The Complex Dynamics of LINE Yahoo and its Implications for South Korean and Japanese Relations

1. Introduction

• This report analyzes the intricate situation involving the LINE Yahoo platform, focusing on the geopolitical, economic, and technological implications stemming from the ongoing disputes between the South Korean company Naver and the Japanese government.

2. Background of LINE Yahoo

• 2-1. The Creation of LINE

• In June 2006, the South Korean company Naver (then NHN) acquired a search engine called 'First Snow.' Initially, 'First Snow' had drawn attention for its advanced search technology and was even rumored to have interested Google for an acquisition. Despite these expectations, Naver acquired 'First Snow' for 35 billion KRW. The search engine continued under Naver as a project but was discontinued in 2007. However, the former employees of 'First Snow' became influential figures in the IT industry, most notably Jungho Shin, who later became known as the 'Father of LINE.' In 2011, as Naver explored international expansion, they established 'NHN Japan' to enter the Japanese market, eventually leading to the release of the LINE messaging app. LINE quickly dominated the messaging market in Japan and Southeast Asia, evolving into an extensive platform offering various services such as payment solutions, cloud, and AI capabilities.

• 2-2. Naver's Acquisition of First Snow

• In June 2006, Naver acquired 'First Snow' for 35 billion KRW. 'First Snow' was notable for its specialized search technology and was once considered as having the potential to be 'the Google of Korea.' Some industry analysts believed that Naver’s acquisition was a strategic move to eliminate a potential future competitor. Although the 'First Snow' service itself was short-lived and ended in 2007, its team members, particularly CTO Jungho Shin, went on to play significant roles in Naver's subsequent projects. Jungho Shin's contribution was particularly apparent in the development of LINE, which significantly impacted both the Japanese and Southeast Asian markets.

• 2-3. First Snow's Impact on IT Industry

• Although 'First Snow' ceased to exist as an independent service shortly after its acquisition by Naver, its influence persisted due to its former employees, who became prominent in the IT sector. One notable figure is Jungho Shin, who played a crucial role in Naver's successful international initiatives, especially in developing and growing the LINE platform. The creation and expansion of LINE not only cemented Naver's presence in the Japanese market but also solidified its influence across Southeast Asia. This development paralleled the success of KakaoTalk in South Korea, establishing LINE as a pioneering IT platform in the global market.

3. The Rise and Growth of LINE

• 3-1. LINE's Initial Developments and Market Reception

• The genesis of LINE traces back to the acquisition of a Korean search site, 1noon.com, by Naver (then NHN) in June 2006 for 35 billion KRW. This strategic acquisition was intended to bolster Naver’s exploration into the international search market. From its inception, LINE emerged as a mobile platform under the influence of first-gen internet ventures like 1noon. The key figure behind this development, Jungho Shin, former CTO of 1noon and later known as the 'Father of LINE,' played a crucial role in defining LINE as a strong competitor in the mobile messaging ecosystem.

• 3-2. Strategic Shifts by Naver

• Naver's entry into the Japanese market initially saw limited success. However, the advent of smartphones catalyzed a strategic pivot towards mobile messenger services. This led to the launch of the LINE messaging app, which swiftly captured a significant market share in both Japan and Southeast Asia. The service transformed from a messaging app into a comprehensive platform, navigating through expansions including payment services and cloud computing solutions. The merger with Yahoo Japan in 2019 to form 'Line Yahoo (LY)' marked a pivotal moment, combining LINE’s mobile-first approach with Yahoo Japan’s established service infrastructure to mitigate intense competition in Japan’s fintech sector.

• 3-3. LINE's Market Domination in Japan and Southeast Asia

• Post-launch, LINE experienced exponential growth, especially in Japan where it became the dominant messenger service. The app’s popularity extended into Southeast Asia, establishing LINE as South Korea’s first successful international IT platform. The consolidation of market presence was further solidified by strategic integration with Yahoo Japan under the name 'Line Yahoo,' effectively positioning the company as a tech giant in Japan's portal and messaging markets. The collaboration catered to emerging market dynamics, including the rapid adoption of digital payment services and enhanced data security protocols.

