Korean Naver corporation is a confusing digital company. It’s great and it’s messed up. That makes it an interesting target for investing. There is the possibility of seeing something that others are not.
On one hand, it is the leading search engine in South Korea, with +75% market share. That is fantastic. This is the result of being one of the first South Korean web portals. The company, founded in 1999, was an early portal and built its own search engine. Additionally, given the lack of webpages in Korean back then, it developed various tools for content creators in South Korea. The portal has faded away but today the company is the leading search engine of South Korea – and it has deep roots within content (which can limit other search engines).
A dominant search engine (even at the country level) should absolutely get your attention. I talked about this in:
- Introduction to Learning Platforms, Computer Vision and Megvii (Jeff’s Asia Tech Class – Daily Update)
My basic point was that learning platforms (one of my five platform types) focused on search are a particularly powerful business model. Google search has over 90% of the world’s market. That type of dominance is almost unheard of. Naver ranks about 7th globally. And is one of three country-level search engines on the list. The others are Baidu in China and Yandex in Russia.
Naver also owns the messenger Line, which is successful in Thailand, Japan, and Taiwan. According to the Business of Apps:
- Line in Japan’s MAU (Q3 2020) was 86M and slowly but steadily rising. This is out of a Japanese population of 125M.
- Line in Thailand’s MAU (Q3 2020) was 47M and stable. This is out of a Thai population of 67M.
- Line in Taiwan’s MAU (Q3 2020) was 21M and stable. Out of a population of 23M.
- Line in Indonesia’s MAU (Q3 2020) was 13M and falling. Out of a population of 267M.
Basically, Naver has two particularly powerful platform business models in Asia.
On the other hand, Naver is a relatively small, geographically strange and unfocused.
- The search engine is 75% of South Korea but less than 0.1% internationally. They have repeatedly tried to expand from South Korea, with Japan the primary target. But this has been unsuccessful. Entering search in Japan means going head to head with Google (and to a lesser degree Yahoo Japan).
- Line’s dominance in Thailand and Taiwan are strange artefacts. Line has not expanded in either in services or functionality significantly. And it has not expanded geographically in SE Asia. Like WhatsApp has.
- Plus management is all over the map in terms of its activities. They are in webtoons. They are in cloud. They are in enterprise.
Overall, Naver is a small digital company that has been thriving between the evolving and growing giants of China, Asia and the West. My question is: Is this sustainable?
My answer thus far is 5 points.
Point 1: Management Has Too Little Focus. And Too Much “Silicon Valley Woo Woo”.
Here is the first page of Naver’s 2019 Annual Report.
“The future is a gift for all of us. Which is why we should make today more meaningful by overcoming the limitations of time and physical spaces.
And for this reason, NAVER ceaselessly takes on challenges. There is no stop on the path of challenges leading to a technology platform. There are no boundaries defining targets to pursue. An innovation that rises up from between the familiar and the new should be in contact with a better future.
“Dynamic Tech Cube” is the future that NAVER envisions as a technology platform. It embodies our promise that we will help creators bloom in success with technology, and offer users the convenience of connection and the joy of discovery. NAVER will become the best partner that lays stepping stones to a future where today’s dreams lead to a better tomorrow and imaginations come true.”
I have no idea what most of that means. I have read it 5 times and it still makes no sense to me. Management talks a lot about their “dynamic tech cube”. It is the term on the cover of their annual report. There are lots of graphics of cubes. I have no idea what that means.
The sub-points are:
- “Connect, build and boast”
- “Create and interact dynamically”
- “Challenge to change globally”
Here is the statement by President and CEO Seong-sook Han in that annual report.
“NAVER is evolving into a set of global challenge by redefining the value of connection. We pursue new possibilities of connection by upgrading them to the next level through technologies on a global scale, and by transforming tomorrow’s technology into today’s daily life tools. Going forward, NAVER will envision a bolder future in a wider world, and thus create opportunities that enable us to go further.”
This is what I call “Silicon Valley woo woo”. They are stringing together a lot of technical words (connect, interact, dynamic, platform, technology) and it sounds like it means something. But it’s gibberish.
There was a great debate between atheist / writer Sam Harris and mystic(?) Deepak Chopra. Deepak usually speaks quickly with a flurry of terms from psychology, medicine, quantum mechanics and other fields. It sounds impressive until you try and figure out what he actually said. After one such stream of gibberish, Sam responded by calling it “scientific woo woo”. We sometimes see the same thing in tech. And in my experience, sloppy and vague words mean sloppy and vague thinking.
Compare Naver’s language to Ant Financial, which speaks crisply and cleanly. Here is the opening of their 2019 Hong Kong filing.
Thank you for your interest in Ant Group. Today, Ant Group is not a financial institution, nor simply a mobile payments company. We are a technology company using the best technologies and resources to empower banks and financial institutions to serve every consumer and small business.”
“Our business is built on three major pillars: digital payments, digital finance, and digital daily life services. That is today, but we will continue to evolve with a focus on the future.”
