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(2nd LD) Kakao creates 300 bln won fund for small merchants amid growing scrutiny over market dominance

All News 15:56 September 14, 2021

(ATTN: UPDATES with stock closing price in paras 6, 9)
By Chae Yun-hwan

SEOUL, Sept. 14 (Yonhap) -- South Korean internet giant Kakao Corp. said Tuesday it has decided to form a 300 billion won (US$256.2 million) fund for small merchants and scrap some of its services that compete against them, in a move to appease growing scrutiny from regulators and politicians over its rapidly expanding online platform empire.

The company said the fund will be able to help support small businesses on its platform over the next five years, while some of its services, such as flower delivery, which have stirred controversy for taking business away from mom-and-pop stores, will be shelved.

The announcement came as politicians and top regulators have recently ramped up rhetoric against the online giant's aggressive expansion into wide-ranging businesses, from banking, ride-hailing to education, in recent years.

Last week, Democratic Party leader Song Young-gil issued a stern warning against the company, saying Kakao should not take the path of past conglomerates of only seeking profit and ignoring fairness.

The comments, along with new consumer protection rules from financial authorities that target Kakao's financial services subsidiary, led to a sharp drop in its share price.

Kakao's shares closed at 124,000 won Tuesday, down 19 percent from a week ago, wiping over 13 trillion won off its market cap.

In a statement Tuesday, Kakao founder Kim Beom-su said the online platform giant will seek ways for change.

"Kakao and all of its affiliates need to throw away the growth model pursued in the past decade, while fundamental change is needed at this point for growth that fulfills social responsibility," Kim said.

Kakao's new announcement uplifted investor sentiment as its shares closed down 0.4 percent Tuesday, after tumbling as much as 5.22 percent earlier in the session.

(2nd LD) Kakao creates 300 bln won fund for small merchants amid growing scrutiny over market dominance - 1

At the core of the online platform giant's rapid expansion is its dominant messaging service KakaoTalk, which boasts around 46.6 million local users, accounting for around 90 percent of the country's population.

On the back of its strong online user base, Kakao has aggressively entered new businesses, heralding a shift to online services in South Korea, and becoming one of the country's top five most valuable companies before its recent tumble. According to Korea Fair Trade Commission (KFTC) data, Kakao has 118 affiliates under its wings.

But politicians and regulators alike are now on guard against Kakao's far-reaching influence amid growing accusations of unfair business practices.

The KFTC is currently investigating alleged unjust business practices by Kakao Mobility Corp., the country's leading taxi-hailing firm, after allegations that the company deliberately gives priority to taxis affiliated with the firm in receiving calls when a customer hails a taxi with its application.

Kakao's mobility unit has also faced fierce protests from taxi drivers for attempting to levy some service fees in its taxi-hailing service, which taxi drivers argue had previously been offered for free.

The country's top telecommunications regulator Han Sang-hyuk said in parliament last week that he is looking into the controversy and shared the concerns of taxi drivers.

As part of Kakao's broader support plans, Kakao Mobility said it will scrap its flower and snack delivery services for businesses, as well as lower its paid membership price for taxi drivers.

It will also change its chauffeur service's fee from a flat 20 percent to range between zero and 20 percent.

Taxis affiliated with Kakao Mobility's taxi-hailing service operate outside Seoul Station in central Seoul in this file photo taken on April 8, 2021. (Yonhap)

Joh Sung-wook, the head of the KFTC, voiced broader concerns last Friday about the influence of internet giants, saying that while platforms have given more choice to consumers, there has also been an increase in consumer harm.

The KFTC is also taking aim at Kakao's founder, reportedly investigating Kakao for allegedly omitting or fabricating submitted documents on Kim's wholly owned Kcubeholdings, which owns a 10.59 percent stake in the company.

As part of its latest plans to appease regulators, Kakao added Kcubeholdings will be reshaped to focus on social issues, such as education.

Earlier this year, Kim joined the Giving Pledge, a global campaign created by Bill and Melinda Gates and Warren Buffett for the world's wealthiest individuals and families to give back the majority of their wealth.

In April, Kim and his wholly-owned company sold 500 billion won worth of stocks in Kakao as part of his pledge.

Lawmakers, however, have already taken steps to curb Kakao's influence, with about 10 different versions of a bill targeting domestic online platform giants currently under parliamentary review since last year.

In a parliamentary speech last week, ruling party floor leader Rep. Yun Ho-jung warned of looming regulations.

"We will definitely rectify the uneven playing field between platform operators and businesses running on them," he said.

Legislative movement is expected to pick up, considering growing concerns from regulators and politicians, as well as the ruling Democratic Party's super-majority status.

The Democratic Party has 170 seats in the 299-member parliament, meaning that there is no obstacle in passing a bill.

Driven by the ruling party, the National Assembly passed a controversial bill late last month that curbs the influence of global tech giants Apple Inc. and Google in their app store operations.

The new law, the first of its kind globally, limits app store operators from forcing certain payment systems on software developers and goes into effect Tuesday.


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