Naver and Kakao, South Korea’s leading IT platform companies, are facing significant challenges. On the surface, the crisis appears to stem from Naver’s “LY Corp. incident” and the arrest of Kakao’s founder. However, industry experts point to a deeper issue: a lack of innovation to counter the aggressive push from global tech giants like Google and Meta, which are leveraging advanced AI technologies.
Naver and Kakao have uniquely positioned themselves as the only local platforms in South Korea, unlike the rest of the world dominated by American big tech platforms, except for the closed-off Chinese market. Recently, both companies have seen a decline in market share in the search engine and messaging markets. Kakao’s stock price has plummeted to a quarter of its value over the past three years, and Naver’s stock has dropped by more than 60 percent during the same period. A domestic industry insider warned, “There is growing concern that the South Korean platform market could be completely overtaken by foreign big tech companies, much like in Europe.”
For Naver and Kakao, which have thrived by dominating the local market, the only way to overcome this crisis is by exploring new business ventures and expanding globally. However, their efforts have yet to yield significant results.
Piccoma, Kakao’s subsidiary that dominated the Japanese manga app market and was considered its most significant overseas achievement, withdrew from the French market in May due to “sluggish market growth.” Additionally, Kakao has yet to launch its much-anticipated AI technology, KoGPT. In 2023, Kakao’s operating profit decreased by 11 percent compared to the previous year, with its commerce and advertising business on KakaoTalk being the only stable sources of revenue.
Similarly, Naver’s major overseas success, LY Corp. in Japan, faces difficulties in market expansion due to friction with the Japanese government, which is wary of foreign platforms. Even Naver’s core e-commerce business is experiencing slower growth in domestic market due to competition from Chinese e-commerce giants like AliExpress and Temu. Naver’s total commerce transaction volume grew by only 6 percent in the first quarter compared to the same period last year, lagging behind the overall online shopping growth rate of 9 percent.
One of the biggest dilemmas for Naver is its AI technology. Despite investing over 1 trillion won, Naver’s language model HyperCLOVA X has yet to produce significant results and is at risk of becoming a costly misadventure. Naver’s cloud division, responsible for its AI solutions, only generated 117 billion won in revenue in the first quarter. Considering Naver invests over 700 billion won annually in AI hardware, there is still a long way to go. Due to the poor performance of the cloud division, Naver’s operating profit margin fell from 20 percent in 2021 to 15.4 percent in 2023. An industry expert noted, “Competing with the massive AI models developed by companies like OpenAI and Google, which involve astronomical investments, is inherently challenging.”
Amid the lack of a clear future strategy, even Naver’s dominant position in the domestic search engine market is being threatened. A decade ago, Naver had a market share of over 80 percent, but it has now dropped below 60 percent. According to Internet Trend, Naver’s search engine market share in July is 55.9 percent, with the gap with second-place Google (35.6 percent) steadily narrowing.
As more young people use messaging features on platforms like YouTube and Instagram, KakaoTalk is also losing ground to foreign platforms. KakaoTalk, which boasted over 47 million users and the highest monthly active users in South Korea, lost over 2 million users in 2023. For the first time in December, it was overtaken by YouTube, which had 45.65 million users.
