SK Telecom Leverages Kakao’s Location and Gig Economy Tech to Enrich 5G

For some time now, there has been a growing consensus that Communication Service Providers (CSPs) need to diversify away from the bit pipe model in order to generate additional revenues and profits. Investment banks and industry analysts have had the refrain of “digital transformation,” “multimedia services,” “value-added services” for some time now. However, perhaps with the exception of the largest CSPs, many lack the skillsets, confidence, and knowledge to provide sure-fire implementations.

Therefore, partnerships and collaboration are more likely to generate a better return on investment. For a couple of years now, SK Telecom and Kakao have been exploring the development of location-based services. In early November 2019, the two companies announced a stock swap transaction: SK Telecom will hold a 2.5% stake in Kakao, and Kakao will have a 1.6% stake in SK Telecom. Furthermore, the two companies wish to accelerate development by establishing a “Synergy Committee” headed by Ryu Young-sang, Vice President and Head of MNO Business of SK Telecom, and Yeo Min-soo, co-CEO of Kakao.

The Synergy Committee will be exploring a number of initiatives:

• In mobile network operations, the companies intend to develop the customer experience and benefits by combining SK Telecom’s mobile service and benefits with Kakao’s online messenger platform. Specific services will be augmented for 5G.
• In e-commerce, SK Telecom and Kakao will collaborate intend to introduce a new shopping experience based on the latest Information and Communication Technology (ICT) and Artificial Intelligence (AI).
• In the digital content arena, the two companies will combine SK Telecom’s media platform and Kakao’s rich digital content offerings.
• In next-generation ICT, SK Telecom and Kakao will explore long-term research and development into AI, the internet of Things (IoT), and finance.

All this is a real coup for Kakao, as the company was only formed in 2010. In May 2017, the company gained further prominence from KakaoTalk, a free mobile instant messaging application for smartphones with free text and call features, 220 million registered users, and 47 million active monthly users. In 2017, Kakao's annual revenue amounted to around US$1.76 Billion.

While KakaoTalk is primarily a messenger service, it has also become a platform for the distribution of third-party content and apps, including games. Furthermore, through its "Plus Friend" link, users can follow brands, media, and celebrities to receive exclusive messages, coupons and other real-time information through KakaoTalk chatrooms.

In addition to KakaoTalk, the company has developed a comprehensive portfolio of location-based services for end users, automobile drivers, and individuals wanting to participate in the gig economy:

• KakaoTaxi: Taxi-calling service for passengers that also coordinates the arrival of drivers. Users can enter their current location and destination to call a taxi.
• KakaoNavi: Launched in February 2016 and based on a recent acquisition, Kimgisa, in 2015. Initially Kimgisa used SKT’s T Map, but since 2015 it has developed its own commercial map based on the raw map data from the government agency Korea Geospatial Information and Communication. Kakao has also developed a 3D cityscape version;
• Kakao T: Transportation app that provides taxi-hailing, designated driver booking, nearby parking space searching, and real-time traffic information service.
• Kakao Place: Restaurant and places of interest, promotion, and rating social media application.

Based on SK Telecom’s most recent results, SK Telecom’s revenue increased by 9.0% for 3Q 2019. Net income increased by 5.9% compared to the previous quarter. SK Telecom’s 5G subscriber base also exceeded 1.54 million as of the end of September 2019. Remarkably, 45% of SK Telecom’s consolidated revenue came from businesses other than mobile communication. Major sources of revenue are attributed to media, security, and commerce. SK Telecom wishes to accelerate that diversification and ensure there is a rich source of digital content, location-based services, and e-commerce applications to attract and retain 5G customers.

SK Telecom has been putting other partnerships in place. In September 2019, SK Telecom announced a partnership to deliver 5G-based cloud gaming in Korea. SK Telecom will be an exclusive operating partner of Microsoft’s cloud gaming service, xCloud. The partnership has significant potential, as Korea has the fourth largest gaming market in the world with mobile gaming being a particularly popular platform.

While the Microsoft xCloud and Kakao partnerships will help build content and services for SK Telecom’s 5G services, the Kakao partnership should help SK Telecom enrich the online 5G and 4G experience for its end users across a number of sectors. It is more than likely that the two companies will further integrate their operations and even their equity stakes.

We will have to see how the Kakao/SK Telecom partnership pans out but this partnership approach is likely to be a promising avenue for Tier 2 and 3 CSPs to build a viable portfolio of value-added services and content. Of course, the partnerships need to be constructively developed on both sides, but many CSPs will find it challenging to develop the application/service entrepreneurship, software agile expertise, and culture to go it alone.