Kakao is feeling the heat following massive service outage

kakao outage
REUTERS/Thomas White/Illustration

SEOUL (Reuters) – Shares of South Korea’s Kakao plunged on Monday after a widespread outage in the country’s largest mobile chat app triggered a sharp political backlash and calls for increased scrutiny on the company’s market dominance.

The outage was caused by a fire at a data centre near Seoul on the weekend and while systems had mostly been restored by Monday, the disruptions to a range of related services from payments to taxis and restaurant bookings have raised questions about public reliance on the app.

President Yoon Suk-yeol said on Monday that the company’s services, which includes the flagship KakaoTalk messenger app, are “like a fundamental national telecommunications network as far as the public is concerned,” and promised follow-up measures over the service outage.

“If the market is distorted in a monopoly or severe oligopoly, to the extent where it serves a similar function as national infrastructure, the government should take necessary measures for the sake of the people,” Yoon added, noting South Korea’s antitrust watchdog would examine the matter.

Line surges as Kakao plummets

Kakao shares plunged as much as 9.5% on Monday to their lowest since May 2020, wiping out 2 trillion won ($1.39 billion) in market capitalisation at one point, while shares in affiliates KakaoPay and KakaoBank lost more than 8% before paring losses.

kakao outage share slump

On Monday, rival messaging service Line zoomed to the top of iPhone App Store’s most downloaded apps in South Korea, having not even ranked in the top 100 on Friday, according to SensorTower data. KakaoTalk fell to 36th from 13th.

South Korea’s technology ministry is probing whether the outage violated any laws while the communications regulator is reviewing the matter, including questions of user compensation, officials said on Sunday.

A Kakao spokesperson told Reuters on Monday core services such as messaging were back online, although some minor applications were still being restored.

“Basically it’s a free service and how compensations will work for paid services is ambiguous, but it’s being seen as a national communication network, not a private one,” said Choi Yoo-june, analyst at Shinhan Financial Corp. “Parliament audits are ongoing right now, and it’s likely to spread to the issue of platform monopoly regulation.”

An initial probe on Sunday found electrical issues around battery racks in third basement floor of the data centre, which is operated by SK C&C, may have caused the fire. A forensic investigation was being conducted on Monday.

Reputational hit

Kakao’s messenger app KakaoTalk has more than 47 million active accounts in South Korea and 53 million globally, the company said in August, making it one of the most ubiquitous in the country of 51.6 million.

The free messenger service took mobile users by storm soon after smartphones took off in late 2000s and its early mover advantage allowed it to outpace competitors, including tech giant Naver, to become South Korea’s dominant messenger.

It was later able to leverage its large user base to expand into games, advertising, intellectual property and other entertainment, shopping, payments and mobility.

Kakao is not expected to suffer a large financial hit from compensation, but the reputational blowback is what matters if businesses and consumers reduce their reliance on the service, analysts said.

“Assuming that the damage compensation range is limited to paying users, the effect on operating profit is estimated to be about 12 billion won,” said Kim Jin-woo, analyst at Daol Investment & Securities. “What is important would be user traffic trends after full service recovery.”

Kakao reported 330 billion won in operating profit during the first half of 2022.

It said on Monday it would discuss compensation with data centre operator SK C&C for losses it and its key units have sustained.

“Insufficient management”

Kakao said on Sunday while its servers are distributed across four data centres, the fire-hit data centre housed 32,000, or the main share, of its servers, which lost power and were damaged as a result of the blaze.

Joo Ho-young, a ruling party lawmaker, told a party meeting on Monday the fact Kakao did not manage its own data centre and had concentrated most of its systems in one place showed “insufficient management”.

Yang Hyun-seo, vice president at Kakao said on Sunday while the extent of the damage caused difficulties in responding, back-up storage meant no data was lost.

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

($1 = 1,435.0700 won)

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

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