to prevent the two mobile giants from “unfairly using their market position to force a certain manner of payment” upon businesses. Violators can be fined up to 3% of their annual sales, or up to 300 million Korean won ($257,000) in sanctions.
The move has been informally dubbed the “Anti-Google law” in Korea – possibly because the best-selling smartphones in the country, those produced by Samsung, use the Google operating system, Android, which is applied in 73%-80% of smartphones globally, rather than Apple’s iOS.
Samsung, despite its dominance in IT hardware – it is the world’s leading seller of both smartphones and memory chips – has been unsuccessful in promoting its OS, Bada, or in the broader platform space.
In a subsequent but related development on September 14, South Korea’s Fair Trade Commission announced a 207 billion won ($177 million) fine against Google for hampering competition in the smartphone market by prohibiting smartphone makers from loading modifications of Android, or other operating systems, on to their phones.
Google has appealed.
But by then, Seoul’s crackdown had shifted focus. On September 13, Kakao found itself under regulatory investigation.
A kicking for Kakao
That came as a surprise to many. While it may not – yet – be a global brand name, Kakao is one of the country’s biggest success stories of recent years.
South Korea’s first industrial revolution took place under authoritarian governance in the 1960s and 70s, giving birth to the heavy industrial conglomerates, such as Samsung, Hyundai and LG, that would become the country’s economic locomotives.
Swift and widespread embedding of broadband Internet in the late 1990s helped Korea exit the Asian financial crisis and ignited its second industrial revolution, based around digital technologies. Surviving the dotcom bust, a wave of new firms, such as Internet portal Naver, gaming firm Nexon and the entertainment companies that now disseminate K-pop, rose to prominence.
The mobile-based third industrial revolution saw the advent of platform firms such as on-demand delivery players Coupang and Woowa Brothers. But the big gorilla in the space is KakaoCorp.
In 2010, Kakao launched its free messaging service. Boasting a first-class, fun and user-friendly interface, KakaoTalk became the mobile communications app of choice for high-tech South Koreans. Having won trust, affection – and a reported user base of 46 million, among a national population of 52 million – Kakao expanded in every direction.
It runs payment service KakaoPay, digital finance firm KakaoBank, and leading music streaming app Melon. It publishes games, videos and webtoons. So widespread are its operations, visitors to Korea might be mistaken for believing Kakao is an official service.
After ride-sharing firm Uber was banned in the country due to furious political pressure from the taxi lobby, Kakao stepped into the vacuum and helped out authorities by assuaging public anger at the unpopular move via a free hailing app for taxis. How about a bus? If you need to know routes and times, Kakao has your back.
The leading mobile QR code adopted in the Covid-19 era for entry to buildings and businesses is supplied by Kakao. Even the presidential Blue House uses Kakao’s messenger service as its communications channel with foreign reporters.
Yet over the last month, Kakao has been riding a rollercoaster of soaring bad news and plummeting stocks.
On September 7, ruling party lawmakers warned about its expansive tendencies and dominant position, sending Kakao stock into a downward spiral. The tough talk from lawmakers continued the following day. Subsequently, both the Fair Trade Commission and the Financial Supervisory Commission launched probes.
The FTC found flaws in public disclosures, and required Kakao to submit a detailed map of their affiliate structure. The probe focused in on a company owned by chairman Kim, K Cube Holdings, that appears to have switched roles – from a software and consulting company to a financial investment company. This should not hold voting rights in affiliates.
“I think that is a violation of the Fair Trade Act,” Park Sang-in, an anti-trust specialist at the elite Seoul National University, told Asia Times. He considers such a move “serious,” but admits that considerable opacity still surrounds the probe: “That is my guess,” he stressed.
The FSC has been probing regulatory discrepancies related to KakaoPay – notably whether it was appropriately licensed to act as a financial intermediary, Park said, citing complaints from insurers and other traditional finance players.
In a country known for policy initiatives that favor major businesses, what has driven this offensive against a rising national champion?
Behind the scenes
With Moon Jae-in now in his presidential twilight – an election is set for March 2022 – conspiracy theories are rife. A Korean investor, who requested anonymity due to the sensitivity of the matter, summed them up.
“There is something going on, as this government has been supporting platforms – Kakao got a lot of business support – then, all of a sudden, pretty much at the time they are finishing their term, they are starting to press Kakao,” he told Asia Times. “It looks like a political move.”
Even though Kakao’s current rout was sparked by lawmakers’ comments, not all agree.
“I don’t know if this is a coordinated action by the government as a whole,” Park cautioned, suggesting that regulators appear to have sound grounds for their investigations.
Park also did not see a link between Seoul’s maneuvers against Apple and Google, on the one hand, and against Kakao, on the other.
Even so, the team Moon entered office with in 2017 is not what it used to be. After multiple personnel reshuffles over the last four and a half years, policy priorities may have shifted.
“The Moon administration advocated the growth of big tech like Kakao and Naver,” Park said. “But I would guess that drive has been weakened by the changes of staff in the Blue House.”
Especially notable are changes in the leadership of the economic and financial regulatory teams, Park said, though he remains unsure if current policy is “explicit or consensual.”
Even so, within the ruling party, there is clear interest in trammeling the expanding power of platforms.
“The recent controversy regarding Kakao illustrates the government’s plan to crack down on platform-based tech firms that face allegations of misusing their market power,” a ruling party lawmaker said this week according to reports.
“Anti-trust regulators and politicians don’t want to see a complete exit of big tech companies. What they want is to see how the rising big tech companies can provide specific plans for co-existence.”
Joining Kakao’s Kim at the National Assembly interrogation next month will be senior executives from Coupang, Nexon, on-demand service provider Woowa Brothers/Baemin and online travel/accommodation player Yanolja.
It looks increasingly like a turning point for platforms in Korea.
“This all shows how entrenched apps and the mobile economy are. The app environment is now considered something like a utility,” said Tudor.
“Platformization is something that worries me. The very essence of the platform model is oligopoly, ginormous margins, and one-sided relationships between the platform and the guy delivering your pizza, etcetera. In general, I think they should be heavily regulated.”
Still when it comes to regulation, while the means of different Asian governments may appear similar, their desired ends are different, Weigand said.
“I understand that the motivation of the Chinese government is because the platforms have been launching IPOs on the US stock market, so are getting out from under the thumb of the Chinese government,” he said. “I think that the Korean government is more in line with what the EU is doing in trying to break up these monopolies – these eco-systems in their walled gardens – and open things up.”