Internet: Platform Revolution

AnalystswhopreparedthisreportareregisteredasresearchanalystsinKoreabutnotinanyotherjurisdiction,includingtheU.S.
PLEASESEEANALYSTCERTIFICATIONSANDIMPORTANTDISCLOSURES&DISCLAIMERSINAPPENDIX1ATTHEENDOFREPORT.
Internet
Platform revolution
Initiate coverage of internet sector with Overweight call
We initiate our coverage of the internet sector with an Overweight call. In the
internet industry, the spotlight is shifting from mobile applications toward
platforms based on robots and artificial intelligence (AI). Against this backdrop, we
think internet companies with competitive platform services stand the best chance
of becoming leaders in driving a new industrial revolution.
In particular, AI applications should enable internet companies to achieve further
growth in their existing businesses, as well as uncover new growth opportunities
through new businesses. Backed by improvement in existing services (e.g., search,
e-commerce, behavioral ads, and video streaming), internet use has been on the
rise, creating fresh growth momentum for the internet market.
Over the medium and long term, we expect the internet business to evolve toward
connected platforms consisting of both hardware and software. The ongoing
“servitization” of manufacturing and of software should enable internet platform
service providers to expand their businesses and secure new revenue sources.
2017 preview: Further monetization of mobile traffic, start of AI business
For 2017, we expect to see additional monetization of mobile traffic and the
emergence of new growth engines, such as AI. In the short term, we think the key
variable is mobile revenue growth, driven by video on demand (VOD), online to
offline (O2O), messenger services, and cameras. Over the medium term, expansion
into AI platforms and Internet of Things (IoT) deserves attention. In addition,
overseas expansion is likely inevitable, given the limited growth potential of the
domestic market.
For internet companies, we think a balance between new and existing businesses is
needed to avoid the kind of revenue plateau (or chasm) that tech companies often
face in trying to take new services beyond early adopters to the masses.
In the short term, we recommend focusing on companies with earnings stability
coupled with additional growth potential in existing businesses, or those with
strong free cash flows to fund new investments. Over the medium to long term, we
think companies with game-changing potential deserve attention.
Our top pick is NAVER; stocks to watch are Kakao and Interpark
We initiate our coverage of NAVER (035420 KS) with a Buy rating and 12-month
target price of W1,160,000, and recommend it as our top pick. We expect NAVER to
continue rapid growth in existing businesses on the back of: 1) synergies between
shopping, search, and payment services; 2) promising mobile video app services; 3)
overseas expansion; and 4) improvement in service quality through the application
of AI. Over the medium to long term, we expect NAVER to tighten its grip on the
platform service market by investing in AI technologies and developing new
services and products.
We initiate our coverage of Kakao (035720 KQ) with a Buy rating and 12-month
target price of W105,000. We expect content revenue growth to bolster Kakao’s
enterprise value. For 2H17, points to watch include stabilization of ad revenue, the
contribution of O2O services (e.g., Smart Mobility) to revenue, and progress in the
AI business.
We initiate our coverage of Interpark (108790 KQ) with a Trading Buy rating and 12-
month target price of W12,000. For 2017, we expect Interpark to display YoY
earnings improvement, given its solid market share in the e-commerce segment
(e.g., travel and ticket reservations) and easing cost pressures.
Overweight (Initiate)
Industry Report
April 5, 2017
Mirae Asset Daewoo Co., Ltd.
[Internet/Game/Advertising]
Jee-hyun Moon
+822-3774-1640
jeehyun.moon@miraeasset.com

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April 5, 2017
Mirae Asset Daewoo Research
C O N T E N T S
I. Investment recommendation: Overweight 3
1. Initiate coverage with Overweight call 3
2. Top picks: Companies with earnings stability, coupled with additional growth
potential 4
II. Internet sector analysis 5
1. Share-price variables 5
2. Business model 9
1. Korea’s internet market landscape 14
4. Cases of global internet firms 19
III. Internet industry outlook 22
1. Revolution of platform economy 22
2. Present: Business model development and monetization accelerating 23
3. Future: Gearing up for upcoming AI era 27
4. Key risk factors 38
IV. Key issues in internet industry 39
1. Changes in online shopping market 39
2. Full-swing competition in fintech market 43
3. Content business’ inflection points 50
4. Challenges of messenger business 55
V. Investment strategy & valuation 58
1. Investment strategy 58
2. Valuation comparison 60
NAVER (035420 KS) 61
Kakao Corp. (035720 KQ) 70
Interpark (108790 KQ) 78

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I. Investment recommendation: Overweight
1. Initiate coverage with Overweight call
We initiate our coverage on the internet sector with an Overweight recommendation. In the
internet industry, the spotlight is gradually shifting from mobile applications to a connected
platform. The development of AI is improving the quality of existing services and giving rise
to a hyper-connected platform that encompasses both software and hardware. The
technology is expected to provide new-found momentum to traditional businesses and
present fresh opportunities for growth.
Korea’s internet sector index has experienced quantum leaps twice in the past with the
emergence of new growth drivers. During 2017-2012, the index gained 35% from early-2007
to end-2012, in line with the expansion of the internet ad market from W1tr to W2tr. In
2013-2016, the index advanced 70% from early-2013 to end-2016, as the pick-up in mobile
revenue pushed up the value of the internet ad market to W3tr. From 2017 onwards,
sophistication of the monetization of mobile traffic on video, O2O, and messaging
platforms, as well as the application of AI, should present new growth momentum.
Internet firms are expanding their business domain from PC and mobile applications to IoT
and AI. For such firms, overseas expansion is likely inevitable, given the limited growth
potential of the domestic market. In such an environment, top-tier players that are able to
invest in human resources and M&As, based on robust cash flows and a strong capital base,
should enjoy greater benefits and opportunities.
Figure 1. Korea internet index: Looking for growth through AI
Source:ThomsonReuters,CheilWorldwide,PwC,MiraeAssetDaewoo Research
Figure 2. Entering era of ‘connected platforms’ from era of ‘mobile apps’
Source:Mediareports,MiraeAssetDaewooResearch
0
1
2
3
4
5
0
100
200
300
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F
(Wtr)(p)
Korea internet ad market (R)
Korean internet sector index (L)
Mobile ad-led growth
Application
of AI
Internet ads: W1r → W2tr
Global
financial
crisis

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2. Top picks: Companies with earnings stability, coupled with additional
growth potential
Our top picks for the sector include companies that are expected to exhibit strong future
growth potential backed by robust earnings stability. Given the growing importance of
investments for the sector, we recommend keeping an eye on internet names that have
strong cash-generation capability backed by solid business models, and ease concerns over
short-term margin erosion.
Internet companies need to achieve a balance between new and existing businesses in
order to avoid a kind of revenue plateau (or chasm), as their businesses (currently focused
on mobile apps) expand into Internet of Things (IoT).
Over the short term, we recommend focusing on companies with earnings stability coupled
with additional growth potential in existing businesses, or those with strong free cash flows
to fund new investments. Over the medium to long term, we think companies with game-
changing potential deserve attention.
We initiate our coverage of NAVER (035420 KS) with a Buy rating and target price of
W1,160,000, and recommend it as our top pick. Through its first management changes in
eight years, we think the firm has improved its expertise, in terms of service offerings,
technology investments, and BOD management, and achieved a balance. We expect NAVER
to continue to achieve rapid growth in existing businesses, on the back of: 1) synergies
between shopping, search, and payment services; 2) promising mobile video app services;
3) overseas expansion; and 4) improvement in service quality through the application of AI.
Over the medium to long term, we expect NAVER to tighten its grip on the platform service
market by investing in AI technologies and developing new services and products.
Figure 3. Short-term: Stable earnings, growth in existing businesses, and cash for investments
Note:Figuresareconsolidatedbasis,dataafter2017Fareourestimates
Source:NAVER,MiraeAssetDaewooResearch
Figure 4. Mid- to long-term: Mobile-IoT to approach inflection point
Source:Ericsson,Softbank,MiraeAssetDaewooResearch
-10
0
10
20
30
40
0
400
800
1,200
1,600
2013 2014 2015 2016 2017F 2018F
(%)(Wbn)
Free cash flow (L)
OP margin (R)
Revenue growth (R)
Increase in free cash flow
Sustained double-digit revenue growth
OP margin expansion expected

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II. Internet sector analysis
1. Share-price variables
1) Quantitative variables: User metrics
Based on the correlation between internet companies’ historical earnings and share
performances, we have found that quantitative variables can serve as lead indicators for
internet company shares. The internet is a two-sided market, i.e., a market in which two or
more distinct groups of consumers are brought together via networks. In other words,
internet companies first attract a sufficient number of users to their platforms and then
generate ad revenue by securing advertisers, backed by their user base.
As an increase in user numbers is seen as equating upside in revenue growth, user number
trends can serve as a lead indicator for shares of internet names. We view unique users and
active users as valid user metrics for the sector.
For Korea’s leading internet names, Naver and Kakao, their market caps have historically
moved largely in line with monthly unique user numbers. Notably, their unique users have
increased sharply since 2012, thanks to improving service accessibility backed by greater
numbers of LTE subscribers and increasing mobile-optimized service offerings. Global
internet players, such as Facebook, Twitter, and Snap, have also seen their total market caps
fluctuating sensitively to monthly active user growth trends.
Figure 5. NAVER’s market cap and MUV Figure 6. Kakao (Daum)’s market cap and MUV
Note:MonthlyUniqueVisitors(MUV)aresumofPC andmobile
Source:ThomsonReuters,KoreanClick,MiraeAssetDaewooResearch
Note:MonthlyUniqueVisitors(MUV)aresumofDaumandKakao’sPC
andmobile;DaumandKakaomergedinOct.2014
Source:ThomsonReuters,KoreanClick,MiraeAssetDaewooResearch
Figure 7. Facebook’s market cap and MAU Figure 8. Twitter and SNAP’s market cap and MAU
Note:MAUreferstoMonthlyActiveUser
Source:Facebook,ThomsonReuters,MiraeAssetDaewooResearch
Note:MonthlyActiveUsers(MAU),SNAPmarketcapaccountingforIPO offering
priceandopeningprice
Source:Twitter,SNAP,ThomsonReuters,MiraeAssetDaewoo Research
20
25
30
35
40
0
5
10
15
20
25
30
03 05 07 09 11 13 15 17
(mn persons)(Wtr)
Market cap (L)
MUVs (R)
MUV increase driven by
mobile- optimized services
0
10
20
30
40
50
60
70
0
2
4
6
8
10
00 02 04 06 08 10 12 14 16
(mn persons)(Wtr)
Market cap (L)
MUVs (R)
Daum and Kakao merged in Oct. 2014;
No. of aggregate users was reflected in shares
0
90
180
270
360
0
10
20
30
40
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
(mn persons)(US$bn)
Twitter market cap (L)
Snap market cap (L)
Twitter MAUs (R)
Snapchat MAUs (R)
Decline inTwitter shares
due to stagnating MAU
600
1,000
1,400
1,800
2,200
0
100
200
300
400
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
(mn persons)(US$bn)
Market cap (L)
MAUs (R)
User growth in early stage
led by North America;
Current global user
uptrend appears sustainable