“To better realize our mission “to make it easy to do business anywhere”, we are dedicated to solving the trust problem for our customers. Lack of trust is the biggest cost of doing business. Through innovations ranging from trusted online escrow to credit-underwriting based on data technology, we provide unsecured loans to small businesses.”
That is a crisp description of their business, its metrics and its risks.
Ignore all that dynamic tech cube nonsense, here is my summary of what Naver is doing:
They have two successful digital platform businesses that they are trying to grow, thus far unsuccessfully.
- A search engine that is a learning platform for Korean webpages.
- A messenger business that is a communication and audience builder platform connecting Japanese, Taiwanese and Thai consumers with local advertisers.
Outside of this, they are incubating and experimenting with other digital businesses.
Point 2: The Key Question is How Durable Their Core Two Businesses Are Against Much, Much Larger Competitors.
Can Naver Search in South Korea compete long-term against $1.2 trillion market cap Google? Against Bing and Yahoo? If any of these competitors decides they want the South Korean search engine market, could Naver fight them off?
If Mark Zuckerberg decides he really wants the messenger market of Thailand, what could Line do to stop $760B Facebook (plus Facebook Messenger plus WhatsApp plus Instagram)?
I have been repeating over and over that you have to compete on multiple levels. I refer to this as the digital strategy pyramid and you generally want to be as high up on the pyramid as you can. You want:
- Winner take all
- Competitive advantage
- Barriers to entry and soft advantages
- SMILE marathon
- Short-term and resource-based tactics
And you need to assess your strengths and weaknesses specific to each competitor (both existing and potential). Naver Search has some powerful incumbent advantages against South Korean Kakao. And it has some attacker advantages against incumbent Yahoo Search in Japan. But what advantages does it have against Google?
When I look at these companies, I map out the current and potential competitors. And I run through my checklist of questions. They usually fall under the “customer view” and the “competitor view”. But you can sort of summarize all of it with the question:
- “Could a well-funded and well-run competitor take 20-30% of this business in 1-2 years?”
I got this question from Warren Buffett. When he talked about buying Coca-Cola, he said (approximately) “if you gave me $100B, I couldn’t beat that business.” It’s not a bad summary of a lot of factors on my pyramid.
When I look at a smaller digital platform (like Naver) versus such massive competitors, I focus on;
- Competitive advantages
- Barriers to entry and soft advantages
- A different SMILE marathon
In this case, my short list would be:
- Has a local network effects that doesn’t asymptote.
- Has localized content and services.
- Has physical operations and assets.
Note: I don’t focus on the resources and short-term tactical stuff at the bottom of the pyramid. If WhatsApp wants to spend $3B to take on Line Thailand, Naver would have to find a big partner with deep pockets. This is how Didi (and Softbank) fought off Uber in China. This is how Shopee (with Tencent) avoided a money war with Lazada / Alibaba in SE Asia.
Point 3: A smaller platform needs local a network effect that doesn’t asymptote.
The biggest gun these platform business models have are network effects. It’s the biggest strength of Naver, Google and Facebook. So a smaller company needs the right one for a local fight.
Recall how Uber was going to be a global company. They launched services everywhere. They spent more money than any startup in history. And they lost in almost geography to local competitors. Ola beat them in India. Didi beat them in China. Grab beat them in SE Asia. Because their primary source of power was a network effect. And it turns out this is pretty weak in ride sharing. It flatlines pretty quickly. And it is mostly local. Having drivers available in Japan is of no use in China. And having drivers in Bali is a little use in Jakarta.
Compare that to Airbnb and Ctrip, which have international network effects that don’t flatline. The more hotels and stays available in Indonesia and Australia, the more valuable it is to travelers out of Beijing.
If you are a digital platform in a small / medium country, you want local network effects. You probably can’t win if they are international (like hospitality). The international giants will have a superior service. And you want a network effect that doesn’t asymptote too early, because that will make it easy for a local or international player to enter. You want a local network effect where a larger service is dramatically better.
Point 4: A smaller digital company needs localization of content and services.
Entertainment is actually a pretty local business. Everyone talks about Hollywood, Disney and Netflix – but +80% of all the media watched in a country is created in that country. Chinese overwhelmingly watch Chinese tv and movies. Indians mostly listen to Indian music. The more a digital good or service depends on content, the harder it is to replicate internationally.
Garena in SE Asia is a good example of this. Even though everyone plays the same 20-30 really popular video games, the content within these game is somewhat localized. The language, content, skins, chat, communities, and advertising are usually specific to each country. So Garena has significant power by its ability to localize such content to each country within SE Asia. That makes it hard for gaming giants (Riot, Epic, etc.) to go direct.
The international giants (Google, Facebook, etc.) are based on scalability. This requires a standardized service. Like sharing. Or payment. The more differentiated and localized the service, the harder it is to do it everywhere. There are some ways around this. For example, TikTok and YouTube went international based on user generated content.
