Shares of Kakao fell as the disappearance sparked calls for regulatory scrutiny

SEOUL, Oct 17 (Reuters) – Shares of South Korean company Kakao Corp (035720.KS) fell on Monday after a widespread outage of the country’s largest mobile chat app sparked a sharp political backlash and calls for tighter controls on the company’s market dominance.

The outage was caused by a fire at a data center south of Seoul for weekend and while systems were mostly restored by Monday, disruptions to a range of connected services, from payments to taxis and restaurant reservations, raised questions about public reliance on the app.

President Yoon Suk-yeol said on Monday that Kakao’s services are “like a core national telecommunications network as far as the public is concerned” and promised follow-up measures for the service outage.

“If the market is disrupted in a monopoly or serious oligopoly, to the extent that it serves a similar function to national infrastructure, the government should take necessary measures for the welfare of the people,” Yoon added, noting that South Korea’s competition watchdog will investigate the matter.

Shares of Kakao fell more than 9% on Monday to their lowest level since May 2020, while shares of Kakao affiliate KakaoPay (377300.KS) and KakaoBank (323410.KS) it also fell more than 8% in morning trade.

South Korea’s Science and Technology Ministry is investigating whether the outage violated any laws, while the communications regulator is looking into the matter, including the issue of compensation for users, government officials said Sunday.

A Kakao spokesman told Reuters on Monday that key services such as messaging were back online, although some smaller apps were still being restored.

“It’s basically a free service and it’s ambiguous how compensation will work for paid services, but it’s seen as a national communications network, not a private one,” said Choi Yoo-june, an analyst at Shinhan Financial Corp. “Parliamentary reviews are underway right now, and will likely extend to the issue of platform monopoly regulation.”

On Monday, the police and the National Forensic Service conducted a second investigation into the data center, which is managed by SK C&C (034730.KS).

After an initial investigation Sunday, police said the fire may have been caused by electrical problems around battery racks on the third basement floor of the data center.

REPUTATION HIT

Kakao’s messaging app Kakao Talk has more than 47 million active accounts in South Korea and 53 million worldwide, the company said in an August report, making it one of the most popular apps in the country at 51.6 million.

Kakao is not expected to take a big financial hit from the compensation, but the reputation and future hit is what matters if companies and consumers are to reduce their reliance on Kakao, analysts said.

“Assuming that the range of damages is limited to paying users, the impact on operating profit is estimated to be around 12 billion won,” said Kim Jin-woo, an analyst at Daol Investment & Securities. “What matters is the trends in customer traffic after service is fully restored.”

Kakao reported 330 billion won ($229.74 million) in operating profit during the first half of 2022.

A regulatory filing on Monday said that once it normalizes services, it will discuss compensation with data center operator SK C&C for losses suffered by Kakao and its key units.

Cocoa said on Sunday that while its servers are spread across four data centers, the data center affected by the fire housed 32,000, or the bulk, of its servers, which lost power and were damaged as a result of the fire.

“The failure of 32,000 servers… is unprecedented and has caused difficulties in responding,” Yang Hyun-seo, Kakao’s vice president, told reporters on Sunday, adding that there was no data loss due to the storage backup.

A spokesperson for Kakao declined to specify the total number of servers it uses, citing security concerns.

($1 = 1,436,2700 won)

Reporting by Joyce Lee; Additional reporting by Jihoon Lee, Hyonhee Shin, Soo-hyang Choi and Joori Roh; Editing: Kim Coghill, Tom Hogue and Sam Holmes

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