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2) Qualitative variables: Profit indicators
Qualitative variables, especially profit indicators, are the most important share-price
determinants of all companies. For internet companies, in particular, the expansion in user
base carries significance only when it translates into profit increases. While the number of
users is a lead indicator (just like valuation multiples), profit indicators are the key to share
performances.
Indeed, Naver and Kakao (Daum, prior to the October, 2014 Daum-Kakao merger) have
historically seen their shares moving largely in line with earnings per share (EPS) trends. For
global internet players, such as Alphabet and Amazon, share prices and EPS have also been
moving in similar directions.
Meanwhile, there were exceptions to these trends. For Naver and Amazon, shares moved
out of sync with EPS in the mid-2000s and early 2010s, respectively. During both periods,
strong share price rallies preceded actual profit growth, as shares moved first on robust
revenue growth (double-digit) and expectations for profit increases.
In our view, investors can take any time gap between growth in user numbers (and
subsequent growth in revenue) and actual profit growth as an opportunity to accumulate
shares. Even when sluggish earnings lead to share pullbacks and overvaluation concerns,
we think a steady increase in revenue, which points to a near-term rise in profit, should
offer an entry point.
Figure 9. NAVER’s stock price and EPS Figure 10. Kakao (Daum)’s stock price and EPS
Note:Earningspershare(EPS)basedondatafromThomsonReuters
Source:ThomsonReuters,MiraeAssetDaewooResearch
Note:Earningspershare(EPS)basedondatafromThomsonReutersandDaum
Figure 11. Alphabet’s stock price and EPS Figure 12. Amazon’s stock price and EPS
Note:EPSreferstoearningspershare
Note:EPSreferstoearningspershare
0
10
20
30
40
50
60
0
200
400
600
800
03 05 07 09 11 13 15 17
(W'000)(W'000)
Share price (L)
EPS (R)
-5
0
5
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15
0
40
80
120
160
00 02 04 06 08 10 12 14 16
(W'000)(W'000)
Share price (L)
EPS (R)
0
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0
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1,000
05 07 09 11 13 15 17
(US$)(US$)
Share price (L)
EPS (R)
0
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05 07 09 11 13 15 17
(US$)(US$)
Share price (L)
EPS (R)

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3) Paradigm shift; a game changer
For internet companies, the most important share-price variable is the ability to implement
major innovations. Innovative companies should emerge as new market leaders, leading to
upswings in their enterprise value.
Portals  search: In the early stages of the PC-internet era, most internet companies
focused on the conventional portal business. However, Google turned the tide in its favor by
shifting its focus to ‘search’. In the mobile era, the company expanded its internet business,
by creating the relevant ecosystem (e.g., Android, app stores). Over the past 10 years,
Google has also been investing in AI. As a result, the market cap of Alphabet (Google) has
been on the rise since exceeding that of Yahoo in 2005.
Display ads  search ads: In Korea’s internet ad market, we also note the change in its
growth driver from display ads to search ads. Indeed, the search ad market began to
surpass the display ad market in 2005, driven by Overture’s entry into Korea (in 2003) and
Naver’s expansion of the search ad business. This has resulted in market cap growth for
both Naver and Daum.
Offline retail  e-commerce: The market cap of Amazon, the world’s largest online
retailer, has topped that of Macy’s, the US’ leading offline-only retailer, since 2007. However,
even in the US, online transactions now represent only 13% of the entire retail market,
which we think points to ample upside for Amazon shares going forward. Moreover,
Amazon has been reinforcing its digital content distribution business (e.g., e-books, video),
as well as its online retail business. Recently, it has also been expanding into AI platforms
(e.g. Echo) and IoT devices.
Text  images and videos: We also note the shift in the key communication tool from text
to photo/video. Recently, the market cap of Snap, whose flagship product is the image
messaging and multimedia mobile application Snapchat, has exceeded that of Twitter, a
text-based networking service provider.

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Figure 13. From ‘portal’ to ‘search’, and ‘expansion of
ecosystem’: Yahoo  Alphabet
Figure 14. From ‘offline retail’ to ‘e-commerce’: Macy’s 
Amazon
Source:ThomsonReuters,MiraeAssetDaewooResearch Source:ThomsonReuters,MiraeAssetDaewooResearch
Figure 15. From ‘display ads’ to ‘search ads’: Daum  NAVER Figure 16. From ‘text’ to ‘video’: Twitter  Snap
Source:ThomsonReuters,MiraeAssetDaewooResearch Source:ThomsonReuters,MiraeAssetDaewooResearch
0
50
100
150
200
250
300
350
00 02 04 06 08 10 12 14 16
(US$bn)
Yahoo! market cap
Alphabet (Google) market cap
0
100
200
300
400
00 02 04 06 08 10 12 14 16
(US$bn)
Macy's market cap
Amazon market cap
0
10
20
30
40
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
(US$bn)
Twitter market cap
Snap market cap
0
5
10
15
20
25
30
00 02 04 06 08 10 12 14 16
(Wbn)
Kakao (Daum) market cap
NAVER (NHN) market cap

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2. Business model
1) Indirect pricing: Ads
 Key business model
The internet platform service market is a two-sided market that connects two or more
distinct groups of customers via networks. Internet firms provide opportunities for their
customer groups to reach deals with each other. A typical example is connecting website
users with advertisers.
To be recognized as attractive advertising tools by advertisers, internet firms strive to
attract as many subscribers as possible by providing them with a variety of free services,
including search, community, messenger, email, and content distribution services. Internet
firms generate revenue by charging for ads at rates that are based on their subscriber base.
In other words, internet firms indirectly charge advertisers, instead of subscribers.
When users search via Google and NAVER’s search engines, they are exposed to ads, as well
as search results. As ads related only to search words appear, advertisers can adjust their ad
targets and ranges based on search words. A larger subscriber base would lead to higher
ad exposure, thus presenting higher value to advertisers.
Figure 17. Internet platforms’ two-sided market structure: Connecting users and advertisers
Source:FairTradeCommission,MiraeAssetDaewooResearch
Figure 18. Google (Alphabet) and NAVER’s business model: Internet ads a steady source of profits
Source:BusinessModelGeneration(A.Osterwalder,Y.Pigneur),MiraeAssetDaewooResearch
[KA] Key activities
Platform management
Management services
Expansion of scale
[CR]
Customer
relationships
[KR] Key resources
Search platform
Front page
[CH] Channels
[KP]
Key partnerships
[VP] Value proposition
Targeted ads
Free search
Paid content
[CS] Customer segments
Advertisers
Web/app users
Content providers
[C$] Coststructure
Platform costs
[R$] Revenue streams
Internet ads
Free

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 Size of ad market
In 2017, we estimate the domestic ad market will reach around W11tr: W3.7tr for internet
ads; W3.7tr for TV ads; W1.8tr for print ads; W1.6tr for outdoor ad/production; and W290bn
for radio ads. We expect the domestic ad market to grow by 3% YoY. The internet and TV ad
markets will likely expand 9% and 1% YoY, respectively, while the radio ad market should
remain flat YoY. The print and outdoor ad/production markets are likely to shrink by 2% YoY,
respectively.
The domestic internet ad market can be divided into PC internet and mobile ads. In terms of
value, mobile ads exceeded PC internet ads for the first time in 2016. In 2017, we project
mobile and PC internet ads at W2.1tr and W1.5tr, respectively, widening the gap in value
between mobile and PC internet ads. Of note, mobile traffic (the number of visitors, time
spent, etc.) has long exceeded PC internet traffic. We think mobile ad revenue has been
growing rapidly, in line with rising mobile traffic.
In the global internet ad market, the video ad segment will likely deliver the highest growth.
In 2017, we expect the global internet ad market to grow by 10% YoY. The search ad market,
which accounts for 46% of the global internet ad market, is likely to expand 5% YoY. The
video ad market, which accounts for only around 10% of the global internet ad market,
should grow 27% YoY this year.
Major internet firms are currently increasing investments in their video ad businesses, due
to their high growth potential. Indeed, Facebook presented a “Video First” strategy in a
conference call early this year. NAVER has also set out a strategy to bolster its video
businesses (including Live broadcasts) by purchasing a stake in YG Entertainment and
creating a private equity fund (investing in content).
Figure 19. Ads the most important business model for media: Internet ads accountfor 1/3 of total 2017F domestic ad market
Note:InternetissumofPCandmobile;TVissumofterrestrial,cablePP,generalTVprogrammingchannel,IPTV,satellite,DMB,andSO
Source:CheilWorldwide,PwC,MiraeAssetDaewooResearch
Figure 20. Domestic mobile ads exceed terrestrial TV ads in
2016
Figure 21. Growth in global internet video ads exceeds that of
search ads
Source:CheilWorldwide,MiraeAssetDaewooResearch Source:Bloomberg,MAGNA,MiraeAssetDaewooResearch
0
2
4
6
8
10
12
14
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F 20F
(Wtr)
Outdoor Print
Radio TV
Internet
Internet ad market:
- To approach TV ad market in 2017
- Highly likely to be greater in 2018
0
500
1,000
1,500
2,000
2,500
3,000
11 12 13 14 15 16 17F 18F
(Wbn)
Internet - mobile ads
TV - terrestrial ads
-20
0
20
40
60
80
100
11 12 13 14 15 16 17F 18F
(YoY,%)
Internet - video ads
Internet - search ads

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2) Direct pricing: subscription fee, charging for content, service revenue
 “Freemium “ model
Another business model for internet firms is to charge users directly via subscription fees,
item sales, and service sales.
In internet or software services, a “freemium” business model has emerged. The freemium
model is a business model that combines free and premium services. Under this business
model, a majority of subscribers enjoy free services, while 10-20% of the subscribers use
paid services. The business model is viable, as the cost of free services is low. The
profitability of the model hinges on: 1) the average cost of free services; and 2) the ratio of
customers switching from free subscribers into paid accounts.
The major premium services of NAVER and Kakao are mostly content-related services,
including music, webtoons, and web novels. Melon, an online music service offered by LOEN
Entertainment (which was acquired by Kakao in 2016), is a typical freemium model. Users
can listen to music content from Melon free of charge for up to one minute, but they must
make a payment to listen to or download the whole song, or to subscribe to a streaming
service for a certain period.
In 2016, NAVER and Kakao saw direct pricing content revenues increase YoY. We believe
subscription-based revenue complements ad revenue, as the former is less sensitive to
economic conditions than the latter.
Figure 22. Subscription model: Kakao subsidiary, Loen Figure 23. Increase in subscriptions in mobile app market
Source:BusinessModelGeneration(A.Osterwalder,Y.Pigneur),MiraeAsset
DaewooResearch
Note:Excludinggameapp;datafor2016areJan.toSep.
Source:Activate,AppAnnie,Apple,Google,MiraeAssetDaewooResearch
Figure 24. NAVER’s content revenue Figure 25. Kakao’s content revenue
Note:Dataareconsolidatedbasis
Note:Dataareconsolidatedbasis
Source:Kakao,MiraeAssetDaewooResearch
10
15
20
25
30
0
50
100
150
200
250
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16
(%)(Wbn) Content revenue (L)
Contribution of content revenue (R)
0
10
20
30
40
50
60
0
50
100
150
200
250
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16
(%)(Wbn) Content revenue (L)
Contribution of content revenue (R)
Acquired Loen
in Mar. 2016
18
38
65 71
17
57
82 86
0
20
40
60
80
100
2011 2013 2015 2016 2011 2013 2015 2016
App breakdown Revenue breakdown
(%) Subscription Freemium Paid download[KA] Key
activities
Platform
management
[CR]
Customer
relationships
[KR] Key
resources
Melon
platform brand
[CH] Channels
[KP]
Key
partnerships
Kakao
SK Telecom
Free
one-minute snippet
Streaming/
download
Full song/album
[CS] Customer
segments
General/spot
users
Large storage/
power users
[C$] Cost structure
Platform development
Music costs
Free account with restrictions
Monthly subscription fee