So content tends to be localized. You can also localize some services. A lot of services in China and Japan are solutions to very country-specific problems. Chinese consumers like riding bicycles. Bike-sharing is good but very country specific solution for mobility in Chinese cities. Japan has all those crazy vending machines. And all those fax machines that everyone still uses.
GoJek in Indonesia is a great example of highly localized services. They went from basic motorcycle rides to a suite of +20 services specifically tailored for Indonesian consumers. This is actually very difficult to for Grab, Alibaba and others to replicate.
Point 5: Smaller digital companies probably need physical operations and assets.
Probably, the best long-term defense a smaller digital company can have against an international digital giant is physical assets and operations. At the end of the day, Google and Facebook don’t want to build a bunch of warehouses in Thailand and Indonesia. They don’t want to have tens of thousands of delivery people in South Korea.
As I talked about in podcast 18 (JD vs. Alibaba: How Retailers and Marketplace Platforms Compete and Evolve in China (Jeff’s Asia Tech Class – Podcast 18), companies that go into physical assets and operations become digital-physical hybrids. Their economics are not as pretty as pure digital / software companies. But they are far more defendable. These physical assets are big barriers to entry. And, interestingly, digital companies out of developed countries like the US and South Korea don’t like to get their hands dirty in operations that much. Chinese companies have no problem with this.
That said. Let me answer my questions:
How Durable Is Naver Search? Can It Survive and Thrive Between the Giants?
I really like Naver’s search business in South Korea. I like that they are combining lots of long-tail search topics with a walled garden of content (somewhat). I think that is a good strategy against local competitors. And they can keep dumping money into search technology and AI over time.
But what about Google?
Naver Search has a network effect that is mostly local and non-asymptotic. Good.
Webpages and search are both language and country-specific to a large degree. Not entirely but to a large degree. Most of the people writing in Korean and about things that Korean people care are in Korea. Google can translate other webpages from around the world. But I think there are defendable national and international types of network effects for search. And it does not asymptote. It keeps increasing with the ever changing content of webpages and with the ever increasing number of webpages. Search has a great network effect.
Naver Search has some localized content.
A lot of the content is local. That is great. And they have been moving into niche areas of Korean content like webtoons and local influencers.
Naver Search has no significant physical assets or operations.
They could have become a physical digital hybrid in South Korea +10 years ago. They could have been doing rides and food delivery. They could have built warehouses. They could have built a suite of Korean-specific solutions and services, like GoJek did in Indonesia. And Meituan did in China.
But they have remained a software and content company. Overall, I like their search engine in South Korea and I think it is reasonably defendable. But I wish they had done a GoJek model as well.
How Durable Is Line in Thailand, Taiwan and Japan? Can They Survive and Thrive Between the Giants?
This is the business that is vulnerable. Yes, messenger has a local effect but it is going international. But I don’t see any reason why it will remain at the national level. Messenger is a commodity service. It is a simple service. It is a lot about user generated content. And it is getting easier and easier to convert from one language to the next. It does increase linearly with users but it doesn’t strike me as local long-term.
The content and services aspect is also absent. This is mostly a commodity. It’s just chatting, which means user generated content. And a good advertising auction service can be deployed country-by-country.
There are no physical assets, operations or services.
Overall, messenger looks a lot more like TikTok than search engines. I think Line in Thailand and Taiwan are vulnerable. Japan is a bit of a question mark. It is a unique situation.
Final Point: Line in SE Asia Has Reached the Marissa Mayer / Yahoo Moment. It should be sold.
Marissa Mayer was a disastrous CEO of Yahoo. She came in with activist investors backing her (mostly Dan Loeb) and then spent a ridiculous amount of money on dumb acquisitions and hires. She was an empire builder, which is a common affliction of tech CEOs. Very few CEOs have the visionary abilities of Bill Gates and Steve Jobs. They should stick to creating shareholder value, like Tim Cook.
All the Yahoo initiatives failed. And the company finally accepted that it was a small player that could compete against Google and the other giants. It was sold to Verizon.
I think Line in Taiwan, Thailand and maybe Japan are at this point. Line Indonesia was at this point 3 years ago and should have sold then before it cratered.
All the digital giants of Asia want to be in messenger. It is a strategic control point in the ecosystem. The big players are going to try and capture this space eventually. I would sell Line Thailand, Taiwan and probably Japan now. Keep a minority share and sell the rest to Facebook.
In terms of investment, I would value the company based on its search engine cash flow and on the private market value of Line.
That’s it. Cheers, Jeff
- Introduction to Learning Platforms, Computer Vision and Megvii (Jeff’s Asia Tech Class – Daily Update)
- JD vs. Alibaba: How Retailers and Marketplace Platforms Compete and Evolve in China (Jeff’s Asia Tech Class – Podcast 18),
From the Concept Library, concepts for this article are:
- Local Network Effects
- Learning Platforms
From the Company Library, companies for this article are:
- Naver Corp / Line Messenger
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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