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Analysis of the 'LINE-Yahoo' Dispute: Implications and Reactions

GOOVER DAILY REPORT 6/3/2024
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TABLE OF CONTENTS

  1. Introduction
  2. Background of LINE and Its Development
  3. The Governance Structure of LINE-Yahoo
  4. Triggers of the Current Dispute
  5. Responses and Actions Taken
  6. Government and Public Reactions
  7. Potential Implications for Future Ventures
  8. Glossary
  9. Conclusion
  10. Source Documents

1. Introduction

  • The dispute over LINE-Yahoo's governance between Korean and Japanese stakeholders has significant implications for the technology and geopolitical landscapes of both countries.

2. Background of LINE and Its Development

  • 2-1. Establishment of '1noon' and Its Acquisition by Naver

  • In 2005, '1noon.com' was launched, catching the attention of the IT industry with its advanced search technology. There was speculation that Google might acquire it, as it was seen as a potential competitor. However, in June 2006, 1noon was acquired by Naver (then known as NHN) for 35 billion KRW. Although the official reason given by Naver was to expand into the international search market, some believed that Naver absorbed a future competitor. Following the acquisition, 1noon continued as a project under Naver until its services were discontinued in 2007. Despite its short-lived operation, the personnel from 1noon, including CTO Shin Joong-ho, who later became known as the 'Father of LINE,' left a significant impact on the IT industry.

  • 2-2. Growth of Mobile Platform LINE

  • Naver established 'NHN Japan' after acquiring 1noon, initially struggling in the Japanese market. With the rise of smartphones, Naver pivoted to a mobile messenger service, launching the LINE app, which quickly dominated the messenger markets in Japan and Southeast Asia. Over the years, LINE expanded from a simple messaging app into a comprehensive platform integrating payment services, cloud solutions, and AI, akin to the success trajectory of KakaoTalk in Korea. LINE became the first significant IT platform from Korea to achieve success in international markets.

  • 2-3. Merger with Yahoo Japan

  • In 2019, LINE faced intense competition in Japan's payment services market, especially from Yahoo Japan, a Softbank subsidiary. To curb the financial burdens from intense cashback promotional wars, LINE decided to merge with Yahoo Japan, leading to the creation of 'Z Holdings'. This new entity, branded as 'LINE-Yahoo (LY),' positioned itself to dominate both the portal and messenger markets in Japan. The corporate structure of LY is balanced, with both Naver and Softbank holding 50% stakes in their parent company, A Holdings. While management primarily consists of Japanese personnel, technical development is led by Korean teams. However, recent interventions by the Japanese government demand Naver to divest its shares in A Holdings, citing issues arising from a past data breach incident and the need to ensure security independence from Naver.

3. The Governance Structure of LINE-Yahoo

  • 3-1. Ownership Distribution between Naver and SoftBank

  • The ownership of LINE-Yahoo is evenly split between South Korea's Naver and Japan's SoftBank, each holding a 50% stake in the joint company AHoldings. This balanced ownership structure has been fundamental in maintaining operational equilibrium until recent pressures from the Japanese government began demanding changes. The Japanese authorities have asked AHoldings to reconsider the capital relationship by reducing Naver's stake, thus altering the governance balance in favor of SoftBank.

  • 3-2. Role of Key Personnel: Shin Jung-ho

  • Shin Jung-ho, once the CTO of the early search engine 1noon and now the CPO of LINE-Yahoo, has been a pivotal figure in the company's technological development. Despite his crucial role and contributions, he has recently resigned from his position on the board of directors as of May 8, 2024. This resignation follows pressures arising from political and strategic friction between South Korea and Japan, especially after significant data security violations and governmental interventions. Although Shin will no longer serve as an internal director, he continues to oversee the technology development at LINE-Yahoo.

  • 3-3. Operational Dynamics Between Korean and Japanese Teams

  • Operational responsibilities within LINE-Yahoo are split between Japanese and Korean personnel. Typically, Japanese executives handle managerial duties while Korean teams focus on technology development. This division of labor is currently under strain due to regulatory directives from the Japanese government, specifically triggered by a significant data breach incident involving 440,000 user records. Following this incident, the Japanese Ministry of Internal Affairs has mandated LINE-Yahoo to sever its reliance on Naver's systems and operations, demanding greater autonomy and a reevaluation of board structure to enhance independence.