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 As-a-Service model
The conventional manufacturing industry’s adoption of the “As-a-Service” model could offer
a new revenue source for internet companies. The convergence of production and services
could also provide newfound value to customers and new growth drivers for
manufacturers.
The “As-a-Service” model comprises five components: business processes; applications &
platforms; cloud; security; and infrastructure. Internet firms are focusing on applications &
platforms and cloud, areas in which they have competitive advantages.
Most internet firms generate revenue by incorporating applications & platforms and cloud
services into hardware, such as Amazon’s Kindle and Echo, Google’s Google Home, and
NAVER and LINE’s Wave (an AI-embedded smart speaker). Cloud computing technology is
the basis for the as-a-service model. NAVER subsidiary NAVER Business Platform carries out
infrastructure-as-a-service (IaaS) businesses based on B2B cloud solutions, while also
expanding its platform-as-a-service (PaaS) businesses.
The auto industry is emerging as a new land of opportunity. Internet-based firms, including
Uber and Kakao, are driving the so-called “car-as-a-service” trend. Eventually, various “car-
as-a-service” businesses will likely be integrated into a self-driving car network. NAVER LABS,
a NAVER subsidiary developing autonomous driving solutions, recently added car-sharing
services to its business portfolio. The “car-as-a-service” model - once considered a
representative business of the sharing economy - is now expected to drive the overall
mobility industry, and not merely serve as a niche market model.
Figure 26. Five components of As-a-Service: Internet company expands applications, platforms,
and cloud business
Source:Accenture,MiraeAssetDaewoo Research
Figure 27. Urban driving: Cars-as-a-service to be connected to self-driving car network
Source:WerkriegtdieKurve?(F.Dudenhöffer),MiraeAssetDaewooResearch
Past Current Future
Taxi
Ride-sharing intermediary
Ride-sharing carpool center
Conventional car-sharing
Free-float
car-sharing
Neighborhood car-sharing
Private car Private car
Self-driving
car
network
Private car
Taxi

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3) Commissions: Transaction commissions
E-commerce firms’ major revenue source is commissions. In Korea, Gmarket, Auction, 11st,
Interpark, and several social commerce firms are leading the online shopping industry. If an
online shopping company sells directly-purchased products or services (and takes
responsibility for inventory), it recognizes the gross value of sales as revenue. Indeed, some
online shopping malls ship products directly from their own warehouses.
In Korea, online shopping transaction value reached W65tr in 2016, accounting for 17% of
total retail sales (versus 13% in the US). Of note, mobile transactions came in at W35tr last
year, accounting for 54% of online shopping transactions. In 2017, online shopping
transactions are projected to increase further to W78tr, with the percentage of mobile
transaction rising to 61%.
The Korea Fair Trade Commission (KFTC) estimates that online open markets’ commission
revenue accounts for 4% of total transaction value. Open market operators provide a
marketplace in which sellers and buyers trade freely, and take a certain percentage of
commissions from the sales amount.
In our view, revenue from advertising and ancillary services, rather than commissions, has
the greatest impact on open markets’ profitability. Open markets provide a variety of
services (namely, payments); in addition, advertising sales in open markets are believed to
be driven by competition between sellers and efforts to maximize transaction value.
Figure 28. Domestic online shopping-mall billing: Mobile billing accounted for 54% of total online shopping in 2016
Note:Forecastsareourestimates
Source:NationalStatisticalOffice,MiraeAssetDaewooResearch
Figure 29. E-commerce’s basic business model is fee revenue
Figure 30. Additional ad-type revenue has more impact on
profitability than fee revenue
Note:BasedonfeerevenuereportedbyfairtradeopenmarketinSep.2015
Source:FairTradeCommission,MiraeAssetDaewooResearch
Note:BasedonAuctionandGmarket’sads/additionalservicerevenuereportedby
fairtradeopenmarketinSep.2015
Source:FairTradeCommissionMiraeAssetDaewooResearch
0
5
10
15
20
25
30
0
25
50
75
100
125
150
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F 20F
(%)(Wtr)
Online shopping mall transaction value (L)
Mobile transaction value (L)
Contribution of online shopping to domestic retail sales (R)
0
20
40
60
80
240
250
260
270
280
290
2010 2011 2012 2013 2014
(Wbn)(Wbn) eBay Korea ad/additional service revenue (L)
eBay Korea OP margin (R)
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014
(Wbn)
Interpark 11st
Auction Gmarket

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14
April 5, 2017
1. Korea’s internet market landscape
1) Total user traffic
Looking at current user traffic to both PC websites and mobile apps in Korea, portals,
messengers, videos, e-commerce, and social networking sites occupy the top positions, in
terms of user traffic.
As of 2017, Naver, Kakao, and Daum rank first through third, in terms of the number of
monthly unique visitors. Global players, such as Google and YouTube (Alphabet), as well as
Facebook, have also seen sharp rises in unique visitors in Korea, as smartphone penetration
has increased. Currently, the number of monthly unique visitors to Facebook in Korea is
nearly equivalent to that of Gmarket or 11st.
In 2017, Kakao ranks first, in terms of total time spent (TTS) in apps, followed by Naver and
Daum (both portals), YouTube, and Facebook. Online shopping sites (e.g. 11st and Gmarket)
tend to have relatively lower visit duration (time on site) than messaging and portal sites,
because online shopping site visitors have a conspicuous purchase purpose.
Figure 31. MUV of major domestic domains: Increase in Kakao, Google, YouTube, and Facebook,
after mobile penetration
Note:Basedon2000-2001PC;dataafter2012basedonsumofPCandmobile;MUVreferstoMonthlyUniqueVisitors
Source:KoreanClick,MiraeAssetDaewooResearch
Figure 32. Monthly average time of stay on domestic major domain (2017): Kakao > NAVER >
Daum > YouTube > Facebook
Note:Datafor2000and2006arebasedonPC,datafor2012and2017arebasedonsumofPCandmobile
0
10
20
30
40
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
(mn persons)
NAVER Kakao
Daum Google
YouTube 11st
Gmarket Facebook
0
1
2
3
Kakao NAVER Daum YouTube Facebook Google 11st Gmarket
(bn minutes)
2000 2006 2012 2017

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April 5, 2017
2) Traffic by service category
Korea’s internet market can be divided into the search, e-commerce, social networks (SNS),
and mobile video segments. While Korean players hold a competitive edge over global players
in the search and e-commerce segments, global players (which have mobile-optimized apps)
have topped Korean players in social networks and mobile videos (in terms of traffic).
Search: Naver currently represents a hefty 70% of Korea’s total monthly search queries,
followed by Daum, Google, Bing, and Zum. Among the five search engines, local search
engines - including NAVER, Daum, and Zum - collectively account for 92% of the market. This
stands in contrast to Google’s high market shares in English-speaking countries.
E-commerce: 11st ranks the first in the e-commerce segment (in terms of monthly mobile
unique visitors), with a 50% market share, followed by the Gmarket and Auction online open
market sites. Social commerce sites, such as Coupang, WeMakePrice, and Ticket Monster,
now stand in the fourth place, followed by home-shopping channel or department store-
based apps. Naver’s e-commerce page is projected to rank in the top-10 in the segment.
Social networks: Facebook holds the largest share of Korea’s social network market, in
terms of TTS per month, followed by portal-based service providers, such as Naver and
Daum. Total time spent on Instagram, Kakao, and Twitter apps is only 20% that of Facebook.
Mobile videos: In terms of the number of monthly unique visitors, nearly 80% of total video
consumers use YouTube, versus 24% for Naver, and 16% for SK Telecom’s Oksusu. As in the
social network segment, Korea’s local players also lag behind their global counterparts in
this segment.
Figure 33. Domestic top-5 search engines: NAVER dominates
Figure 34. Domestic top-10 e-commerce apps: Open markets
rank high, but usage is evenly spread
Note:BasedontotalPCsearchquery,basedonFeb.2017
Note:Basedontotalmobilee-commerceusers,basedonFeb.2017
Figure 35. Domestic top-10 social network
services/communities: Facebook and NAVER stand out
Figure 36. Domestic top-10 mobile video apps: YouTube
dominates
Note:Basedontotaltimeofstayonmobilecommunities,asofFeb.2017
Note:Basedontotalmobilevideousers,asofFeb.2017
0
10
20
30
40
50
(%)
0
5
10
15
20
25
30
(%)
0
20
40
60
80
(%)
0
20
40
60
80
NAVER Daum Google Bing Zum
(%)

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16
April 5, 2017
3) Traffic by user age
We have also analyzed user preference for mobile apps by age group in Korea, by selecting
top-five mobile apps by service category (in terms of TTS on mobile apps) and thereafter
identifying the app with the highest TTS share in each age group. The results of our analysis
show that the lower the age of users, the greater the time spent viewing images/videos, or
using entertainment, and global services. Details are as follows:
Generation Z (those born in the mid-1990s): Of all social networking sites, Generation Z
spends the most time on Twitter and Facebook, while 11st ranks first among all e-commerce
apps. Among video apps, Twitch (which specializes in game broadcasting) shows the highest
TTS, followed by YouTube. In the camera app segment, Cymera ranks first, followed by
Snow.
Millennials (born 1981-1996): Of all social networking apps, millennials spend the most
time using Instagram and Facebook, which suggests a growing preference for image/video
communication among young users. In this age group, Ticket Monster posted the highest
TTS in the social commerce segment, while Naver TV, which specializes in short videos of TV
content and web dramas, claims the highest TTS share in the video app segment. In
addition, Naver-based Snow and B612 are the most popular camera apps in this age group.
Generation X (born 1965-1980): Of all social networking sites, Generation X spends the
most time on Naver’s BAND. They prefer Gmarket in the e-commerce segment; Daum tvPot
(integrated with Kakao TV after the Daum-Kakao merger) among mobile video apps; and
KakaoTalk Cheez (which allows users to develop their own unique KakaoTalk profiles)
among camera apps.
Baby boomers (born in 1946-1964): As with Generation X, baby boomers spend the most
time on Naver BAND of all social networking sites. For reference, BAND (a closed networking
service where members can join only via invitation) represents a hefty 46% of TTS on social
networking apps by users aged 50 or over. Coupang has seized the top spot in the
commerce segment, while Oksusu (operated by SK Telecom) and Photo Wonder rank first in
the video app and camera app segments, respectively.