4. LINE Yahoo Integration

• 4-1. Decision for Management Unification with Yahoo (SoftBank)

• In 2019, LINE and Yahoo (a subsidiary of SoftBank) decided to unify their management to combat the intense competition in the mobile payment market in Japan. This decision came after both companies faced significant financial burdens due to aggressive cashback events aimed at dominating the market. As a result, LINE and Yahoo announced a management integration to halt this competitive spending and have since emerged as the giant technology platform company known as LINE Yahoo (LY).

• 4-2. Impact of Competition in the Mobile Payment Market

• The Japanese mobile payment market has witnessed fierce competition, leading to financial strains on companies due to extensive cashback promotions. LINE and Yahoo's management integration was a strategic move to alleviate these financial burdens and prevent further losses from such competitive practices. The integration's goal was to create a more efficient and dominant service by combining the strengths of both platforms in the mobile payment market.

• 4-3. Formation and Structure of A Holdings

• A Holdings was formed as the parent company of LINE Yahoo, with both Naver of South Korea and SoftBank of Japan holding equal 50% stakes. This structure was intended to maintain a balance, with Japanese executives primarily handling management and Korean experts leading technology development. However, this balance faced challenges from the Japanese government, particularly following a substantial data breach incident in October last year. The Japanese Ministry of Internal Affairs and Communications urged the reformation of the ownership structure and a shift toward independence from Naver's systems, thereby complicating the relationship between the stakeholders.

5. The Data Breach and Its Ramifications

• 5-1. Details of the Personal Information Leakage

• On October of the previous year, a data breach occurred within the LINE platform. This incident involved the leakage of approximately 440,000 user records from the virtual servers managed by NAVER Cloud. The Japanese government's Ministry of Internal Affairs and Communications (総務省) launched an investigation into this breach and subsequently sent two administrative guidance letters to LINE Yahoo, instructing them to address their dependency on NAVER's systems.

• 5-2. Japanese Government's Regulatory Actions

• Following the data breach, the Japanese government took significant regulatory actions against LINE Yahoo. The Ministry demanded that LINE Yahoo restructure its security systems to reduce dependence on NAVER and even proposed a reconsideration of the capital relationship with NAVER. This was an unusual stipulation, as the government's intervention typically does not extend to capital structure adjustments in similar situations. The government cited the critical nature of the breach and the intertwined capital structure as primary concerns.

• 5-3. Subsequent Administrative Guidance

• In response to the administrative guidance from the Ministry of Internal Affairs and Communications, LINE Yahoo announced a series of measures during their financial report meeting on May 8. The CEO, Idezawa Takeshi, confirmed that the company would work on ending its technical reliance on NAVER and reevaluating its capital relationship with its parent company, A Holdings. Additionally, the company's board structure was altered, reducing the number of internal directors and increasing the number of outside directors, leading to the resignation of key figure Shin Jung-ho, the CPO and former CTO of LINE. These steps were taken to align with the government's directives and address their security and governance concerns.

6. Japanese Government's Demands

• 6-1. Request for Naver's Equity Liquidation

• The Japanese government has requested that Naver liquidate its equity holdings in LINE Yahoo. This demand has significantly altered the dynamics between the parties involved. The background for this request stems from a series of incidents, including a major data breach on a Naver Cloud server used by LINE Yahoo, which led the Ministry of Internal Affairs and Communications (総務省) to question the dependency of LINE Yahoo on Naver’s services. Subsequently, the Ministry sent administrative guidance notes emphasizing the need for independence in security and server systems.

• 6-2. National Security and Data Sovereignty Concerns

• Japan's insistence on changes to the equity structure of LINE Yahoo is driven by concerns regarding data sovereignty and national security. The context of this demand is rooted in Japan's economic security policies, particularly following the enactment of the Economic Security Promotion Act in 2022. Officials have expressed apprehensions about the potential for South Korean influence over key Japanese IT infrastructure through LINE Yahoo’s current governance structure. Statements from key political figures, such as Sanae Takaichi, the Minister of Economic Security, reveal deep-seated worries about the control and utilization of Japanese user data by foreign entities.