4. Triggers of the Current Dispute

  • 4-1. Personal Data Leak Incident

  • The immediate cause of the 'LINE-Yahoo' dispute was a personal data leak incident in October 2023. During this incident, approximately 440,000 user data records were leaked from LINE's virtual server, managed by Naver Cloud. This prompted Japan's Ministry of Internal Affairs and Communications to conduct an investigation. In response, the ministry issued two administrative guidance documents to LINE-Yahoo, instructing them to reassess their dependence on Naver due to insufficient security measures.

  • 4-2. Administrative Guidance from Japan's Ministry of Internal Affairs and Communications

  • Following the personal data leak, Japan's Ministry of Internal Affairs and Communications issued administrative guidance to LINE-Yahoo, demanding an improvement of their security system independent of Naver. The ministry emphasized the need to reconsider the capital control relationship between Naver, A Holdings, and LINE-Yahoo. This move highlights the ministry's significant concerns about LINE's reliance on Naver's infrastructure and the potential risks it poses to data security.

  • 4-3. Demands for Ownership Structure Changes

  • Additionally, the Japanese government requested changes in the ownership structure of LINE-Yahoo's parent company, A Holdings, insisting that Naver reduce its shares. This demand, which extends beyond typical security improvements, underscores Japan's intention to diminish Naver's influence over LINE-Yahoo. The government argues that resolving the capital relationship is crucial to mitigating potential security risks and asserts that the company should function more independently from its South Korean stakeholders.

5. Responses and Actions Taken

  • 5-1. Resignation of Shin Jung-ho from LINE-Yahoo's Board

  • Shin Jung-ho, the Chief Product Officer (CPO) and the only Korean member of LINE-Yahoo's board, was excluded from the board in a recent move aimed at enhancing the company’s operational independence. This decision aligns with LINE-Yahoo’s strategy to end business delegations to Naver and pursue technological independence.

  • 5-2. Naver's Official Stance on the Dispute

  • Naver has officially addressed the 'LINE-Yahoo dispute,' acknowledging that a potential stake sell-off is under discussion with SoftBank. Naver stated its intent to achieve the best possible outcome for the company, including exploring all options, and is in sincere negotiations with SoftBank. Despite the ongoing discussions about stake reduction, Naver has withheld from disclosing detailed plans until a definitive conclusion is reached.

  • 5-3. Adjustments in LINE-Yahoo's Operation and Service Independence

  • In response to the Japanese government's demands for a reconsideration of the capital relationship between LINE-Yahoo and Naver, adjustments in LINE-Yahoo's operations have been made. This includes terminating the delegation of system operation tasks to Naver and pushing for technological independence. Additionally, SoftBank announced its intention to acquire part of Naver's shares by July, indicating a shift towards reducing Naver's influence in LINE-Yahoo.

6. Government and Public Reactions

  • 6-1. South Korean Government’s Position and Actions

  • Vice Minister Kang Doo-Hyeon from the Ministry of Science and ICT highlighted the Korean government's view that LINE-Yahoo’s management control has essentially been under SoftBank since 2019. The Korean government expressed regret over what it perceives as pressure from the Japanese government to sell off Naver’s shares in LINE-Yahoo. Despite confirming Japan’s administrative guidance did not explicitly instruct a sell-off, the Korean government remains concerned about the perceived pressures. The Korean government has supported Naver through various diplomatic channels, seeking clarifications and defending Korean corporate interests. This includes affirming that no discriminatory measures against Korean companies should exist and asserting their firm stance against any unfair actions. The Ministry of Science and ICT has committed to assisting Naver if it decides to retain its shares and business interests in LINE-Yahoo.

  • 6-2. Reactions from the South Korean Public and Media

  • The South Korean public and media have been closely following the developments of the LINE-Yahoo situation. There has been significant attention on the implications for Naver, a major Korean company. The media reports, such as those from Chosun Biz, have extensively covered the reactions and the strategic decisions made by Naver, reporting on its mention of potential share sales to SoftBank. Media coverage has highlighted Japan's administrative comments suggesting a reevaluation of capital relationships, adding to public concern about Japanese influence over a significant Korean technology asset.