Internet
17
April 5, 2017
Figure 37. Mobile apps preferred by Generation Z users (ages
7-18)
Figure 38. Mobile apps preferred by Millennialusers (ages 7-
18)
Note:Proportionof7-18year-oldsoutofTTSforallagegroupsineachapp’s
usage,asofFeb.2017
usage,asofFeb.2017
Figure 39. Mobile apps preferred by Generation X users (ages
35-49)
Figure 40. Mobile apps preferred by Baby Boomer users (ages
50-69)
usage,asofFeb.2017
usage,asofFeb.2017
Twitter
11st
Twitch
Cymera
0
15
30
45
60
Social network E-commerce Video Camera
(%)
Ages 7-18
Instagram
Ticket Monster
NAVER TV
Snow
0
20
40
60
80
(%)
Ages 19-34
Band
Gmarket
Daum tvPot
(Kakao TV)
Kakao Talk
Cheez
0
25
50
75
100
(%)
Ages 35-49
Band
Coupang
oksusu
PhotoWonder
0
15
30
45
60
(%)
Ages 50-69

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18
April 5, 2017
The age distribution of NAVER and Kakao’s mobile app users varies, as: 1) the preferred
service or communication mode differs by age group; and 2) users tend to build social
networks with similarly-aged people. Typically, to attract users of diverse age groups,
internet firms with web portals, like Kakao and Naver, leverage the brands of their flagship
apps to launch individual service apps.
Of note, an increasing number of internet firms are utilizing individual service apps, rather
than flagship apps, to attract non-major customer groups, such as young or overseas users.
Such apps include NAVER’s Snow, LINE, and V Live.
Figure 41. MUV on NAVER’s major mobile apps
Figure 42. Proportion of total time of stay on NAVER’s major
mobile apps
Note:AsofFeb.2017
Note:AsofFeb.2017
Figure 43. MUV on Kakao’s major mobile apps
Figure 44. Proportion of total time of stay on Kakao’s major
mobile apps
Note:AsofFeb.2017;DaumtvPotandKakaoTVmergedinFeb.2017
Note:AsofFeb.2017;DaumtvPotandKakaoTVmergedinFeb.2017
Figure45.NAVER’smobileappfavoredbyyoungagevs.elderly Figure46.Kakao’smobileappfavoredbyyoungagevs.elderly
Note:Proportionoftotaltimeofstayforallages,totaltimeofstay,asofFeb.2017
Source:NAVER,KoreanClick,GooglePlay,MiraeAssetDaewooResearch
Note:Proportionoftotaltimeofstayforallages,totaltimeofstay,asofFeb.2017
Source:Kakao,KoreanClick,GooglePlay,MiraeAssetDaewooResearch
0 10 20 30
NAVER
Band
NAVER Map
NAVER Cafe
NAVER Cloud
NAVER Webtoon
Snow
NAVER TV
LINE
Papago
V Live
(mn persons) 0 20 40 60 80 100
NAVER
Band
NAVER Map
NAVER Cafe
NAVER Cloud
NAVER Webtoon
Snow
NAVER TV
LINE
Papago
V Live
(%)
Age 7-18
Age 19-34
Age 35-49
Age 50-69
0 10 20 30
Kakao Talk
Kakao Story
Daum
Kakao Page
Kakao Taxi
Daum Cafe
Kakao Map
Kakao Talk Cheez
Daum Webtoon
Daum tvPot
Kakao TV
(mn persons) 0 20 40 60 80 100
Kakao Talk
Kakao Story
Daum
Kakao Page
Kakao Taxi
Daum Cafe
Kakao Map
Kakao Talk Cheez
Daum Webtoon
Daum tvPot
Kakao TV
(%)
Age 7-18
Age 19-34
Age 35-49
Age 50-69

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19
April 5, 2017
4. Cases of global internet firms
1) Alphabet: Implementing “10x” strategy
Alphabet is a major US internet firm with a market cap of around W649tr. The company
recorded revenue of W105tr and operating profit of W27.5tr in 2016. The company’s major
business model is advertising via its subsidiary, Google. The company offers search,
(Google.com), advertising (AdWords), and third-party content ad (AdSense) services through
its search platform.
Google generates revenue from ad services, while offering free services to web users and
content creators. The value that Google presents to advertisers hinges greatly on the
number of its users. Therefore, Google is striving to attract more users by offering free
email, map, and photo album services in addition to the search engine. In addition, Google
has expanded the ad business scope by launching AdSense which allows Google ads to
appear on other websites.
In August 2015, Google overhauled its governance structure by establishing the holding
company Alphabet. Under the new governance structure, medium- to long-term projects
have been placed under Alphabet, and major services units have been spun off to become
individual firms. Of note, Alphabet’s CEO Larry Page promotes a philosophy of "10x”, which
states that whatever products and services Google creates should be 10 times better than
anything that is already available. Alphabet puts an emphasis on world-changing projects
and ideas, and its acquisitions of other companies and experiments reflect this. We think
Alphabet’s corporate governance and ambition is a model that can inspire other companies
to realize their technological visions more boldly.
Figure 47. Alphabet’s main business model: Ads Figure 48. Current revenue breakdown: Ads dominant source
DaewooResearch
Note:Consolidated basis
Source:Companydata,MiraeAssetDaewooResearch
Figure 49. Major corporate/business structure Figure 50. Business expansion: Search  media  AI
Note:Describesonlymajorcompaniesandprojects
Source:BusinessInsider,MiraeAssetDaewooResearch
Source:WhatGoogleReallyWants(T.Schulz),MiraeAssetDaewooResearch
[KA] Key
activities
Platform
management
Management
services
[CR]
Customer
relationships
[KR] Key
resources
Search
platform
[CH] Channels
[KP]
Key
partnerships
Targeted ads
Free search
Paid content
[CS] Customer
segments
Advertisers
Web surfers
Content
developers
[C$] Cost structure
Platform costs
Keyword auction
Free
88%
11%
1%
2016
revenue
Ads
Other
New businesses

Internet
20
April 5, 2017
2) Amazon: Aims to provide best services for customers
Amazon is a US e-commerce company with a market cap of around W467tr. The company
recorded revenue of W158tr and operating profit of W4.8tr in 2016. The company’s revenue
sources include product sales commissions, subscription fees, and ads, which are the three
major business models of internet firms. On a positive note, the company’s subscription fee
model has recently begun to take root.
Amazon, which started as an online bookstore, now engages in a variety of businesses. We
recently visited the company’s headquarters in Seattle and met with the head of its IR team.
In the meeting, he emphasized that Amazon focuses only on customers, rather than a
certain ecosystem or application. CEO Jeff Bezos defines Amazon as a platform that each
serves its own customers in the best - and fastest - way possible.
Based on this customer-oriented service mindset, Amazon - which had been a purely online
firm since its inception - has opened offline stores, and now supplies original video content
via its Netflix-like streaming service Prime Video. In addition, the company is leading the AI-
assistant voice recognition speaker and digital secretary service markets, with Echo and
Alexa, respectively.
Amazon’s growth is currently being driven by: 1) Prime, a subscription-fee-based
membership program; 2) offline bookstores, including Amazon Books and Amazon Go; and
3) cutting-edge logistics centers, called ‘Fulfillment Centers’, where humans and high-tech
robots work together. The company’s CEO calls Prime a flywheel; just as a flywheel provides
constant energy to an engine, Prime is both an accelerant for Amazon’s forward motion and
a beneficiary of it.
Figure 51. Amazon’s main business model: Sales commissions,
subscription fees, ads
Figure 52. Current revenue breakdown: Merchandise sales
volume strong, but subscription-related sales also robust
DaewooResearch
Note:EstimatesformediaandAWSrevenuearesubscription-relatedrevenue
Figure 53. Amazon’s corporate structure Figure54.Businessexpansion:E-commercemedia,cloudAI
Source:Bloomberg,MiraeAssetDaewoo Research Source:FastCompany,MiraeAssetDaewooResearch
[KA] Key
activities
Platform
management
Management
service
[CR]
Customer
relationships
[KR] Key
resources
Amazon Web
Services
Kindle
[CH] Channels
[KP]
Key partnerships
Open market platform
Digital content
Express shipping
Cloud
Targeted ads
[CS] Customer
segments
Sellers
General users
Regular users
[C$] Cost structure
Platform costs
Distribution costs
Content costs
Transaction fees
Prime subscription
Ad revenue
70%
18%
9%
3%
2016
revenue
Merchandise sales
Media services
AWS
Other services
17%
28%
55%
Jeff Bezos (founder)
Institutional inverstors holding over 3%
Other

Internet
21
April 5, 2017
3) Tencent: Diversifying, based on dominance in communication services
Tencent is a China-based internet/game company with a market cap of W304tr. The
company recorded revenue of W26tr and operating profit of W9.2tr in 2016. The company
enjoys dominance in the communication services market, based on its messaging
application, WeChat, and other social networking services. Its major revenue sources are
the distribution of digital content, namely, games and ad sales. Tencent’s business model is
similar to those of Kakao and LINE. It is also a major shareholder in Kakao and Netmarble
Games and publishes the games of NCsoft, Nexon, and Netmarble Games in China.
Since the company began publishing 3D online games in 2003, online games have made the
greatest contribution to revenue. In 2002, Tencent’s founder Ma Huateng said that while US
internet firms mostly generate revenue through ads, that business model would not work
well in China. Thus, the company has focused on generating revenue largely through value-
added services (VAS), including online games.
Tencent allows the account holders of its instant messaging software service QQ to use the
services of its various platforms by assigning unique QQ numbers to each account holder.
Users pay for items via mobile phone bills, or with Tencent’s virtual currency, Q Coins. The
payment methods have proven to be safe and user-friendly.
Benchmarking Korean mobile messaging services’ character business (e.g., KakakoTalk’s
Kakao Friends and LINE’s LINE Friends), the company is now licensing its penguin character
and operates Q-Gen stores that sell QQ branded merchandise. Recently, the company has
seen an increase in revenue related to advertising (via social networking services’ corporate
accounts and display ads) and from payment services (via TenPay). Tencent is considered to
be one of the most successful examples of monetizing messenger services.
Figure 55. Tencent’s main business model: Content
distribution, ads
Figure 56. Current revenue breakdown: Games still majority,
but ad-related revenue also increasing
DaewooResearch
Figure 57. Tencent’s corporate structure
Figure 58. Business expansion: Communication  additional
service
Source:Bloomberg,MiraeAssetDaewoo Research Source:TencentMaHuateng,MiraeAssetDaewooResearch
[KA] Key
activities
Platform
management
Management
services
[CR]
Customer
relationships
[KR] Key
resources
Messengers
(e.g., WeChat)
[CH] Channels
[KP]
Key partnerships
Digital content (e.g., games)
SNS/messengers
Corporate accounts
Online ads
[CS] Customer
segments
Content
providers
Advertisers
Service users
[C$] Cost structure
Platform costs
Content costs
Contents distribution fees
Ad revenue
Free + item sales
33%
9%
12%
46%
MIH TC Holdings (Naspers affiliate)
Ma Huateng (founder)
Institutional investors holding over 1%
Other
52%
24%
18%
6%
2016
revenue
Games
Social networks
Ads
Other

