AUG. 9, 2013 • Thirteen years after it came on the scene, Next Human Network Corp. (NHN) has been in the process of spinning off its online gaming and online portal businesses since the beginning of the month. The Hangame division now operates as NHN Entertainment Co., while the Naver search division has been renamed Naver Corp. The break up into separate entities was seen as the best strategy to execute more quickly and efficiently on opportunities in the burgeoning global mobile segment – of which Europe, India and the Latin America have been identified as markets for expansion outside Northeast Asia. Content development will be a primary focus for NHN Ent. moving forward, with an emphasis on mobile and online games. Although both of the new companies are intended to operate completely independently, the two will work together in the area of mobile publishing. Trading in NHN Corp. was suspended for the month of August during the transition period of the restructuring. On Aug. 29, Naver Corp. will resume trading. The same day, NHN Ent. will be listed separately on South Korea’s main bourse. As part of the spin-off, NHN Ent. received 1 trillion won ($892 million) in NHN Corp. assets. Today, the two new firms jointly reported NHN Corp. results for the second quarter of this year that included a net profit of 122.7 billion won ($110.4 million) and sales of 722.6 billion won ($650 million). The latter was an increase of 26.3% compared to the same period last year. Net profit was up 7.5%. Overseas sales for the quarter were 28% of total sales at 199.1 billion won ($179.1 million), and increase of 107.4%.

CLICK BRIEF ICON to register to get our latest Complimentary Brief

Impact: NHN has been a leader in online games on PCs.  DFC Intelligence reported that worldwide they were No. 9 in revenue for PC games in 2012.  However, they were one of the few companies to show a revenue decline in PC games as 2012 revenue was down 5% from 2011.  So NHN Corp.’s fixation on the mobile segment is fathomable. According to Korea Internet & Security Agency, between 2011 and 2012 smartphone penetration in South Korea for those between the ages of 19 and 59 jumped from 39.2% to 78.5%. That’s a huge number of new consumers to be reeled in, and there is no shortage of Korean competitors with the ability to service them.

Which leads us to another factor in the equation. NHN Corp. was formed from the combination of two start-up firms. One of those founders, co-chief-executive Kim Beom-Soo (who started Hangame) left the company in 2007 and a year later co-founded Iwi-lab. By 2010 after attempting several online services that did not catch on, the start-up saw a market opportunity and developed a free text messaging app called KakaoTalk for the iPhone, which took off since sending text messages in Korea at the time often cost consumers 20 won each (around two cents). The app became so popular that an Android version soon followed and Iwi-lab changed its name to Kakao Inc.

Kakao founders Lee Jae-Beom (R) and Kim Beom-Soo (L).

In one year KakaoTalk had attracted 10 million users. By 2012 that number had grown to 50 million, and last month had grown to more than 100 million users globally. KakaoTalk earns most of its revenue from selling enhanced emoticons and a gift feature that transacts the sending of gifts by users for a fee. During 2012, a social gaming platform was added. When a former chief-executive leaves your company, helps found a start-up, and soon after rides the explosion of smartphone ownership to huge success, you take notice… and we wager that was the case with NHN. During 2011 NHN launched its own messenger, LINE, in Japan. The app rose to dominance in that country, and has grown to more than 200 million users globally, although KakaoTalk remains dominant in South Korea. Despite this, NHN has suffered criticism that it is mimicking KakaoTalk features as they are introduced. One of the hoped-for benefits of spinning off Naver Corp. and NHN Ent. is that both entities can get better at innovating features and new IP rather than reacting to the advancements of other firms.

Other major technology companies have come to similar plateaus when they become so successful that the tried-and-true models that achieved that success often restrain the kind of change that facilitates exploiting unexplored opportunities. Netflix is one of the rare examples of a firm abandoning its existing model wholesale for a new technology, whereas Microsoft just announced yet another major operational restructuring to prod itself into better forward thinking. Whether NHN’s formula will be successful is anyone’s guess at this juncture. Too much depends on the intangibles of how individual initiative responds in these spun off entities. It’s a bold strategic play to be sure.