Online giants attract attention and restrictions

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Online giants attract attention and restrictions

 
Korea's big internet players — Kakao and Naver — are in the crosshairs of authorities and politicians, who are branding them as having grown too fast and too widely at the cost of consumers and small businesses.
 
Kakao had 115 local affiliates as of June, with the number rising to 158 including overseas subsidiaries. It acquired 47 companies since 2016.  
 
“It has been charging excessive fees while expanding its business by launching KakaoTalk Gift, Kakao Hairshop, Kakao T and Kakao Friends Golf,” said Rep. Lee Dong-ju of the ruling Democratic Party (DP). “This is typical behavior of conglomerates and chaebol.”
 
A spokesperson for Kakao admitted the company “tends to have a large number of companies related to its core businesses due to it being a platform company.”
 
Some critics are concentrating on the type of business Kakao has expanded into: services related to everyday life such as the KakaoTalk messenger application, which has 45 million users, and mobile payment service Kakao Pay, which has 36 million. Over 16.7 million people use Kakao Bank.
 
The more data it acquires, the easier it becomes for Kakao to tap into new businesses and dominate new fields.
 
Kakao's expansion into certain industries is seen as too pervasive, and taxis is the best example. Kakao Mobility operates taxi hailing application Kakao T, which is supposed to be an app connecting riders with taxis of all types. But Kakao Mobility also has a subsidiary called KM Solutions, under which Kakao Blue drivers are registered. Kakao Blue is a taxi that charges extra for better services.


So Kakao runs both the app that hails the taxis — and some of the taxis themselves.
 
Taxi unions have accused Kakao Mobility of prioritizing its Kakao Blue taxis when allocating rides, and an investigation into that practice seems to be going ahead. FTC Vice Chairperson Kim Jae-shin said on Sept. 10 the antitrust body “is conducting an investigation after it received reports that a major mobility platform discriminated against non-franchise taxis and prioritized rides to its taxi franchises.”  
 
Although Kim didn’t mention a specific name, he seemed to be referring to Kakao T, which has 80 percent of the cab-hailing market.  
 
“If an online platform is a playing field, Kakao is basically both the referee and the athlete, which is why it’s being called unfair,” said Lee Sang-gun, a business professor at Sogang University.  
 
Naver is facing similar accusations. It expands through strategic partnerships and share swaps. This year, Naver swapped shares with Emart and Shinsegae International. Past partners include CJ Logistics, Mirae Asset Securities, CJ ENM, drama production company Studio Dragon and HYBE.
 
Some are worrying that Naver is sucking up too much personal data from its customers as it expands. When buying things on Naver Shopping, people can use Naver Pay to pay. They receive loyalty points, which brings them back to Naver Shopping to buy more things. At all points of the cycle, data is collected.
 
This lock-in strategy has worked, with users and revenues constantly growing. In the second quarter, Naver’s e-commerce and fintech businesses recorded sales of 365.3 billion won ($310.7 million) and 232.6 billion won respectively. That’s first time sales of the two areas made up for more than half of the company’s total revenue.
 
“It’s even more dangerous than chaebol and conglomerates of the past because it has exclusive control over data,” said Professor Lee. “If it dominates the market, then the harm is spread to all consumers.”
 
The rumbles of regulation have been getting loud recently.
 
“There are growing concerns regarding the ill side effects of online platforms,” said FTC chairperson Joh Sung-wook at a meeting with the European Chamber of Commerce in Korea on Sept. 10.  
 
The FTC plans to amend the Fair Online Platform Intermediary Transactions Act to oblige big online retailers to sign a contract with sellers when deciding to carry products on their e-commerce websites. Currently, the two parties aren’t obliged to draw up a contract.
 
If the amendment is made, the contract will have to include how much commission the platform operators will receive. 
 
Companies that earn transaction commissions of 10 billion won or total transactions of 100 billion won will be covered by the law, which will include some 30 companies including Naver, Kakao and Coupang.  
 
“Considering the opposition of the platform operators, we will only implement minimum regulations,” said an official for the FTC.  
 
The FTC also plans to amend the Electronic Transaction Act to force the platform operators to compensate customers if it is not clear whether the platform or another company is the actual seller.
 
Companies will also need to state if they are using targeted advertisements based on user data they have collected.
 

Although the new guidelines and restrictions are intended to protect small businesses, some say the measures could actually hurt them.  
 
“Obliging businesses to sign contracts under the Fair Online Platform Intermediary Transactions Act could restrict small- and mid- sized businesses from even starting business on [the platforms],” said Jeon Seong-min, a professor of business at Gachon University. “Explicitly stating that something is a targeted advertisement would inevitably take away the effectiveness of the ads, leading to a rise in marketing costs for the small businesses.”
 
A legal expert said some new regulations are designed to emulate rules in Japan and the European Union, although market conditions are different in Korea.
 
“Any new platform-related laws such as the Electronic Transaction Act mostly follow those of the European Union and Japan’s, but those countries have different situations,” said Hong Dae-sik, a Sogang Law School professor specializing in competition law. 
 
“Similar laws were implemented in Japan to protect local platform operators because global companies such as Google and Amazon had a huge influence, but local companies such as Naver and Kakao are strong in the market."
 
“If the competitiveness of Naver and Kakao weaken due to regulations, global platform companies from the United States will penetrate the market.”
 
 
 

BY JUNG WON-YEOB, KIM JUNG-MIN, JEONG JIN-HO [lee.taehee2@joongang.co.kr]
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