Internet
22
April 5, 2017
III. Internet industry outlook
1. Revolution of platform economy
1) Era of connected platforms
Internet firms generate revenue by creating a network that connects sellers and buyers via
a wide array of products and services. Traffic tends to be concentrated on a very small
number of strong and influential platforms, thanks to network effects, in which greater
usage of the product by any user increases the product's value for other users. The effects
also benefit customers pursuing higher value and reasonable prices.
In the internet industry, the spotlight is gradually shifting from mobile applications to a
connected platform. We are now witnessing the establishment of the fourth industrial
revolution, which is characterized by: 1) ubiquitous mobile internet; 2) cheaper and stronger
sensors; and 3) AI and machine learning.
Meanwhile, AI technology should accelerate internet firms’ efforts to improve the quality of
existing services and develop new products and services. Competition among industry
players to enhance the clout of their own platforms should intensify going forward.
Figure 59. Evolution from ‘mobile app’ to ‘connected platform’ era
Figure 60. Among companies with global top-15 market caps, seven are platform-centric
Note:StockpriceasofMar.23,2017
Source:Bloomberg,MiraeAssetDaewooResearch
0
200
400
600
800
(US$bn)

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April 5, 2017
2. Present: Business model development and monetization accelerating
1) Monetization of mobile traffic
Progress in the monetization of mobile traffic on video, O2O, and messaging platforms should
serve as a near-term earnings variable. In Korea, mobile traffic - which is measured by data
usage, search ad usage, and time spent on messaging apps - is on a steady upswing. However,
we think that revenue has further upside, in light of the slow pace of growth.
Over the past few years, internet firms have focused on developing business models that could
narrow revenue gap between PC and mobile platforms. With regard to search ads, NAVER’s
mobile search queries are about twice as high as those on PCs. However, the company’s parent-
based (excluding LINE) mobile ad revenue was smaller than PC revenue in 2016.
In Korea, total internet search page views from mobile devices now approaches 60% of
those from PCs. However, growth in the mobile search ad market is not catching up with the
pace of mobile search traffic’s uptrend. To narrow the gap, internet companies will likely
improve mobile ad offerings, increase the number of ad slots, and raise ad prices. Through
the use of AI technology, including deep-learning algorithms, they should also be able to
enhance the qualities of search services and effectiveness of ads.
In addition, many mobile messengers, O2O platforms, and camera applications have yet to
generate revenue, despite robust traffic growth, due to a lack of business models. If
applications with a sufficient number of active users begin to generate revenue, based on
effective business models, they could provide added momentum to earnings.
Figure 61. Domestic mobile data traffic and mobile ad market
Figure 62. Domestic mobile search ads have room to
monetize, considering traffic versus PC
Source:MSIP,CheilWorldwide,MiraeAssetDaewooResearch Source:Bloomberg,MAGNA,KoreanClick,MiraeAssetDaewooResearch
Figure 63. Kakao platform revenue has room to increase,
considering traffic growth
Figure 64. Quarterly consecutive increase in number of
camera apps since 2016
Note:TrafficandrevenuebasedonKakaoplatform,excludingDaum
Source:Companydata,KoreanClick,MiraeAssetDaewooResearch
Note:IncludingInstagram,SNOW,KakaoTalkCheez,B612,Cymera,Candy
Camera,PhotoWonder,andCamera360;sumoftop5usersineachperiod
6
9
12
15
18
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16
(mn persons)
Cumulative no. of users - top 5 domestic camera apps
0
20
40
60
80
12 13 14 15 16
(%)
Domestic search ad market size - mobile as % of PC
Domestic search page views - mobile as % of PC
0
30
60
90
120
0
100
200
300
400
500
10 11 12 13 14 15 16
(bn minutes)(Wbn)
Kakao platform music revenue (L)
Kakao platform game revenue (L)
Kakao platform ad revenue (L)
Kakao total time spent/mo. (R)
0
500
1,000
1,500
2,000
2,500
3,000
0
50
100
150
200
250
300
1/12 1/13 1/14 1/15 1/16 1/17
(Wbn)('000 TB)
Annual domestic mobile ad market (R)
Total demestic data usage (L)

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24
April 5, 2017
2) Business model adoption and monetization
Not all internet services have their respective profit models. Internet companies still provide
a variety of services (e.g. search, communication, and content) free of charge. They typically
focus on expanding user traffic and total time spent (TTS) in their apps in the initial business
stage, before monetizing the traffic (e.g. ads). As such, for internet companies, increases in
traffic heighten expectations for monetization.
Search engine companies, such as Naver and Daum, have added a variety of features to
their respective flagship platforms (with most of the features included in search databases),
offering an opportunity for revenue generation from search ads. Another opportunity for
revenue generation is the addition of display ads on content web pages (e.g. news,
information, and entertainment).
However, due to the fast-paced shift into the mobile platform, existing business models are
seldom appropriate for mobile apps. Even when existing business models are adopted, it
usually takes a while to optimize the model to fit the new platform. For messaging and
social media platforms, accumulated search data are difficult to use for search ads or other
marketing purposes, due to concerns over the potential for disclosure of personal
information. In addition, PC-based ads are often incompatible with mobile apps, due to the
smaller display size.
Next monetization target should be camera apps and O2O apps. Naver’s leading camera
app, Snow, deserves attention. Snow recorded monthly active users of 25mn in 2016, within
only one year of its September 2015 launch. We note that for Snapchat, a comparable app
to Snow, monetization (e.g. ads) began in 2014 (in three years of its 2011 launch), when the
number of daily active users stood at 50mn levels.
In the offline to online (O2O) business segment, Kakao also provides a wide range of
services (e.g. Smart Mobility, Kakao Hair Shop, Kakao Order). Kakao expects full-fledged
monetization of Kakao Taxi to kick off in 2H17.

Internet
25
April 5, 2017
Figure 65. NAVER stock price and time of major service launches
Note:KnowledgeiNservicelaunchedinOct.2002;Hangamespin-offlaunchedinApr.2013;LINElistedinJul.2016
Source:Companydata,ThomsonReuters,MiraeAssetDaewoo Research
Figure 66. Kakao stock price and time of major service launches
Note:MergerofDaumandKakaoannouncedinMay2014;DaumKakaolaunchedinOct.2014
Source:Companydata,ThomsonReuters,MiraeAssetDaewoo Research
0
200
400
600
800
1,000
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
(W'000)
NAVER adj. stock price
Launched
shopping,
blog, and
cafe
Launched
local
information
search and
webtoon
sections
Started
real-time
search
rankings
NAVER
Phone; video
search;
major news
NAVER Video;
real-time traffic
information
NAVER
homepage
facelift
Launched
Shopping
Cast and
mobile app
Launched
LINE
Launched
NAVER
tvcast
and
Band
Spin-off of
Hangame,
changed company
name to NAVER
Launched
Shopping
Window
PHOLAR;
NAVER Pay;
V Live; Snow;
Talk Talk
Launched Papago,
shopping search ads,
and Whale
LINE IPO
Spin-off of Snow
Spin-off of
NAVER LABS and Webtoon;
Appointed CEO Han Seong-Sook
0
40
80
120
160
200
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
(W'000)
Daum-Kakao adj. stock price
Launched
Media Daum
Daum
acquired
Lycos;
Entered
Japan
Launched
Daum
Shopping
How
Launched Daum
Map mobile app
Search
alliance with
Twitter
Changed
company
name to
Kakao
Appointed
CEO
Jimmy Lim
Launched Kakao Taxi;
Acquired Path/Kimgisa
navigation;
Launched Kakao TV
and Brunch beta;
Acquired podotree
Acquired
Loen;
Launched
Kakao Driver
Launched Daum
tvPot;
Developed
search engine;
Acquired Tistory
Daum and
Kakao
merged
Spin-off of
Kakao
Pay;
Attracted
investment
from Alipay

Internet
26
April 5, 2017
3) Growing adoption of spin-off strategy
Internet companies, such as Google (Alphabet), Naver, and Kakao, have recently decided to
spin off businesses into separate companies. Spin-offs entail significant benefits, in terms of
both operations and share prices/enterprise value.
From an operational perspective, spin-offs enable companies to: 1) implement independent
management to fit each business; 2) speed up decision making; and 3) minimize conflicts of
interest with headquarters, thus increasing business opportunities.
In terms of enterprise value (share prices), spin-offs should allow companies to carry out
separate assessment of individual spun-off entities, which could potentially lead to
improvement in the total enterprise value. In addition, spun-off companies can raise capital
on their own through either the securing of investments or IPOs, thus easing their financial
burden on headquarters.
In August 2015, Google restructured its operations, creating Alphabet, a holding company
of which Google became one of its subsidiaries. Through the massive corporate overhaul,
the internet giant uncoupled its self-driving technology research arm, medical research
arm, Google’s search engine/maps, YouTube, Android smartphone software, and some of
its projects. The company believes that its efforts have clarified its long-term direction.
In a bid to focus on the mobile business, over the past several years, Naver has spun off its
flagship business units (e.g., Camp Mobile, LINE, and Snow) or launched new brands. In
2017, the company has spun off a number of business segments into companies that
specialize in R&D and global operations. For example, Naver spun off its part of R&D
division into an independent entity (Naver Laps) to develop future technologies, including
self-driving vehicles and robotics. The company also plans to spin off Naver Webtoon to
expand its global operations and content business.
In February, Kakao announced a spin-off of its simplified payment business into a separate
entity, Kakao Pay. At the same time, the company formed a partnership with China’s Ant
Financial, the financial affiliate of e-commerce juggernaut Alibaba Group Holding. Under the
deal, Ant Financial will invest US$200mn in Kakao Pay and expand business cooperation.
Figure 67. Alphabet’s major spin-offs: Decision to spin off for the sake of long-term future business
Note:Onlymajorexamplesofspin-offsshown;Alphabetiscurrentlya holdingcompanyofGoogle
Source:Alphabet,Google,mediareports,MiraeAssetDaewooResearch
Figure 68. NAVER’s major spin-offs: Business organization  mobile-specialized organization 
change business purpose to future and global business
Note:Onlymajorexamplesofspin-offsshown
Source:NAVER,NHNEntertainment,mediareports,MiraeAssetDaewooResearch

