2019 Kakao-SK Share Swap and Technology Collaboration Establish Ultra-Cooperation System
SK C&C Data Center Move-In Also Part of Both Companies' Cooperation
SK C&C Fire Insurance Claim Up to 7 Billion KRW, Legal Disputes Inevitable Over Liability and Reimbursement Claims
Analysis Suggests Minimum 100 Billion KRW Needed Including Compensation for Free Services
[Asia Economy Reporter Seungjin Lee] The two sides are engaged in a blame game over compensation for damages amounting to hundreds of billions of won caused by the SK C&C data center fire. While it is known that SK C&C can receive about 7 billion won in compensation through fire insurance, Kakao requires more than 40 billion won just for the first phase of damage compensation. As a result, there is speculation that depending on the amount of subrogation claims in the future, both parties may inevitably resort to legal litigation.
The ultra-cooperative relationship between SK Group and Kakao in 2019 is also expected to face difficulties. The two sides strengthened their partnership by exchanging shares worth 300 billion won, forming technical consultative bodies, and establishing ESG funds.
Choi Tae-won, Chairman of SK Group, appeared as a witness at the comprehensive audit of the National Assembly's Science, Technology, Information and Broadcasting and Communications Committee, which resumed on the evening of the 24th. [Image source=Yonhap News]
Damage Compensation Amount 40 Billion+α... Insurance Payout Only 7 Billion
Kakao and SK established an alliance system in 2019 by exchanging shares worth 300 billion won. Through this, the two companies agreed to pursue close cooperation in fields such as telecommunications, commerce, digital content, and future information and communication technology (ICT). Since then, they have solidified their relationship by forming various consultative bodies and funds. Kakao’s choice of SK C&C’s data center was also based on this background.
However, the two sides are expected to be embroiled in conflict over damage compensation issues arising from the recent data center fire. The compensation amount has already far exceeded the insurance payout, and as the scale of damages continues to grow, the responsibility dispute between the two sides is expected to intensify. Depending on the scope of damages, both companies’ operating profits are also likely to be impacted.
The general liability insurance SK C&C subscribed to has a compensation limit of only about 7 billion won. However, Kakao’s estimated damage compensation amount that must be paid first for paid services due to the outage is about 40 billion won. Kakao did not subscribe to ‘business interruption insurance,’ which compensates for damages when a company suspends operations, so it must initially cover the compensation from its own resources.
The problem is that Kakao’s burden for damage compensation is increasing. Kakao is currently accepting damage claims from free service users as well, and about 45,000 damage cases were reported within five days of opening claims. Separately, the Small Business Federation has received over 1,400 damage cases from small business owners.
Industry insiders expect the compensation to be at an all-time high. During the 2018 KT Ahyeon Station fire, which was limited to some areas in Seoul, KT provided compensation of 400,000 to 1.2 million won per small business owner and waived 1 to 6 months of fees for general telecom customers. The total compensation amount was about 35 to 40 billion won.
The KT Ahyeon Station incident had a maximum communication outage of 89 minutes, but the service disruption caused by this fire lasted about five days. Moreover, many customers linked to Kakao account login and KakaoPay payments, as well as Kakao-affiliated services, were affected, making it difficult to estimate the scale of damages. Some even predict that Kakao’s compensation payments could exceed 100 billion won. This amount corresponds to one-sixth of Kakao’s operating profit of 596.9 billion won last year.
Kim Beom-su, Head of Kakao Future Initiative Center, appeared at the comprehensive audit of the Ministry of Science and ICT and related audit target organizations held at the National Assembly on the 24th, responding to questions from lawmakers. Photo by Yoon Dong-ju doso7@
The Key Issue Is the Scope of Liability... Legal Disputes Inevitable
The key issue is the extent to which SK C&C, responsible for the fire accident, must pay damages. The responsibility dispute between Kakao and SK C&C is already intensifying. Kakao emphasizes that the data center fire was an ‘unexpected disaster that caused the entire server to shut down,’ while SK C&C actively explains that the complete power shutdown in the center was a decision made by the fire authorities.
At the comprehensive National Assembly audit held on the 24th by the Science, Technology, Information and Broadcasting Committee, there were calls for Kim Beom-su, Kakao founder and head of the Future Initiative Center, and Choi Tae-won, SK chairman, to meet and discuss the data center fire accident and Kakao’s outage damage compensation issue together. When Rep. Heo Eun-ah of the People Power Party asked, “From a consumer perspective, if the three heads meet and talk together, wouldn’t the issue be resolved faster? Do you have the willingness to do so?” Chairman Choi replied, “I will consider discussing it.”
However, the prevailing opinion is that this is difficult to realize. Since the cause of the data center fire has not been clearly identified, if Kakao and SK negotiate without clear standards and grounds, there is a high possibility of being implicated in breach of fiduciary duty.
Ultimately, since Kakao has promised to compensate affected users before disputing responsibility with SK C&C, it is expected to first pay damage compensation and then proceed to claim subrogation rights from SK C&C. Currently, SK C&C is reportedly reviewing or consulting with Kim & Chang law firm, while Kakao is considering or consulting with law firms Yulchon and Bae, Kim & Lee.
Additionally, Kakao resolved at a board meeting in March 2021 to build an Internet Data Center (IDC) on the ERICA campus of Hanyang University in Ansan City. The Ansan data center, with 120,000 servers spanning from basement level 1 to the 6th floor above ground, involved an investment of 460 billion won and aims to open in January 2024. A second data center is also scheduled to be completed in January 2024 at Seoul National University’s Siheung campus.
Kakao is expected to spend hundreds of billions of won just to newly build about 32,000 servers outside the SK C&C data center, so it seems difficult to leave the SK C&C data center immediately. However, due to the loss of trust in the SK C&C data center caused by this incident, Kakao may hasten server migration, potentially leading to the dissolution of the SK-Kakao alliance.
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