  • 6-3. Japanese Government’s Justifications and Rhetoric

  • Japan's Ministry of Internal Affairs and Communications has pushed for a systemic review of the management structure at LINE-Yahoo, emphasizing concerns over privacy breaches and the dependency on Naver for system operations. Japanese officials like Minister Takeaki Matsumoto have called for accelerating the fundamental review of capital relationships and overall security governance within the group. This has been interpreted as indirect pressure for Naver to divest its holdings. Japanese media, such as Asahi Shimbun, have reported that some politicians advocate for tighter control to ensure that important infrastructure remains domestically governed.

7. Potential Implications for Future Ventures

  • 7-1. Impact on Naver’s Overseas Operations

  • Naver's overseas operations, particularly in Indonesia, are under scrutiny due to the pressure exerted by the Japanese government over the management of LINE. HANA Bank launched LINE Bank in Indonesia in collaboration with LINE in June 2021, aiming to leverage combined technological and financial expertise to expand their digital banking services. Despite the turmoil surrounding LINE's management in Japan, HANA Bank officials believe that the LINE Bank operations in Indonesia would remain unaffected. LINE Bank has shown significant growth, with a reported 80,000 new customers since its launch. The digital transition strategies and local market fit have played crucial roles in mitigating the impact of COVID-19 on their financial performance.

  • 7-2. Potential Reevaluation of Japan’s Tech Policies

  • The Japanese government has scrutinized the capital relationship between Naver and LINE-Yahoo, prompting calls for Naver to divest its shares. Following a data breach incident in March, Japan’s Ministry of Internal Affairs and Communications demanded a reshuffle in the management, citing over-reliance on Naver. Consequently, LINE-Yahoo’s board removed Korean representative CPO Shin Jung-ho and announced a gradual cessation of ventures outsourced to Naver. These actions reflect a broader intent to reinforce technological sovereignty and reduce dependency on foreign entities, potentially impacting cross-national tech ventures.

  • 7-3. Lessons for Cross-Border Tech M&A

  • The regulatory complications faced by LINE and Naver highlight critical lessons for future cross-border M&A activities in the technology sector. The integration of LINE by Naver, compounded by geopolitical elements, underscores the importance of thorough due diligence and the anticipation of regulatory hurdles in foreign markets. The strategic attempt by Japanese stakeholders to consolidate control over technological and operational facets of LINE demonstrates how corporate governance issues can transcend mere M&A agreements, stressing the necessity for balanced and collaborative cross-border partnerships.

8. Glossary

  • 8-1. Naver [Company]

  • A South Korean internet conglomerate that initially acquired '1noon' and developed the LINE platform. Its technology and strategic decisions are at the core of the current dispute.

  • 8-2. LINE [Product]

  • A mobile messaging platform developed by Naver, which has grown into a significant tech entity in Japan and Southeast Asia. The platform's governance is the focal point of the current dispute.

  • 8-3. SoftBank [Company]

  • A major Japanese multinational conglomerate, which co-owns LINE-Yahoo with Naver. It plays a key role in the ongoing negotiations over the governance structure of LINE-Yahoo.

  • 8-4. Shin Jung-ho [Person]

  • Former CTO of '1noon' and CPO of LINE-Yahoo, referred to as the 'father of LINE'. His recent resignation from the board is a central development in the dispute.

  • 8-5. A Holdings [Company]

  • The holding company established by Naver and SoftBank, which controls LINE-Yahoo. It represents the shared governance structure between the two companies.

  • 8-6. Japan’s Ministry of Internal Affairs and Communications [Government Agency]

  • The Japanese government body that issued administrative guidance prompting the current dispute over LINE-Yahoo's governance.

9. Conclusion

  • The LINE-Yahoo dispute represents a complex interplay of technological leadership, corporate governance, and geopolitical strategy, with far-reaching consequences for both South Korean and Japanese interests.

10. Source Documents