• 6-3. Implications for IT Services and Security

• The implications of the Japanese government’s directives extend to IT services and security frameworks. The administrative guidance received by LINE Yahoo called for improvements in security governance and a lesser dependency on Naver's technological infrastructure. This includes transitioning from Naver Cloud services to an independent setup. As a result, action steps were taken, including the reduction of Naver's involvement in LINE Yahoo, which has had various impacts including the resignation of key figures like Jungho Shin from the internal board.

7. Reactions and Strategic Responses

• 7-1. Naver's Position and Strategic Deliberations

• On June 10th, Naver released a statement regarding the LINE Yahoo situation, mentioning they are in diligent negotiations with SoftBank, including the possibility of a stake sale. Despite Naver’s lack of a concrete response plan, the company emphasized they are committed to achieving the best outcome for the company. However, industry insiders highlight that the absence of a defined strategy from Naver might weaken joint response efforts with the South Korean government against Japanese pressures.

• 7-2. Actions by SoftBank

• LINE Yahoo's CEO Idezawa Takeshi announced on June 8th that the company would completely stop outsourcing any service development work to Naver. This decision includes investing approximately 15 billion yen (around $131.7 million) to internalize the previously outsourced projects. Furthermore, SoftBank is pushing for a revision of the capital structure, aiming to hold a majority share in LINE Yahoo by reducing Naver’s ownership stake.

• 7-3. Reactions from South Korean Government

• The South Korean Ministry of Science, ICT, and Future Planning expressed strong regret over Japan’s administrative guidance that indirectly pressures Naver to sell its shares. The ministry asserted a determined stance to prevent any unfair measures against South Korean enterprises. The South Korean government established a policy consultative body to swiftly share domestic and international developments in AI and digital sectors and to negotiate related policies. However, critiques from various sectors suggest that South Korea's reactive measures appear insufficient amid the ongoing geopolitical business dynamics.

8. Public and Media Opinions

• 8-1. Coverage in South Korean Media

• The South Korean media has extensively covered the situation surrounding LINE, particularly highlighting the challenges Naver faces due to the Japanese government's demands. For instance, reports reveal that since May 9, the Japanese government has been pressing for changes in Naver's shareholding structure, which has led to considerable media attention in South Korea. South Korean outlets emphasized the historical roots of LINE's development and the significance of key figures such as Shin Jung Ho, the former CTO of 1Noon and the Chief Product Officer at LINE Yahoo, who recently stepped down from the board on May 8 due to these pressures. This shift is seen as a notable impact on the technology and governance of the platform.

• 8-2. Japanese Media Perspectives

• Japanese media has focused on the geopolitical and economic aspects of the LINE Yahoo situation. Publications such as Asahi Shimbun have reported on the Japanese government's stringent measures, emphasizing comments from key political figures who advocate for LINE to be recognized as a Japanese infrastructure company. The media also highlighted the concerns about data security and national security, suggesting that as long as Korean companies like Naver hold significant shares, there are risks of data being under foreign influence. Newspapers reported this incident in the context of Japan's broader economic security policies, which were reinforced under Prime Minister Kishida's tenure.

• 8-3. Public Opinion in South Korea and Japan

• Public opinion in both South Korea and Japan has been significantly influenced by the media coverage of the LINE Yahoo situation. In South Korea, there is a strong sentiment that Japan is attempting to undermine a key technological achievement spearheaded by a Korean company. This has led to criticism of the government's perceived passive stance, with calls from various political figures for a more active intervention. Conversely, in Japan, there is a growing perception that LINE Yahoo needs to be brought under more strict local control to ensure national security. Japanese citizens, influenced by the government's narrative about economic security and data protection, largely support moves to reduce Naver's influence in LINE Yahoo.

