August 8, 2016 7:00 pm JST
Interview

Line goes its own way under Naver founder's hands-off philosophy

OSAMU INOUE, Nikkei Business staff writer

Line executives attend a listing ceremony at the New York Stock Exchange in July.

TOKYO -- In the dog-eat-dog internet industry, dominated by giant U.S. companies, South Korean web services provider Naver has spawned a subsidiary valued at nearly 1 trillion yen ($9.89 billion).

The subsidiary, Line, was initially just Naver's Japanese unit but went on to develop the popular Line messaging app. Unconstrained by national borders or capital ties, it has continued to grow massively and went public through simultaneous initial public offerings in New York and Tokyo in July. The company's market capitalization ballooned to about 863 billion yen as of July 25, from roughly 600 billion yen when it announced the IPOs.

Even after the listing, Naver still owns 83% of Line's outstanding shares. In an interview with Nikkei Business, Naver founder Lee Hae-jin, who is also chairman of the board of directors at Line, spoke about his unique philosophy regarding the management of the corporate group and how he envisions its future.

"I don't subscribe to the idea that a subsidiary is subordinate to its parent, Naver, or that I own a subsidiary," Lee said. "I think we should support subsidiaries at first. After extending support, if the subsidiary proves itself qualified to be independent, we will give it a totally free hand. Line is sufficiently qualified for such treatment.

"A parent company may feel that it is missing something valuable when it sees a subsidiary becoming independent. In due time, however, a parent company and a subsidiary should deal with each other as two independent entities, as is the case with human parents and their children.

"My son is now a university student. I have things I want to tell him. But if I interfere with his affairs, I may ruin his future -- so I resist meddling."

Greater passion

Lee respected the autonomy of Naver Japan, Line's predecessor, from the beginning. In 2008, about three years after Naver withdrew from the Japanese market, Lee entrusted Shin Joon-gho, who led the company's search service, to re-enter the country.

"Erase from your mind all that you have experienced or considered as common practice, and succeeded with, in South Korea," Lee told Shin at the time. "When you are in a foreign country, you should concentrate attention on things in that country and fully understand the users in that country."

Shin, now the chief global officer at Line, took Lee's message to heart in laying the foundation for Naver Japan. Hiring Japanese staff, including Jun Masuda -- now Line's chief strategy and marketing officer -- Naver Japan developed and released every possible service in an effort to make a dent in the Japanese market.

For years, it was mostly in vain. During this initial period, Lee visited Japan almost every month, looking after the subsidiary as parents do for their children. He spent time with Shin, Masuda and others at Naver Japan, provided consultation, and waited patiently for the company to grow.

"Naver is the top internet company in South Korea," Lee said. "In Japan, however, it was little known and had hardly any presence. We experienced both being at the top and the bottom at the same time.

"At the time, I felt keenly that the staff at Naver Japan had greater passion, a stronger desire for growth and a more sincere attitude toward service than those at the South Korean parent.

"It was a really tough time. But I was very lucky to be able to experience the enthusiasm characteristic of a nascent venture firm, by getting involved in something that was like a second business launch for me."

In June 2011, with their careers at stake, Shin and Masuda embarked on a new service: the Line messaging app.

The parent company had actually developed its own messaging app, Naver Talk, and introduced it in February of the same year. The app was seen as a crucial part of an attempt to revive Naver, which lagged behind in the South Korean mobile market amid the overwhelming popularity of the Kakao Talk messaging service, created by a rival domestic company, Kakao.

Lee eventually decided that the Naver group should abandon Naver Talk and focus on helping Line succeed. "I feel very sorry for the members of the Naver Talk development team," he confessed. "I drank a lot."

It was the last time that the South Korean parent extended its support to the Japanese subsidiary. Rather than absorbing it, Lee kept the subsidiary independent while changing its name to Line.

