How Naver Faced the Risk of Losing Line to Japan [Song Seungseop's Financial Light]

Not a Korean Company? ... Nationality Controversy Following Line
After Personal Data Incident, Ministry of Internal Affairs and Communications Says "Management Method Problem"
Forced to Leave Japan... "In Close Consultation with Authorities"

Line office scene. Photo by Line Creative

Concerns are emerging that the LINE service created by Naver might be taken over by Japan, due to pressure from the Japanese government. However, many aspects of this situation are not immediately clear. Each company has its own distinct ownership, so how can the Japanese government exert pressure on a company? Why is the Japanese government trying to change LINE's governance structure?

Not a Korean Company?…The ‘Nationality Controversy’ Surrounding LINE

First, it is important to know which country the company providing the LINE service in Japan belongs to. The company operating LINE in Japan is called “LINE Yahoo.” The CEO of LINE Yahoo is Takeshi Idezawa, a Japanese national, and its headquarters are located in Tokyo, Japan. LINE’s corporate bylaws and terms of service were originally created in Japanese under Japanese law. Korean users are provided with translated versions of these terms. This forms the basis for perceiving LINE Yahoo as a Japanese company.

Despite this, LINE’s nationality has been questioned due to its governance structure. LINE was planned and developed by Naver Japan. Although it started as a Japanese company, from the beginning the parent company Naver had a strong influence. Even when it began as a startup, the technology owned by Korea had a significant impact. In 2013, when LINE had over 300 million users, a commemorative press conference was held in Japan, but the attendee was Lee Hae-jin, who was then the chairman.

The nationality controversy subsided around 2019. At that time, Naver decided to merge its LINE service with Yahoo, which was then a major Japanese IT company under SoftBank. Originally, the two companies fiercely competed in Japan’s mobile payment market, spending hundreds of billions of yen on marketing to gain an advantage. Meanwhile, IT companies from the US and China were rapidly growing. It was clear that continued competition would only harm both companies, so they merged.

Joint governance of LINE by Korean and Japanese companies has continued to this day. Currently, 65% of LINE Yahoo’s shares are held by A Holdings, a company jointly established by Korea’s Naver and Japan’s SoftBank, with each owning 50%. In summary, LINE Yahoo is a Japanese company primarily operating in Japan, but its owners are Korean and Japanese companies.

Japanese Ministry of Internal Affairs and Communications on LINE’s Personal Data Incident: “Management Issues”

The governance controversy reignited last year following a personal data scandal. In August 2023, 4 million Yahoo Japan user records were shared with Naver without authorization. In November of the same year, a server of a Naver subcontractor was hacked, resulting in the leakage of 440,000 LINE user records. Previously, there had been suspicious views in Japan regarding how LINE collects, stores, and deletes data. When actual data leaks occurred, dissatisfaction exploded over the fact that Korea controlled the governance.

The Japanese government pointed to the governance structure as the cause of these incidents. LINE Yahoo had outsourced various tasks to Naver. While it is natural for LINE Yahoo to manage and supervise Naver as the service was outsourced, the governance structure made this difficult. The government argues that unless the current governance structure changes, LINE Yahoo will find it hard to demand safety management measures from Naver or manage subcontractors, so the management system must be changed.

The Japanese Ministry of Internal Affairs and Communications, equivalent to Korea’s Ministry of the Interior and Safety, took action. In March, the ministry issued an administrative order demanding a complete separation of LINE Yahoo’s and Naver’s systems. LINE Yahoo proposed measures to reduce or terminate outsourcing to Naver, but the ministry deemed them insufficient. Last month, the ministry issued a second administrative guidance demanding that LINE Yahoo divest its shares in Naver.

Forced to Leave Japan…“In Close Consultation with Authorities”

Naver is facing a very difficult situation. Government ministries in Japan hold significant power. If the Japanese government’s displeasure is provoked, it could become difficult to conduct normal business operations in the Japanese market. In particular, administrative guidance from the Japanese government is a very strong measure. Although it is a recommendation rather than a legal obligation, failure to comply may lead to administrative sanctions. Since administrative sanctions apply to illegal matters, compliance is mandatory.

Choi Soo-yeon, CEO of Naver

There is currently no solution. On the 3rd, during the Q1 earnings conference call, Naver CEO Choi Soo-yeon said, “The administrative guidance from the Japanese Ministry of Internal Affairs and Communications requesting a reduction in capital control is unprecedented,” adding, “This is not a decision on whether to comply or not, but is being defined and pursued as a mid- to long-term business foundation.” She also explained, “Since our position has not been finalized, we will clearly announce it when it is. We are in close consultation with government authorities, including the Ministry of Science and ICT.”

The Japanese government states that it is not demanding the sale of shares. On the 3rd, Tomohiro Nakamura, Director of the Usage Environment Division at the Ministry of Internal Affairs and Communications’ General Communications Infrastructure Bureau, told Yonhap News Agency, “The purpose of the administrative guidance is to request a review of security governance for appropriate outsourcing management.” He added, “The guidance includes expressions such as ‘review of the management system including the relationship of substantial capital control from the outsourcing party (Naver),’” but clarified, “There is no expression demanding the sale or divestment of shares.”

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