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3. Future: Gearing up for upcoming AI era
1) AI and direction of development
AI is the simulation of human intelligence processes by machines, especially computer
systems. Based on intelligence, humans can infer, decide, and act in given circumstances.
Robert J. Sternberg, Professor of Human Development at Cornell University, formulated the
triarchic theory, which distinguishes three aspects of intelligence: 1) analytic skills, such as the
ability to think abstractly and evaluate information; 2) inference and judgment, or the ability to
invent creative solutions or ideas; and 3) practical skills, which enable one to cope with
concrete situations.
Machine learning is the science of getting computers to learn without being explicitly
programmed. The most prevalent types of machine learning are: supervised learning, deep
learning, and reinforcement learning. Supervised learning always has a specific preset
outcome that is determined by a human before the machine begins to learn. As for
unsupervised learning, however, the algorithm does not receive clear determination on
input data. The technology is mainly used for clustering. In reinforcement learning, a
machine’s actions and the rewards they produce affect the subsequent data it receives.
Therefore, it continues to complete the task in a way that maximizes rewards.
Deep learning is a subfield of machine learning that is concerned with algorithms inspired
by the structure and function of the brain, called artificial neural networks. The technology
refers to either 1) the formation of multiple layers of neural networks for more successful
learning and prediction, or 2) a machine’s in-depth learning to find a pattern of input data.
In many fields, AI has already reached or even exceeded human intelligence. Among
cognitive activities, AI has reached human levels in speech and visual recognition. For
complex calculation and strategic inference, AI surpassed human intelligence. Going
forward, the development of the technology is expected to give rise to the emergence of
super-intelligence.
Figure 69. Advent of IoT/AI era
Source:Softbank,Kakao,MiraeAssetDaewooResearch
Figure 70. AI has already exceeded human abilities in speech and visual recognition rate
Source:Softbank,MiraeAssetDaewooResearch

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Figure 71. Forecasts of global AI market size
Note:McKinseyincludesrippleeffect
Source:Respectivecompaniesdata,Digieco,mediareports,MiraeAssetDaewooResearch
Figure 72. Revenue forecasts by AI technology: Deep learning revenue to soar
Note:APIreferstoApplicationProgrammingInterface
Source:Tractica,ETRI,MiraeAssetDaewooResearch
Figure 73. Revenue forecasts by AI-adopting field: Bright
prospect for ads
Figure 74. Domestic AI market size forecast
Source:Tractica,ETRI,MiraeAssetDaewooResearch Note:2013datamostlybasedonAI-appliedrobots,forecastsincludeservicefield
Source:MSIP,Digieco,KIRIA,MiraeAssetDaewooResearch
0
1,000
2,000
3,000
4,000
5,000
0
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50
75
100
125
2015 2016 2017F 2018F 2019F 2020F
(US$mn)(US$mn)
Image recognition (L) Predictive APIs (L)
Speech recognition (L) Natural language processing (L)
Machine learning (L) Cognitive computing (L)
Deep learning (R)
0
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(Wtr)
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0
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(US$mn)
Ad services
Investments
Media
Oil/gas
Manufacturing
Automotive
Agticulture
Medical diagnostics
Education

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2) AI improves the utilization of existing platforms
Through the adoption of AI technology, internet companies are able to improve the quality
of existing platform services. Higher quality services should lead to an increase in
customer’s service usage and growth in revenue, resulting from greater satisfaction for
advertisers, as well as a reduction in processing time and costs.
As a core area of cognitive science, various subfields of AI, encompassing machine learning,
deep learning, voice recognition/synthesis, translation, and multimedia recognition/processing
technologies, are being applied to a wide array of existing services, namely search and news
services.
Indeed, NAVER provides news clustering, image grouping and local information search
services based on AI technology. For image search services, NAVER uses unsupervised
learning algorithms to provide information on images (called “photo summary”). In addition,
by grouping similar and related images (“image timeline”), the company further improved
customer satisfaction on search results (see Figure 76).
As for NAVER’s local search services, deep learning algorithms are able to extract
information on a certain subject, based on a vast pool of data, including blog reviews. Thus,
the service can offer results that match the theme of users’ queries (e.g., good places to go
with kids, must-see places in New York, etc.). The search service based on deep learning is
also believed be applied to NAVER LABS’s in-vehicle infotainment (IVI) navigation system
(see Figure 77).
Figure 75. Improved quality of search results, thanks to adoption of AI (machine learning, deep
learning)

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April 5, 2017
Figure 76. Improved quality of search results: Adoption of deep learning in image search 
improved user interface
Figure 77. Improved quality of search results: Adoption of deep learning in local context search 
increase in exposure and clicks
Note:CTRreferstoclick-throughratethatisnumberofclicksdividedbynumberofdisposals
Source:NAVER,NAVERLABS,MiraeAssetDaewooResearch
Note: CTR level is higher than level of exposure; weekend
exposure and clicks are more than double weekday levels
Note: Local context search adopted by NAVER Labs’ IVI (In-
Vehicle Infotainment), GPS-based navigation search

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A customized recommendation service is one of the major examples of applying AI to
content services. Customized recommendation can drive up content consumption, leading
to higher revenue. For example, if customized recommendation is applied to news content,
the page views of a news article will increase and display ads placed near the article will be
better targeted, thus boosting revenue.
Since March 2017, AIRS, NAVER’s AI-based recommendation system, has been available for
its logged-in users. AIRS automatically recommends content by analyzing users’ interest and
content consumption patterns. Of note, since the introduction of AIRS, per-capita
consumption of news content has increased by 30-40%. In addition to mobile news, AIRS is
also applied to NAVER TV and webtoon services. We expect the applications of AIRS to
expand going forward.
Figure 78. Analyzing patter and recommending content
through collaborative filtering
Figure 79. Improving content recommendation level through
recurrent neutral network technology (deep learning)
Source:NAVER,MiraeAssetDaewooResearch Source:NAVER,MiraeAssetDaewooResearch

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Since June 2015, Kakao has applied RUBICS, a real-time user behavior-based interactive
content recommendation system, to its Media Daum service. The AI system analyzes users’
social trends and personal interests in real time, and places customized news content for
them. RUBICS developers account for around 70% of the Media Daum service staff. Daum
news traffic appears to have increased since the introduction of RUBICS.
Figure 80. Mobile Daum news (Media Daum) traffic increased after adopting RUBICS
Note:MediaDaum’smobilewebmonthlypageviewseveryquarter-end
Source:Koreanclick,MiraeAssetDaewooResearch
Chatbots are a mixture of AI and messenger services. Chatbots offer convenience to mobile
users, in particular, as they allow users to gain information via chatting without the need to
open a website or mobile app. Companies that provide services - including order placement
and customer response - via chatbots can enjoy benefits, such as increased platform
utilization, higher purchase volume, and labor cost reduction.
NAVER introduced a chatbot order service to NAVER Talk Talk (a chatting service) in February
2017. In addition, NAVER applied a chatbot to its NAVER Shopping in July 2016. Of note, the
company found that 12% of the users that were responded to by the chatbot actually
purchased the products.
LINE introduced a chatbot to its part time job offering service in July 2014. Currently, about
7,000 chatbot accounts operate on LINE.
Kakao has made the application programming interface (API) for KakaoTalk’s chatbot
program available for developers. As chatbots added to Kakao Plus Friend now include such
features as shopping, food ordering, and purchase consulting, Kakao Talk users can use
such services.
Going forward, Kakao plans to add the chatbot program to its new “KakaoTalk Order”
feature (launched in March), which allows users to order food from local food franchise
brands by clicking a button within each brand’s “Plus Friends” chat room. This should lead to
an increase in TTS in the app, thus driving up the value of the platform.

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3) AI to help internet firms to strengthen influence of their platforms
In our view, internet firms’ medium- to long-term target for their AI investments is the
expansion of their influence in platforms. Their ultimate goal is believed to be changing the
world with technology. Alphabet’s CEO Larry Page asked employees to live by the 10x
philosophy: While other companies may aim to improve a product, service, or situation by
10%, employees at Google and Alphabet should aim to improve by 10 times. NAVER LABS
presented a concept of ambient intelligence, declaring that the era of technology that is
sensitive and responsive to people and the environment has begun.
For now, most internet firms are largely focused on PC and mobile platforms. As the two platforms
have already penetrated deeply in daily life, companies are now turning their eyes to unclaimed
areas – living rooms and cars on the road. To make forays into these areas, they are developing
voice-recognition speakers, car infotainment, and autonomous driving systems based in AI
technology. They are expected to eventually bring about the era of the connected platform.
The breakdown of device usage by time and location well illustrates the reasons why internet
firms should pay attention to audio devices and cars. TV dominates the living room space in
homes, while telephones and audio devices have the greatest influence on the space inside
cars. Analyzing device usage by time, TV, and audio device usage is noteworthy. In particular,
audio device usage tends to increase in the middle of night and mornings.
By location, audio usage was greatest in automobiles, following smartphones, as drivers
cannot use smartphones while behind the wheel. According to Hyundai Marine & Fire
Insurance, smartphone use was the top cause of traffic violations in Korea in 2017, rising by
8%p from the level of four years ago. The fact also suggests that users’ demand for
smartphones’ various functions remains high even while they are driving.
Figure 81. Proportion of media usage by time: Apart from
computer/phone, noteworthy usage on audio and TV
Figure 82. Increase in mobile usage contrast to decrease in PC
usage vs. 2010
Note:Basedon2016
Source:KISDI,MiraeAssetDaewooResearch
Figure 83. Proportion of media usage by place: Apart from
mobile, noteworthy usage on TV at home and audio in
transportation
Figure 84. Increase in audio usage in transportation vs. 2010
Note:Basedon2016
0
20
40
60
80
100
00 03 06 09 12 15 18 21
(%)
Spatial media
Game devices
Video devices
Audio devices
Cameras
Phones
Computers
TV
Print media
0
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20
30
40
50
00 03 06 09 12 15 18 21
(%) 2010 PC 2016 PC
2010 mobile 2016 mobile
0
20
40
60
80
100
Home/office/school Transportation Leisure
facilities/services
(%)
Spatial media
Game devices
Video devices
Audio devices
Cameras
Phones
Computers
TVs
Print media
0
10
20
30
40
50
60
Home/office/school Transportation Leisure facilities/services
(%) 2010 audio
2016 audio
2010 mobile
2016 mobile

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Meanwhile, AI is also increasingly being applied for translation and interpretation services.
Based on voice recognition and synthesis technology, the translation and interpretation of
natural language has become possible.
NAVER developed a translation and interpretation application Papago, which relies on a
deep learning model known as neural machine translation (NMT).
NMP is different from the phrase-based approaches of statistical machine translation (SMT),
which uses separately engineered subcomponents. By converting and interpreting the
subcomponents in the entire sentence, the NMP method can reflect differences in meaning
of words depending on their order and context, enabling translation in a more accurate and
efficient way.
As recognition and expression technology adopted for NMP concerns the input and output
of texts, machine translation technology (combined with other services) could also be
applied to other AI areas, in our view. If the technology is integrated into wearable devices,
robots, driverless taxis, and VR devices, it could give rise to the formation of new markets.
Figure 85. NAVER’s interpretation/translation app, ‘Papago’,
now in beta (official launch planned for June)
Figure 86. Three technologies needed for interpretation and
translation: Recognition, machine translation, voice synthesis
Source:NAVER,MiraeAssetDaewooResearch Source:NAVER,MiraeAssetDaewooResearch
Figure 87. Machine translation technology trend: Neural
network translation on the rise
Figure 88. Increase in quality with neural network translation
versus existing translation
Note:MTandSMTrefertoMachineTranslationandStatisticalMachine
Translation,respectively
Note:GNMTreferstoGoogleNeuralMachineTranslation
Source:GoogleResearchBlog,MiraeAssetDaewooResearch

