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Analysis of the 'LINE-Yahoo' Conflict Amidst South Korea-Japan Relations

GOOVER DAILY REPORT 6/3/2024
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TABLE OF CONTENTS

  1. Introduction
  2. Historical Background of LINE
  3. Recent Developments in the LINE-Yahoo Conflict
  4. Market Impact and Responses
  5. Economic and Security Implications
  6. Potential Outcomes and Future Scenarios
  7. Glossary
  8. Conclusion
  9. Source Documents

1. Introduction

  • This report delves into the complexities surrounding the 'LINE-Yahoo' conflict, analyzing the historical context, the recent developments, and the geopolitical implications on South Korea-Japan relations.

2. Historical Background of LINE

  • 2-1. The emergence of 'Cheol-Nun' and its acquisition by Naver

  • In 2005, a search engine named 'Cheol-Nun' (1noon.com) made its debut in the IT industry, drawing attention with its advanced search technology. Although there were speculations about Google acquiring it, 'Cheol-Nun' was eventually acquired by Naver (then NHN) in June 2006 for 35 billion KRW. Despite its short-lived operation, the people behind 'Cheol-Nun' greatly influenced the IT industry. One notable individual is Shin Joong-ho, the former CTO of 'Cheol-Nun' and later known as the 'father of LINE,' who played a crucial role in LINE's development.

  • 2-2. Early struggles and eventual dominance of LINE in Japan and Southeast Asia

  • Post-acquisition, Naver aimed to expand overseas and established NHN Japan. Initially, the venture did not succeed. However, with the advent of smartphones, NHN Japan pivoted to mobile messenger services, launching the LINE app. LINE quickly dominated the messaging market in Japan and Southeast Asia, similar to KakaoTalk's success in South Korea. LINE grew into a significant IT platform with ventures into payment systems, cloud services, and AI, becoming South Korea's first globally successful IT platform.

  • 2-3. Strategic partnership between Naver and Yahoo

  • In 2019, to counter intense competition in Japan's simplified payment service market, LINE agreed to a business merger with Yahoo (a subsidiary of SoftBank). This strategic integration aimed to reduce financial pressure from aggressive promotional competition in the market. Their combined efforts led to the formation of LINE Yahoo (LY), marking the emergence of a giant technology platform dominating both the portal and messenger markets in Japan. The operational balance had Naver and SoftBank each holding a 50% stake in LY's parent company, A Holdings.

3. Recent Developments in the LINE-Yahoo Conflict

  • 3-1. Initiation of Japanese Government Pressure on Naver

  • The Japanese government has recently pressured Naver, demanding a change in its shareholding structure in LINE-Yahoo. This pressure stems from a series of events including a significant data breach in October, which led to 440,000 user data records being leaked from Naver's cloud services. Consequently, Japan’s Ministry of Internal Affairs and Communications (MIC) has directed LINE-Yahoo to reduce its dependency on Naver and reconsider its capital relationship with Naver.

  • 3-2. The May 8, 2024, Resolution to Reduce Naver's Influence in LINE-Yahoo

  • On May 8, 2024, LINE-Yahoo announced a resolution to decrease its reliance on Naver's technology and capital. CEO Idezawa Takashi confirmed that LINE-Yahoo aims to phase out technical collaborations with Naver and independently manage its systems. Furthermore, the board structure was modified, reducing the number of inside directors from four to two, and increasing the number of outside directors to four, effectively removing Shin Jungho, the only Korean executive, from the board.

  • 3-3. Impact on the Governance Structure of LINE-Yahoo

  • The governance structure of LINE-Yahoo has undergone significant changes. With the Japanese government exerting pressure, LINE-Yahoo has started restructuring its board and gradually ending its service contracts with Naver. This decision also aligns with Japan's broader economic security policies under the Kishida administration, emphasizing control over critical infrastructure. Additionally, SoftBank announced plans to acquire a portion of Naver's shares in LINE-Yahoo, further reducing Naver's stake in the company.