9. Current Status and Future Implications

• 9-1. Current Organizational Changes in LINE Yahoo

• LINE Yahoo CEO, Takeshi Idezawa, announced on June 8th that the company would cease outsourcing service development tasks to its major shareholder, South Korean IT company Naver. This decision is part of a broader strategy to end the dependence on Naver for technological collaboration. Significant organizational changes include the resignation of Naver's product development head, Shin Jung-ho, from the position of representative director on June 18th, although he will continue as chief product officer. Another notable resignation is that of SoftBank's director and chief strategy officer, Takuto Oketani.

• 9-2. Impact on Business Relationships

• The decision to cease outsourcing to Naver is expected to have immediate effects on the ongoing projects. One such project is the integration of LINE ID with PayPay ID, initially scheduled for this year but now postponed indefinitely. PayPay is Japan's largest digital payment service, boasting 63.04 million users and a transaction volume of 12.5 trillion yen as of the previous fiscal year. Additionally, synergy efforts between LINE, Yahoo! Japan, and PayPay were also aimed at increasing market share in Japan's financial sector. Despite the expansion plans and a successful 'LYP Premium' membership program that had already secured over a million new members, the focus on internal governance has put these collaborative initiatives on hold.

• 9-3. Future Technological and Geopolitical Stakes

• The majority of ownership and control over LINE Yahoo has shifted toward SoftBank due to Japanese governmental pressure. The Ministry of Internal Affairs and Communications in Japan has driven the need for higher SoftBank stakes, citing reasons related to security concerns and data governance. This move has been a point of contention between South Korea and Japan, with the South Korean government expressing regret over the perceived forced reduction of Naver's stake in LINE Yahoo. Additionally, while the South Korean government has indicated willingness to support Naver, such as providing security enhancements if Naver retains its stake, the Japanese government's actions signal a strategic push to assert greater local control over technology assets.

10. Glossary

• 10-1. LINE [Product]

• LINE is a popular mobile messaging application that originated from a project by Korean company Naver. It has grown significantly in Japan and Southeast Asia.

• 10-2. Naver [Company]

• Naver is a South Korean online platform that operates the popular messaging application LINE, among other services. It has been involved in various international ventures and acquisitions.

• 10-3. SoftBank [Company]

• SoftBank is a Japanese multinational conglomerate holding company that has a significant stake in LINE Yahoo. It has played a key role in the strategic direction of LINE in Japan.

• 10-4. A Holdings [Company]

• A Holdings is the holding company created to manage the interests of Naver and SoftBank in LINE Yahoo. It ensures an equal distribution of equity between the two parent companies.

• 10-5. Shin Jungho [Individual]

• Shin Jungho is the former CTO of First Snow, which was acquired by Naver, and later became known as the 'Father of LINE.' He has held a significant role in LINE's development.

• 10-6. Takashi Idezawa [Individual]

• Takashi Idezawa is the CEO of LINE Yahoo. He has overseen the unification efforts and strategic responses related to the data breach incident and subsequent regulatory pressures.

11. Conclusion

• The ongoing dispute surrounding LINE Yahoo highlights the delicate balance between national security concerns and the international business dynamics in the IT sector, underlining the complex interdependence between South Korea and Japan.

12. Source Documents

• 잘 키운 ‘라인’ 노리는 일본 우익의 속내https://v.daum.net/v/20240514061458625
• 한국정부는 日에 붉으락푸르락...네이버는 입 싹 닫아 ‘엇박자’https://v.daum.net/v/20240510191500321
• 라인야후, 노골적 네이버 지우기…대응책 손 놓은 정부 - 글로벌이코노믹https://www.g-enews.com/article/ICT/2024/05/2024050910240520683b60030fa2_1
• ‘라인야후’ 사태 한·일 외교전으로… 韓 정부 “경영권 이미 소프트뱅크에 넘어가… 日 정부에 유감”(종합)https://v.daum.net/v/20240510170325449