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April 5, 2017
Voice-recognition speakers and platforms have already become a battlefield for global IT
players. Currently, Amazon is leading the segment on the back of the Echo and Alexa
devices introduced in November 2014. Amazon opened up Alexa to third-party developers
to establish an ecosystem. As of February 2017, Alexa smart assistant has achieved 10,000
skills. In Korea, telcos also introduced virtual assistance services: SKT’s Nugu in September
2016 and KT’s GIGA Genie in January 2017. Among internet firms, NAVER and Kakao are also
scheduled to launch AI-powered digital assistance platforms in 1H and 2H17, respectively.
The development of voice-recognition speakers and platforms should benefit internet firms
in the following ways:
1) Hardware device sales: Sales of hardware equipped with voice-recognition AI should
increase. Membership and exclusive services for long-term customer retention should
constantly generate replacement demand on top of initial demand.
2) E-commerce revenue: The development of voice-recognition technology should boost revenue
from product sales and transaction commissions. The technology could increase traffic to
internet firms’ e-commerce websites, food delivery chains, and local information search services
3) Cloud services: AI improves recognition capabilities by securing data via voice recognition
and learning them for itself. Thus, cloud storage is an essential element of AI technology.
Cloud storage space is also necessary for providing new and customized functions to users.
4) Sales through partnership: If a company opens up the ecosystem of its platform, the
number of partners, and hence sales through partnership, should increase. Eventually, a
platform itself could play a role as an application store.
AI-powered voice-recognition speakers will likely pave the way for forays into the
automotive market by internet firms. As drivers tend to consume audio content heavily
while they are driving, voice-recognition technology should be useful.
Figure 89. Amazon’s Echo speaker with Alexa virtual assistant Figure90.AccelerationinnumberofAmazon’sAlexaskills
Source:Amazon,MiraeAssetDaewooResearch Source:Amazon,Voicebot.ai,MiraeAssetDaewooResearch
Figure 91. NAVER/LINE’s voice recognition speaker, WAVE Figure 92. NAVER/LINE’s AI platform, Clova
Source:LINE,MiraeAssetDaewooResearch Source:NAVER,Clova.ai,MiraeAssetDaewooResearch
0
2,000
4,000
6,000
8,000
10,000
12,000
9/15 12/15 3/16 6/16 9/16 12/16 3/17
(unit)
No. of Alexa skills

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IT has not been fully utilized in an in-car environment. To overcome IT’s limitations and search for
new business opportunities, internet firms are pushing ahead with self-driving car projects.
IT firms, including internet companies, appear to view self-driving cars as a post-smartphone
device, as cars are expected to serve an independent platform. The development of
autonomous driving technology should offer greater opportunities to internet firms.
Self-driving cars require technologies for: 1) location awareness; 2) environment recognition;
and 3) vehicle control. Internet firms’ recognition technology and data could spur the
development of location awareness and environment recognition technologies. Vehicle
control technology, which is directly related to safety, will require cooperation with carmakers.
Alphabet is carrying out the self-driving car project via Waymo. Digital map data is essential
for the development of navigation system and self-driving cars. About 20% of Google’s
search queries are related to location. Accordingly, the search service unit is in charge of
developing street views and maps at Google. Google Maps extracts information by applying
image algorithms to street view images. For example, the program recognizes traffic signs
and adjusts Google Maps’ navigation system.
Alphabet is also utilizing its Android operating system for the operation of digital features.
The operating system is expected to serve as a platform for the development of automotive
applications. By combining data from automotive sensors and applications, internet firms
should be able to offer various services, including voice guide for travelers based on driving
routes, and applications for reserving parking spaces based on data culled from various
sources (e.g., digital calendars, etc.). Waze, a traffic information application acquired by
Alphabet in 2013, specializes in providing information on traffic conditions and accidents.
Such data could also be used to improve the functions of self-driving vehicles.
Figure 93. Self-driving levels of Society of Automotive Engineers (SAE)
Source:NAVERLabs,MiraeAssetDaewoo Research
Figure 94. Alphabet’s autonomous car technology company,
Waymo
Figure 95. Waymo’s prototype autonomous car
Source:Waymo,MiraeAssetDaewooResearch Source:Waymo,WhatGoogleReallyWants(T. Schulz),MiraeAssetDaewoo
Research

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Naver Labs, Naver’s research and development arm (specializing in self-driving vehicle
technology), is currently focusing on “driving-environment monitoring (sensing)”
technology, which enables the vehicle to monitor a range of variables surrounding the
traffic (e.g. obstacles) and combine data from high-definition maps. This technology should
also help the firm to expand into other businesses in a variety of areas.
Under the standard of the US-based Society of Automotive Engineers (SAE), Naver Lab’s self-
driving ability currently stands at Level 3, which means that while drivers are still necessary,
they are able to shift “safety-critical” functions to the vehicle under certain conditions. The
firm is now developing Level 4 self-driving vehicles. Due to the lack of its proprietary
manufacturing unit, it plans to forge a partnership with manufacturing companies.
Naver Labs has applied self-driving technology to its M1 automated indoor mapping robot,
which is capable of 3D image processing based on its laser sensors and cameras. With the
M1 robot, the firm aims to create the service platform that provides detailed 3D imagery of
an indoor space, including shopping malls and airports.
Based on the technology, the firm will provide wayfinding services in complex buildings (e.g.
COEX Mall and IFC Mall) and attempt to either develop or advance property-information
services and AR games/content. The firm should also expand into new platforms to offer
regional ads/information, thanks to the easy reprocessing of graphic images in maps.
Figure 96. NAVER Labs aims to develop products and services
based on ambient intelligence
Figure 97. NAVER Labs’ autonomous car
Source:NAVERLabs,MiraeAssetDaewoo Research Source:NAVERLabs,MiraeAssetDaewoo Research
Figure 98. NAVER Labs robotics team’s mid- to long-term
keywords
Figure 99. NAVER Labs’ M1 robot produces 3D detailed indoor
map
Source:NAVERLabs,MiraeAssetDaewoo Research Source:NAVERLabs,MiraeAssetDaewoo Research

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4. Key risk factors
Key risk factors facing Korean internet companies are as follows;
Competitive risks: Changes in the operating environment, such as the emergence of new
technologies and services (e.g. the shift to the mobile platform from PC web), may pose a
threat to the market leadership of existing players. For example, in the mobile era, global
players, such as YouTube, Facebook, and Instagram, overtook Korean players, such as
Naver and Kakao, in the video and social network segments. Notably, the emergence of the
IoT and connected platforms will trigger cut-throat competition across industries and
nations.
Economic slowdown: As the advertising business is the key revenue source for internet
companies, an economic slowdown could lead to a contraction in companies’ ad spending.
However, we think internet ads have stronger future growth potential than conventional
(e.g. TV and newspaper) ads. Among internet ads, display ads are more affected by
seasonality and economic conditions, due to the high portion of large-sized branded
companies. Search ads are less sensitive to economic conditions, thanks to a high share of
small to medium-sized advertisers and user convenience (direct link to online shopping
sites).
Security risks: Internet companies are also facing growing risks of personal information
leakage, caused by hacking attempts and an information security failure. Leading examples
of massive data breaches in Korea include customer data leaks at Korea’s major online
shopping sites, such as eBay Korea’s Auction (2008), and Interpark (2016), and With
Innovation’s mobile accommodation reservation app, Yeogi-Eoddae (2017). Among global
companies, Yahoo suffered from the world’s biggest-ever data breaches in 2013 and 2014. A
breach of customer data, including personal details and even purchase/payment
information, could result in significant legal and financial damages for internet service
providers, with the subsequent deterioration in reputation potentially resulting in customer
defections.
Technology risks: Technological advancements may have unintended side effect, or result
in a backlash, as evidenced by a recent advertising boycott of YouTube. The issue was
caused by YouTube’s automated system that places 15-30 second ads before videos.
Recently, some of the UK’s largest corporations have stopped advertising on YouTube, after
their ads appeared next to extremist videos, which they feared could tarnish their
reputations. Application of advanced technology (e.g. AI) entails a growing need for tighter
monitoring of content.
Regulatory risks: The expansion of ad revenue at Korean internet service providers is
attracting attention from regulatory authorities. In early 2017, the Korea Communications
Commission hinted at plans to overhaul the legal framework for the internet ad market. The
commission also raised such issues as: 1) whether online video services can be subject to
conventional broadcasting laws and regulations; and 2) whether it is fair to force internet
users to pay for data used to view unwanted mobile ads. In addition, regulatory authorities
(e.g., the Korea Fair Trade Commission) may review whether dominant players in the online
search (e.g. Naver) and mobile messaging (e.g. Kakao) markets have excessive market
control or are in compliance with fair trade practices.
Short-term margin erosion possibility: Over the short term, expansion into the AI and IoT
businesses could lead to a sharp increase in spending for internet companies. While
growing competition for top talent (specializing in internet technology) has driven up fixed
costs, aggressive marketing of new products and services has led to a pickup in variable
costs. When a company starts a new business, it can suffer from margin erosion over the
short term, as it may take a while for the new business to generate revenue.

