Kakao Corporation, South Korea’s leading tech company known for its popular messaging app KakaoTalk, is facing a severe crisis. Its top executives, including founder Kim Beom-su and Chief Investment Officer Bae Jae-hyun, are embroiled in legal battles over allegations of stock manipulation during the high-profile takeover of SM Entertainment — a South Korean multinational entertainment agency.

This legal issue could have significant consequences for Kakao, as a conviction would mean losing management control of KakaoBank, its internet-only banking venture, as per Korean law. This situation is particularly critical as it threatens to derail the company’s global expansion plans, especially with SM Entertainment, a key player in the K-pop industry.

The impact of these legal troubles is already visible in the company’s financial performance. Kakao’s stock, once a darling among small investors for reaching an all-time high of $130 per share in 2021, has seen a dramatic fall to between $23 and $30 this year.

This decline in stock value reflects the immediate concerns over the current legal situation and raises questions about the future stability and growth strategy of one of South Korea’s most prominent tech giants.

EXPANSION AND OPERATIONAL RISKS

Kakao’s aggressive expansion through mergers and acquisitions marks a significant aspect of its current crisis. The company, which outranks even Samsung in its growth, has expanded its reach beyond its core technology and messaging services.

From 65 affiliates in 2018, Kakao’s network has ballooned to 144 as of August, including ventures in disparate sectors like beauty salons, indoor golf driving ranges, and the taxi-hailing industry. Kakao has even succeeded in taking over Daum, one of South Korea’s major internet portal services and has also tapped into the music and entertainment industries.

This rapid diversification, however, has not been without controversy. Kakao’s expansion into small-market industries has raised concerns about its potential impact on small businesses. 

Despite promises by founder Kim Beom-su in a 2021 parliamentary audit to scale back from these markets, the company’s number of affiliates has continued to increase.

Kakao’s seeming focus on growth at the expense of investing in the quality and resilience of its core services is compounding these issues. This was illustrated in Oct. 2022 when a fire at a Kakao data center in Pangyo city caused a widespread service outage.

This incident, which disrupted various sectors across the country for nearly five days, contrasted sharply with the quick recovery of Naver, which also used the same data center but had additional facilities for a more rapid response.

The data center fire and the ensuing service disruption revealed significant gaps in Kakao’s investment in infrastructure and emergency preparedness. The incident damaged user and investor trust and raised serious questions about Kakao’s management and prioritization strategies.

Kakao Mobility CEO Ryu Gung-seon discusses advanced industry cooperation with global leaders during the ‘2023 Korea-Poland Business Forum’ as part of the economic delegation in Poland, July 16, 2023 | Image: Kakao Mobility

ESCALATING MONOPOLY CONCERNS

Kakao Mobility, a subsidiary of Kakao Corporation, has come under criticism for practices that South Korean President Yoon Suk-yeol has termed “extremely unethical” examples of monopolistic behavior.

At a town hall meeting on Nov. 1, Yoon criticized the company for employing strategies that eliminate competitors by initially offering low-cost services and then hiking prices once it has secured a dominant market position.

In the taxi-hailing sector, Kakao Mobility is a dominant force, controlling over 90% of the market share in Korea. This dominance has led to criticisms over its commission practices, with taxi drivers protesting the 3 to 5% commission rates as excessively high, especially compared to lower rates offered by competitors.

Adding to its challenges, Kakao Mobility faced a $20.3 million fine from the Fair Trade Commission (FTC) in February for manipulating its taxi-hailing application’s algorithms. The FTC found that Kakao unfairly favored its franchise drivers in assigning rides, particularly excluding them from less profitable short trips.

This practice led to a sharp increase in the number of affiliated drivers, growing by 73.7% from 2019 to 2021 and allowed Kakao to expand its market presence in what the FTC deemed an unlawful manner.

EYEING INNOVATION

Kakao’s founder, Kim Beom-su, has vowed to reassess the company’s operations in response to the mounting legal challenges and internal issues. This strategic shift includes an in-depth review of Kakao’s services, management practices and personnel.

Kim conducted a third emergency meeting at Kakao Mobility’s headquarters instead of Kakao Corporation’s headquarters, signaling a focused approach to address the criticisms, particularly those highlighted by President Yoon Suk-yeol. The company plans to roll out its reform measures by early next year.

A key element of this reform is overhauling Kakao Taxi’s fee system. The company is reviewing plans to reduce commission rates to below 3%, a move likely aimed at addressing the monopolistic concerns raised.

Simultaneously, Kakao is turning its gaze to the European mobility market, a significant global arena. Industry insiders expect Kakao Mobility to submit its final bid to acquire 80% of FreeNow, a leading German mobility service provider that commands a significant share of Europe’s taxi-hailing market.

Kakao’s investment in FreeNow would be the company’s second foray into international markets following its earlier acquisition of a 49% stake in Splyt, a British ride-hailing startup.

This shift toward global markets may be a strategic response to Kakao’s over-dependence on the South Korean market, which has fueled its aggressive expansion. The move to the European market represents an opportunity for Kakao to diversify its portfolio and reduce the risk associated with its home market.

However, Kakao’s strategy in addressing its challenges raises questions about the company’s approach to innovation, particularly in areas like artificial intelligence. While Kakao has predominantly focused on growth through mergers and acquisitions, the progression in such next-generation technologies has been relatively slow for Kakao, suggesting a potential area for future development.

This shift toward embracing technological innovation could be crucial in defining Kakao’s trajectory in the competitive global tech landscape.

Edited by John Lee