Korean internet giants stick to what they know amid falls in net profit

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Korean internet giants stick to what they know amid falls in net profit

Kakao CEO Namkoong Whon, left, and Naver CEO Choi Soo-yeon share greeting messages during a meeting held in central Seoul on June 22. [JOINT PRESS CORPS]

Kakao CEO Namkoong Whon, left, and Naver CEO Choi Soo-yeon share greeting messages during a meeting held in central Seoul on June 22. [JOINT PRESS CORPS]

 
Faced with lower profit margins, Korean internet giants Naver and Kakao will stick to their mainstay advertising businesses instead of venturing into new territories, according to the two companies' chiefs.
 
While both companies eye the digital advertisement and web content sectors, Naver put its focus on commerce and Kakao announced plans to grow its KakaoTalk messaging app as a new cash cow.
 
The two companies will expand both display ads, which are the visual advertisements that show up on users’ screens like pop-ups or banners, and search ads, which push certain websites higher on search results for a fee.
 
Kakao will expand the ad banners on its KakaoTalk chatting app and also implement search ads on its "Open Chat" feature, while Naver will upgrade its display and search ads by refining its user data analysis.
 
Korea’s two internet giants reported increased revenue during the April-to-June period, but net profit fell 70 percent and was far below analysts’ expectations during conference calls held last week.
 
Kakao reported a 68 percent plunge in net profit to 101.2 billion won ($77.5 million) compared to the year prior and Naver’s net declined 70.7 percent on year to 158.5 billion won. Market consensus for Naver and Kakao was that net profit would have grown.
 
Investor sentiment has also been declining since August last year and shrinking the two companies’ market capitalization to numbers similar to two years ago.
 
On Aug. 6, 2021, Naver’s market cap came in at 73 trillion won and Kakao’s at 65 trillion won — sitting in the third and fourth spots on the Kospi market. On Monday, they had fallen to 42 trillion won for Naver and 36 trillion won for Kakao, seventh and tenth on Kospi.
 
The CEOs of the two companies both cited “pandemic-driven high base effect from the last two years amid a slowing economy,” but falling numbers weren’t the only similarities that the two tech companies shared.
 
During the conference calls, Naver CEO Choi Soo-yeon and Kakao CEO Namkoong Whon — who were both appointed earlier this year — announced plans to use digital advertisements to remedy their ails. Naver said it will tilt from search ads to display ads, while Kakao said the opposite.
 
The decisions come naturally because the highest-grossing sectors for the two companies include their advertisement businesses. Naver’s search platform unit made up 45 percent of its revenue while Kakao’s KakaoTalk businesses made up 23.6 percent of its revenue in the second quarter.
 
Starting in the fourth quarter, KakaoTalk apps will begin exposing search ads to users who look up “Open Chat” rooms, where users can join chatrooms opened up by others according to their different interests.
 
Kakao will be coming after Naver’s throne in the search ad race, which Naver has a 66.1 percent share of as of July. Kakao currently only takes up 4.6-percent of the market, but CEO Namkoong aims to turn it around by implementing search ads not only on its websites but also on the KakaoTalk app.
 
“Right now, the top-paying 1 percent of advertisers pay for 70 percent of all revenue,” he said. “This works to our disadvantage, especially during times like these where companies seek to reduce costs. We will be changing our fundamentals to fix this structure.”
 
Naver will be expanding its commerce service by providing paid data analysis and logistics services to its vendors and raising the commission rate. CEO Choi also announced plans to expand its commerce business to Japan in partnership with SoftBank’s Yahoo! Japan.
 
The two companies will also be facing off in the web content race. Naver’s content division, which includes its webtoon business and Snow camera app, jumped 113.8 percent in revenue. Kakao’s sales in the content sector, which includes webtoons, rose 51 percent.
 
Analysts pushed for a more fundamental change in business models, as internet companies struggle not only in Korea but globally. Tech giants including Amazon, Meta and Netflix have all been seeing plunging stock prices since last year.
 
“New revenue models need to be explored,” said Oh Dong-hwan, a senior analyst at Samsung Securities. He warned that both Naver and Kakao may be facing lower results in the second half of the year.
 
“Search platform and commerce businesses are steadily growing, but the firm [Naver] needs to invest in new businesses for a while. All in all, the firm needs to enhance profitability via exploring new revenue models.”

BY KIM JUNG-MIN, YOUN SANG-UN AND YOON SO-YEON [yoon.soyeon@joongang.co.kr]
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