KakaoTalk fights the Net Neutrality fight in Korea

When cellular carriers look at the threat of over-the-top communications apps, their worst fears might be something like the position KakaoTalk has in South Korea, its home market. The messaging and VoIP app has been growing at a breakneck pace with 38 million registered accounts in a country of almost 50 million people. In response, the leading carriers have worked to make life difficult for KakaoTalk and others in the OTT communications space, blocking and throttling service for these apps. But in the process, the carriers have raised the specter of net neutrality, leading other developers to question how the clamp down might affect their apps in the future.

KakaoTalk, which now boasts 52 million users worldwide, launched in 2010 just a couple a months after the debut of the iPhone in Korea. It quickly shot to popularity thanks to its messaging features, which like WhatsApp, TextPlus, BlackBerry Messenger and iMessage, provide an alternative to SMS text messages. But its breakthrough came in early June when it finally launched a VoIP service in Korea after first introducing it internationally. After three days, users in Korea were making 20 million calls a day. That’s when the two biggest carriers stepped in.

SK Telecom and KT began degrading service for the lowest two tiers of their data plans, causing enough dropped calls that it was unusable for many users, said Kate Sohn, VP of international business development at Kakao Corp. Subscribers with more expensive unlimited 3G or LTE plans were able to make calls without disruptions but they still faced limits on how many megabytes they could use on VoIP calls each month. That stopped KakaoTalk’s voice service right in its tracks. The app has not reached 20 million daily calls since the two carriers started degrading servie, Sohn said.

Any hope that the government would step in on the side of KakaoTalk and other VoIP providers went out the door last week when the Korea Communications Commission, South Korea’s equivalent of the FCC, ruled that operators could block these apps or charge extra fees to use them. This came after the carriers complained about strain on their networks and declining revenue due to mobile voice services.

Earlier this week, LG U+, the third-place carrier in Korea, which beforehand had simply blocked KakaoTalk’s voice service, decided to cash in on the new regulations. It introduced a new pricing policy that allowed users to use VoIP services, but only up to a limit each month. If customers go over that VoIP limit, a $ 7 fee kicks in.

I talked with Sohn about the challenges facing KakaoTalk and other VoIP providers. She welcomed the change of heart by LG U+, saying it was an improvement. But she said it’s still unclear what SK and KT will do. And that uncertainty means there’s a danger to all app makers that they could be blocked or stifled by the big carriers.

“In the short and mid-term it’s absolutely important to collaborate but in the long run if we, the country and the major players, don’t set the right example and direction, there’s a going to be significant damage to the industry,” Sohn said.

Ten years earlier, Korea went through an internet boom with a lot of new companies springing up to feed the demand for content. But Sohn said the broadband operators stood as gatekeepers and made it hard for many start-ups to compete. Most didn’t survive. Now, she’s worried that Korea’s revived startup scene, which is leaning heavily on mobile, will see a similar fate if the carriers are able to block applications that they don’t like. Ideally, she said the carriers would work together with application developers and figure out a way to collaborate.

The Korean carriers are in the same boat as many other operators around the world. They’ve invested a lot in the data networks, but their biggest revenue and profit comes from voice and SMS. Over-the-top services are chipping away at their most profitable services and it’s forcing carriers to respond. Some are going directly after services such as Skype. In Sweden, TeliaSonera is planning to charge people extra to use Skype and other VoIP services. In the U.S., network neutrality rules aren’t extended to wireless networks, but the FCC has said it would look askance at operators who try to discriminate against services that carriers also offer such as voice and messaging. Verizon Wireless has been the most aggressive operator in protecting its voice and SMS revenues: it’s new Share Everything family plans require customers to buy unlimited voice and SMS plans. It’s also protected itself from OTT players like Skype by partnering with Skype directly.

This is going to be a tough transition for carriers as they adjust their business models to account for the fact that voice and text messages are just data in their pipes. Some carriers may make life hard on OTT services, but the smart ones will accept the changing reality and reshape their business plans and partnerships accordingly.

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