4. Market Impact and Responses

  • 4-1. Reactions from South Korean government and public

  • The South Korean government has shown a strong response to the 'LINE-Yahoo' incident. The Ministry of Science and ICT expressed regret and has decided to take a strong stance against the situation where the Japanese government is pressuring Naver to divest its shares in LINE-Yahoo. Despite the South Korean government's firm position, Naver has not disclosed any specific response plan as of yet, which has brought criticism from some quarters. A briefing on this matter was held by Vice Minister Kang Do-Hyeon, where he emphasized that the South Korean government will firmly and strongly oppose any discriminatory measures or unfair treatments imposed on South Korean companies abroad. Additionally, the Ministry of Foreign Affairs and the Ministry of Science and ICT have established a new diplomatic policy consultation council to quickly share domestic and international trends in AI and digital fields and discuss related policies.

  • 4-2. Stance of Japanese government and political entities

  • The Japanese government, through the Ministry of Internal Affairs and Communications, has pressured LINE-Yahoo to address issues stemming from a data breach incident by reviewing its capital relations with Naver. In particular, the ministry directed LINE-Yahoo to reassess its dependence on Naver’s services and sever capital ties if necessary. This directive follows the 2019 decision to integrate Yahoo Japan and LINE, aimed at avoiding fierce competition in the mobile payment service market. The Japanese government views this issue through the lens of economic security, with officials like Sanae Takaichi emphasizing the need for a thorough review of the governance structure, indicating Japan's heightened focus on data sovereignty and the security of domestic IT infrastructure. The publicized stance from the Japanese government comes amid concerns from right-wing politicians that LINE's technology and operations remain heavily influenced by South Korea.

  • 4-3. Naver’s position and strategic responses

  • Naver has acknowledged the ongoing negotiations with SoftBank regarding the potential sale of its shares in LINE-Yahoo. The company has stated that it is keeping all options open to achieve the best possible outcome for itself, though it has refrained from sharing detailed strategies for the time being. Naver's silence on specifics has led to concerns about the effectiveness of the South Korean government's coordinated response. Despite these discussions, significant challenges remain in determining the valuation of the shares that might be sold. As of now, key figures within Naver, such as CEO Choi Soo-Yeon, have indicated plans to adhere to Japan’s administrative guidance, emphasizing adjustments to the company’s infrastructure to ensure independent operations from Naver while still navigating the complex relationship with its Japanese partners.

5. Economic and Security Implications

  • 5-1. Economic significance of LINE in Japan and Southeast Asia

  • LINE has significant economic influence in Japan and Southeast Asia, particularly highlighted by its partnership with Hana Bank to establish 'LINE Bank' in Indonesia. Launched in June 2021, LINE Bank represented a pioneering collaboration between a domestic bank and a big tech firm, marking the commencement of digital banking services in the region. Given Indonesia's large population of approximately 280 million, predominantly young demographic, and the nation's focus on digital financial innovation, LINE Bank quickly gained traction with over 80,000 new customers within a year. This success can be attributed to the seamless integration of LINE’s technical expertise and Hana Bank’s financial knowledge. Furthermore, despite fluctuations in PT Bank KEB Hana's operating revenue, LINE Bank was instrumental in overcoming financial challenges posed by the COVID-19 pandemic, indicating the economic importance of this venture.

  • 5-2. Security concerns raised by Japanese officials

  • Japanese officials expressed notable security concerns surrounding LINE, particularly after a significant data breach incident in November 2021. The breach was attributed to malware infections in Naver Cloud, leading the Japanese Ministry of Internal Affairs and Communications to demand a re-evaluation of the capital relationship between Naver and LINE-Yahoo. This directive was perceived as a call for Naver to divest its shares in LINE-Yahoo, heightening security apprehensions. The Japanese sentiment reflects a broader need to secure national technological infrastructures, marking LINE's handling of personal data as potentially vulnerable.