Line has since expanded by adding new services in quick succession. Meanwhile, in South Korea, Naver has enhanced its highly successful Webtoons manga streaming service and begun to lure overseas readers. The number of downloads for the company's Vapp, a service providing videos of K-Pop (Korean pop music) artists, reached 20 million across 210 countries and regions a year after its launch in July 2015. Lee is counting on the two services as the key to Naver capturing a bigger share of the global market and is considering stepping up the company's presence in North America, possibly this year.

Competing internally

As the parent company and the subsidiary have taken different paths, Naver also created another subsidiary which, interestingly, has started competing with Line. The parent company is pinning its hopes on South Korea-based Camp Mobile, set up in 2013, to come up with a service rivaling Line's explosive growth and success.

Camp Mobile's Snow image editing app has been a major success. The service lets users edit selfies by deforming their features, like eyebrows and noses, for fun. It can also swap faces among two to three people. Snow's popularity has spread rapidly among young women, especially in South Korea, Japan and Taiwan. Its downloads surpassed 40 million in about 10 months since the service was launched in September 2015.

Going up against Snow, Line released egg, a similar service, in May. In Japan, it now rivals Snow in popularity.

"Creating many spinoffs leads to the problem that companies in the same group compete against each other," Lee said. "But I think a degree of sound internal competition is a good thing.

"Yet we must not allow global titans to kill domestic players while they engage in infighting. Therefore, adequate adjustment or control is sometimes necessary. That is why I shuttle between Japan and South Korea, to lend a helping hand where I can, and adjust what is adjustable. I think that is my role."

Overtaking Naver

As Line accelerates its growth by using funds raised through the IPOs, the subsidiary may overtake its parent before long. Line racked up about 120.7 billion yen in sales in 2015, making up about 36% of Naver's consolidated sales. Naver's group sales rose 18% from a year earlier, compared with an increase of 40% for Line. If the trend continues, Line's sales will exceed the rest of Naver group's sales as early as fiscal 2017.

A reversal of their relative market capitalization could happen sooner. Excluding the market value of Line shares held by Naver, the parent's market capitalization was about 1.26 trillion yen as of July 25. Line's total market value briefly surpassed 1 trillion yen on the day of its IPOs, and some have forecast it to grow to 1.4 trillion next year.

How would Lee feel about a reversal? "I always tell junior colleagues, 'I want you to use me as a steppingstone to grow further,'" he said. "Some may dislike seeing their children or subordinates surpass them and grow into people in higher positions than them. My philosophy is, I hope my subordinates will outperform me."

Lee, who owned almost 100% of Naver's shares when he set up the company, has gradually reduced his shareholdings as the company has grown and now holds only a 4% stake. He believes Naver should do the same for Line.

Created in Asia to go up against Western internet giants, Naver and Line have broken out of low growth under Lee's group management philosophy. The conventional ideas that synergy should be promoted among group firms, or that a parent company should control subsidiaries through capital ties, may be getting out of date.

Lee Hae-jin, 49, is the founder and chairman of the board of Naver and chairman of the board of Line. He graduated from Seoul National University, where he majored in computer engineering, in 1990. After earning a master's degree at the Korea Advanced Institute of Science and Technology in 1992, he joined Samsung SDS the same year. In 1999, he set up Naver, serving as its president. He has been in his current post since 2004. 

(This report was adapted from an article in the Aug. 1 edition of Nikkei Business.)

Asia300

NAVER Corp.

South Korea

Market(Ticker): KRX(035420)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 24,986.81M
Shares: 32.96M
Asia300

Kakao Corp.

South Korea

Market(Ticker): KRX(035720)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 8,764.53M
Shares: 67.89M
Asia300

Samsung SDS Co., Ltd.

South Korea

Market(Ticker): KRX(018260)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 13,919.92M
Shares: 77.37M

LINE Corp.

Japan

Market(Ticker): TKS(3938)
Sector:
Industry:
Technology Services
Packaged Software
Market cap(USD): 9,560.40M
Shares: 222.73M

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