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IV. Key issues in internet industry
1. Changes in online shopping market
1) Return of open-market business model
Although Korea’s online shopping market has been expanding at a double-digit CAGR over
the past 10 years, competition in the market has also been intensifying. As of 2016, the
value of Korea’s total online transactions reached W65tr (roughly 17% of its total retail
transaction value), with the share of mobile transactions in its total online shopping
transaction value, at 54%, exceeding the 50%-mark for the first time ever.
The analysis of Korea’s online shopping market growth by retail format as of 2016 suggests
the return of the open-market business model. The combined value of transactions at
Korea’s three major social commerce sites, i.e., Coupang, Ticket Monster, and WeMakePrice,
grew by only 13.5% YoY in 2016, versus 72.9% in 2014, and 46.6% in 2015, while growth
(YoY) in the combined value of transactions at open-market sites (eBay Korea, 11st, and
Interpark) rebounded to 21.5% in 2016.
For 2017, we expect Korea’s online shopping market to exhibit open market-driven growth,
backed by accelerating growth of existing open-market shopping sites and social-commerce
sites’ adoption of the open-market business model. In 2017, Korea’s three major social
commerce sites have been transforming into open-market sites, by either reducing or
discontinuing regional-based sales and group purchases, and soliciting open-market type sellers.
Figure 100. Domestic online shopping market size
Source:NationalStatisticalOffice,MiraeAssetDaewooResearch
Figure 101. Growth rate of domestic shopping by type: Open market rebound
Note:Openmarketincludes3companies:eBayKorea(includingGmarketandAuction),11st,andInterpark;socialcommerce
includes3companies:Coupang,TicketMonster,andWemakeprice;totaldistributioncomplexincludes7companies:online
Emart,Shinsegae,AKMall,Homeplus,GalleriaMall,Lotte.com,andLotteMartMall
Source:MOTIE,MiraeAssetDaewooResearch
7.7 7.4
21.5
72.9
46.6
13.512.9 11.2 10.9
17.7 16.0 18.1
-0.4
3.5 4.5
-20
0
20
40
60
80
2014 2015 2016
(%, YoY)
Open market sites
Social commerce
Comprehensive retail malls
Total online
Total offline
0
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15
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60
80
100
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(%)(Wtr) Online shopping mall transaction value (L)
Online shopping mall transaction value growth (R)

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The marketplace is the key to the open-market business model. Once sellers register their
products with the marketplace, buyers (who log on to the marketplace) make payments for
their purchases. Then open-market operators remit sellers the payment minus commissions.
Open-market operators provide product registration, advertising, and payment services for
sellers, and generate profits by charging fees for each service.
The open-market business model is now projected to represent roughly 30% of all online
shopping transactions. We think the recent rapid growth of the open-market business is due
mainly to the fact that it now offers extensive choices for customers, having expanding its seller
base to include conventional retail channels, including department stores, hypermarkets, and
home shopping malls. Notably, online open-market operators have recently been expanding
their business reach through launches of private brands and the joint development of new
products; moving away from simply being an intermediary for transactions.
With mobile transactions accounting for over 50% of total online transaction value, as of
end-2016, we think growing mobile transactions should continue to drive up the value of
online shopping transactions as a whole. Major online shopping site operators are likely to
expand their mobile-optimized services (e.g., push notifications that offer deals and
discounts, subscription services) going forward, as evidenced by the recent increase in
chatbot-based services.
Figure 102. Open market structure Figure 103. Open market’s traffic still firm
Source:FairTradeCommission,MiraeAssetDaewoo Research Note:MUVisbasedonthesumofPCandmobile;Openmarketincludes3
companies:eBayKorea(includingGmarketandAuction),11st,andInterpark;
socialcommerceincludes3companies:Coupang,TicketMonster,and
Wemakeprice;totaldistributioncomplexincludes7companies: onlineEmart,
Shinsegae,AKMall,Homeplus,Galleria Mall,Lotte.com,andLotteMartMall;portal
shoppingpageincludesNAVER andDaum
Figure 104. Importance of mobile shopping: 1) increase in
mobile for place to purchase
Figure 105. Importance of mobile shopping: 2) Strong traffic
and transactions compared with PC
Source:DMCMedia,MiraeAssetDaewooResearch Note:Traffic(MUV,totaltimeofstay)andtransactionvalueasofDec.2016
Source:NationalStatisticalOffice,KoreanClick,MiraeAssetDaewooResearch
0
10
20
30
40
50
Offline stores Online (PC)
shopping malls
Mobile shopping
malls
TV home shopping
(%)
2015 2016
89%
284%
137%
0
100
200
300
Unique visitors Time spent Transaction value
(%) Mobile shopping/PC-based online shopping
Open market
operator
- Basic infrastructure
- Ad services/platform
- Payment services
Purchases product Posts product
Provides online marketplace
Requests Shipment and A/S services
SellerCustomer
Payment
Payment
Fees
(listing, ads,
sales commissions)
10
20
30
40
50
60
70
1Q13 1Q14 1Q15 1Q16
(mn persons) Open markets Social commerce
Comprehensive retail malls Portal shopping page

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April 5, 2017
2) Deteriorating balance sheets of online shopping sites
We believe the balance sheet deterioration of major online shopping sites is another key
factor behind the broader shift to open markets. Unlike social commerce sites and general
online malls, open markets can generate ad revenue, which boosts their overall profitability.
Sellers on open markets often purchase ads in order to better compete with other vendors
selling similar products within the marketplace and to maximize their sales. On the other
hand, general online malls and the location-based offerings of social commerce sites are
structured in a way that provides little incentive to place such ads.
In 2016, the top three social commerce sites recorded a combined operating loss of over
W600bn. SK Planet, the operator of 11th Street, also booked an operating loss of W365.1bn
last year. These social commerce sites need to achieve sustainable growth in revenue
(transaction value) if they are to raise funds from outside sources.
We believe the adoption of the open market model is inevitable from two perspectives.
From a market point of view, the growth of transaction value is shifting from social
commerce sites to open markets. From a financial standpoint, there is a strong need to
generate additional revenue streams (such as ads) aside from sales commissions.
Looking forward, we expect competition to increasingly revolve around products and
services, rather than promotion-driven marketing tactics, given the increasing financial
stress of online commerce companies. We think more and more companies will focus on
expanding categories (like the recent expansion of traditional retail channels into open
markets), introducing subscription-based services and faster delivery (as in the case of
Amazon), providing a distribution platform for O2O services, and broadening ordering
systems linked to intelligent voice assistants.
Figure 106. Social commerce’s transaction value increasing, but sustaining operating losses
Note:BasedonCoupang,Wemakeprice,andTicketMonster
Figure 107. SK Planet 11st: Transaction value increasing, but operating loss worsening
Source:SKTelecom,SKPlanet,MiraeAssetDaewooResearch
-1,000
-800
-600
-400
-200
0
0
2
4
6
8
10
2012 2013 2014 2015 2016
(Wbn)(Wtr) Social commerce market transaction value (L)
Cumulative operating loss of three major social commerce players (R)
-400
-300
-200
-100
0
100
0
2
4
6
8
2012 2013 2014 2015 2016
(Wbn)(Wtr) SK Planet (11st) transaction value (L)
SK Planet operating profit/loss (R)

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3) The virtuous cycle of NAVER’s shopping/search ad/payment ecosystem
Amid the ongoing paradigm shift of online shopping sites to open markets, we believe
NAVER’s e-commerce business deserves particular attention.
NAVER currently offers price comparison results on its shopping page (shopping.naver.com)
using the database of major online shopping sites. NAVER Shopping is essentially a larger
marketplace that brings together a variety of open markets. Indeed, portal shopping sites
like NAVER Shopping have seen their online traffic steadily grow in tandem with that of
open markets. It is estimated that around 30% of visitors to online commerce sites are
redirected from NAVER Shopping, which recognizes a portion of the transaction value as
revenue.
NAVER is also working to bring in offline stores, SOHO malls (small merchants), and
personal bloggers, who have been largely excluded from existing open markets and social
commerce sites. These sellers have the potential to grow NAVER’s commerce business, while
having very few conflicts of interest with the major commerce sites included in NAVER’s
price comparison service. Most small merchants are featured on NAVER’s Shopping Window
series. As of January 2017, Shopping Window had around 12,000 sellers, and total
transaction value was estimated at approximately W600bn in 2016.
What’s impressive is NAVER’s ability to create a virtuous cycle across the ecosystem by
providing a wide range of solutions to its sellers. Key examples of such solutions include
NAVER login (which allows users to make purchases using their NAVER ID), NAVER Pay
(simplified payment), TalkTalk (a chat service that connects buyers to sellers), shopping
search ads (which increase the exposure of individual products), and Booking (available for
hair salons and restaurants).
Shopping search ads began to pop up on NAVER’s search ad results in November 2016. If a
user clicks a shopping ad placed by a seller and makes a purchase, he or she can earn
points with NAVER Pay. For advertisers and NAVER, the points serve as a useful tool to
encourage users to make repeated purchases. For users, the points can be spent not only
on the relevant shopping site, but also on other items found on NAVER sites, including
digital content (webtoons, music, etc.).
NAVER’s shopping/search ad/payment ecosystem offers net benefits to its various players.
For the online shopping market, it facilitates the migration of traffic from offline to online
stores, fueling the growth of the market. From the sellers’ perspective, it provides a broader
range of distribution channels and helps enhance their business efficiency through an array
of solutions. From the buyers’ point of view, it offers a wider set of search results, greater
convenience (by letting users skip the sign-up process), and monetary benefits via NAVER
Pay points. For NAVER, it allows the company to collect data from its platform users and
increase its sales commissions and search ad revenue.
Figure 108. NAVER shopping  search ads  pay: Virtuous cycle

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2. Full-swing competition in fintech market
1) Direction of the fintech industry
The financial technology (fintech) industry has been gaining attention this year, with an
increasing number of internet companies separating their payment service divisions. On
April 1st
, NHN Entertainment split its simplified payment service and advertising divisions
into a new wholly owned subsidiary, NHN Payco. And in February, Kakao announced a
strategic partnership with Alibaba affiliate Ant Financial Services Group, which will invest
US$200mn in Kakao Pay, the company’s spun-off digital payment system subsidiary.
Notably, Ant Financial is the operator of China’s leading digital payment service Alipay.
Fintech involves digital innovation in the financial sector, and is characterized by the
convergence of technologies and finance, dramatic improvement in the efficiency of
existing services, and the emergence of new financial services. The fintech revolution is
leading non-financial companies (e.g., internet companies) to carry out tasks of
conventional financial institutions, accelerating the unbundling of the financial industry.
Notably, we expect the launch of internet-only banks to bring digital innovation in the
financial sector to a higher level in 2017.
Figure 109. Non-financial companies, including internet companies, act as financial companies;
accelerating unbundling of financial industry
Source:BOK,MiraeAssetDaewooResearch
Table 1. Fintech market outlook: Likelihood of replacing conventional financial players
Likelihood Financial service Outlook Relatedcompanies
High
↓
Low
Payment &
transfer
Fintechservicesare likely to make significantinroadsinto thepaymentservice market,
currentlydominatedby banksandcard issuers.
Consumerexperience(e.g., low fees andconvenience) isakeyfactorinchoosing service
providers. The payment and transfersegment hasarelatively low entry barrierand weak
customerloyalty.
NAVER,Kakao,
NHNEntertainment
Wealthmgmt.
Market divisionbetweenhigh-end and low-end segmentsispossible.
Thewealthmanagement market islikelyto be dividedbetween fintechcompanies(low-cost
robo-advisorservicesforthe mass-affluent section) andconventionalfinancialinstitutions
(highvalue-added servicesforhighnet worthindividuals).
Deposit &lending
Statusquowilllikely be maintained:Conventionalbankswillcontinue to serve theirfunctionin
the deposit-taking and lending segment.
Deposit-taking: Bankchecking accountsand deposit protectionschemesofferconvenience.
Lending: Ex-postcredit risk assessment ismarked by highknowhow andreliability.
Kakao
Virtualcurrency
There isonly aslim chanceofvirtualcurrenciesgrowingto the pointofreplacingconventional
money and paymentmethods.
Virtualcurrenciessufferfrom highpricevolatility and vulnerabilityto hacking, theft, and loss.
Note:KakaohasKakaoBank,aninternet-onlybank
Source:BankofKorea,MiraeAssetDaewooResearch

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