  • 5-3. Comparison with other big tech companies handling of personal data

  • When compared to other big tech companies like Google and Facebook, LINE's handling of personal data has come under more stringent scrutiny, particularly by Japanese authorities. The 2021 data breach intensified concerns, prompting administrative guidance that questioned Naver’s capacity to safeguard user information. Unlike its competitors, LINE's response involved administrative pressures, mirroring a stringent stance lacking in other regions where companies have more autonomy in addressing security incidents. This raises broader questions about the balance between technological advancement and privacy protection.

6. Potential Outcomes and Future Scenarios

  • 6-1. Short-term and long-term consequences for Naver

  • On June 8, Idezawa Takeshi, CEO of LINE-Yahoo, announced that the company would cease outsourcing service development tasks to its major shareholder, South Korean IT firm Naver. This declaration occurred during the LINE-Yahoo earnings press conference, where Idezawa also addressed a recent information leak and pledged to end the technological cooperation with Naver. The immediate plan involves investing approximately 150 billion yen (about 1.317 trillion KRW) this year to terminate outsourced services and internalize related functions. This decision could lead to significant short-term disruptions for Naver, which had previously held a 70% capital ratio that has since decreased to 50%. Long-term effects could include weakening Naver's influence and presence in the Japanese market as LINE-Yahoo moves towards technological independence.

  • 6-2. Possible shifts in South Korea-Japan tech relations

  • The LINE-Yahoo incident underscores ongoing tensions in South Korea-Japan tech relations. The Japanese government, citing a security breach involving 52 million user records, has pressured for a capital restructure where SoftBank holds more shares than Naver. This has culminated in Naver considering selling its shares in LINE-Yahoo. Conversely, despite internal major security breaches, including a SoftBank-related identity theft and hacking incidents involving Japanese lawmakers' smartphones, the Japanese government has shown leniency. This discrepancy in handling domestic versus foreign companies signals potential biases that could further strain relations. Furthermore, Naver's cautious stance and limited public comments reflect the diplomatic sensitivity,

  • 6-3. Impact on global tech governance

  • On a broader scale, the incident reflects the challenges of global tech governance, where national interests can override corporate decisions. The split ownership of LINE-Yahoo between Naver and SoftBank at a 50:50 ratio under A Holdings' umbrella is facing disruptions due to Japanese regulatory pressures. Complications from geopolitical tensions highlight how strategic corporate decisions are influenced by national security concerns. Moreover, with a shift towards Japanese-centric governance and operational autonomy, this case could set a precedent for future disputes involving multinational corporate structures in sensitive tech sectors.

7. Glossary

  • 7-1. LINE Corporation [Technology Company]

  • LINE is a popular messaging platform in Japan and Southeast Asia, originally developed by Naver Corporation. Its strategic decisions and corporate governance structure are central to understanding the conflict examined in this report.

  • 7-2. Naver Corporation [Technology Company]

  • Naver, a South Korean tech giant, has extensive interests in global tech markets, including significant stakes in LINE. Naver's role and responses are crucial in the ongoing conflict discussed in this report.

  • 7-3. Yahoo Japan [Technology Company]

  • Yahoo Japan, a subsidiary of SoftBank, merged with LINE to form LINE-Yahoo. Its role and strategic interests significantly influence the developments in this conflict.

  • 7-4. A Holdings [Corporate Entity]

  • A Holdings is the parent company of LINE-Yahoo, co-owned by Naver and SoftBank. Its governance structure and strategic decisions are key to the conflict.

  • 7-5. Shin Jung-ho [Individual (Technology Executive)]

  • Shin Jung-ho, the former CPO of LINE-Yahoo, has been a pivotal figure in the development of LINE. His role and subsequent resignation are significant events in the ongoing conflict.

  • 7-6. Japan Ministry of Internal Affairs and Communications [Government Entity]

  • This Japanese governmental body has been instrumental in applying regulatory pressure on LINE-Yahoo, pushing for changes in its governance and data handling practices.

8. Conclusion

  • In conclusion, the 'LINE-Yahoo' conflict highlights the intricate interplay between corporate partnerships, geopolitical tensions, and national security concerns. Both South Korea and Japan face significant decisions as they navigate this complex landscape.

9. Source Documents