[The Kakao Without Innovation] ① Big Tech Without Visible AI... R&D Subsidiaries' Net Losses Snowball

Research and Development Kakao Brain Reports 76.4 Billion KRW Net Loss Last Year
AI Performance Deemed Insufficient Despite Support Through Paid-in Capital Increase
"Losing IT Company Brand Power Is a Major Loss"

Kakao founder Kim Beom-su, co-chairman of the CA Council and chairman of the Management Innovation Committee, was arrested on charges of stock price manipulation of SM Entertainment, leading to an unprecedented situation of 'absence of the group head.' There are voices saying this is the result of a company active at the forefront of the IT industry pushing aggressively into the entertainment sector. Fundamentally, it is interpreted as Kakao revealing its true colors after innovation such as artificial intelligence (AI) development disappeared and efforts to discover future growth engines hit a limit.

Innovation is the foundation for the growth of big tech companies. However, innovation has disappeared from Kakao in recent years. According to the Financial Supervisory Service's electronic disclosure system on the 29th, Kakao Brain, Kakao's AI research and development subsidiary established in 2017, posted a net loss of 76.4 billion won last year, more than double the 31.8 billion won loss the previous year. Until 2020, the loss was around 10.7 billion won, but the scale of losses has increased significantly every year.

Kakao Brain, wholly owned by Kakao, is dedicated to research and development, making it difficult to generate net profits. Kakao has recognized this and has consistently provided funding through capital increases. In April, it participated in a paid-in capital increase of 36 billion won for operating funds, and in July last year, it provided 70 billion won. Kakao's cumulative investment in Kakao Brain is known to amount to 230 billion won.

Despite years of support for AI development, Kakao has shown no clear results. The Korean language-specialized large language model (LLM) 'KO GPT 2.0' remains shrouded in mystery. Kakao is evaluated as lagging not only on the global stage but also in domestic AI competition. Ultimately, it is reported that Kakao prioritizes developing AI services using external LLMs rather than building its own LLM.

Kakao also appears to have given up on service development through Kakao Brain. In May, Kakao decided to acquire Kakao Brain's language model business division and AI profile service Karo business, which was announced to be discontinued, as well as the Talk Channel business. The purpose of the acquisition is to restructure the group for rapid and efficient AI model development and commercialization. The business division was in a state of complete capital erosion, with liabilities exceeding assets by about 3.6 billion won.

The research strategy was also unstable. Kakao reorganized its research organization in April and recently changed it again to align with its AI strategy. According to the first quarter report this year, Kakao divided its R&D organization into groups under the Chief Technology Officer (CTO) and Chief AI Officer (CAIO), and a content in-house independent company (CIC) form following the reorganization. However, just two months later, it formed an AI-dedicated organization called 'Kanana' and split it into 'Kanana X,' focused on AI services, and 'Kanana Alpha,' focused on AI model development. Instead of the CAIO position, it switched to a two-top system of Product Owner (PO) and Function Owner (FO), with former CAIO Lee Sang-ho taking the PO role of the AI service organization and Kim Byung-hak, co-CEO of Kakao Brain, concurrently holding the FO position.

In the industry, there are concerns that Kakao could fall into a vicious cycle due to the arrest of its top decision-maker. Delays in important management decisions and disruptions in AI business plans could repeatedly cause Kakao to fall behind competitors. There are even talks that this year's annual developer conference might be canceled again following last year's cancellation. However, Kakao maintains that there is no change in its plan to hold the event.

Professor Kim Yong-jin of Sogang University's Department of Business Administration said, "It cannot be said that Kakao's intention to enter the music industry by leveraging its platform capabilities was wrong," but added, "The arrest of the founder has caused Kakao to lose the brand power it had built as an IT company in an instant, which is a significant loss."