This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Many online platforms served as venues for the political debate around the controversial confirmation of Justice Minister-designate Cho Kuk.
• Supporters and detractors engaged in online campaigns to elevate their respective taglines on the ranking of most-searched keywords on major search portals.
• A group of petitioners claimed that detractors attempted to reduce the credibility of their online petition by using fake accounts and uploading hoax signatures.

Implications: While the high rate of online penetration has been an economic boon to South Korea, the absence of vigilant monitoring on online platforms have raised concerns that savvy users may hijack the algorithm to manipulate political discourse. Both detractors and supporters of Justice Minister Cho Kuk’s confirmation mobilized users to input specific taglines into the search bars of popular online portals, causing key phrases to appear in real-time search rankings. Their aim was to influence public opinion. Observers have also raised suspicions that automated programs were used to boost these search terms. Similarly, some activists have alleged that fake accounts were being used to both inflate and sabotage online petitions. With limited progress from the public or private sectors to control this abuse, civil society leaders worry that these tactics will pose threats to the credibility of democratic institutions and processes.

Context: Concerns around misinformation and public opinion manipulation are acute in South Korea because of the country’s extensive smartphone and internet penetration. The courts recently convicted power-blogger Kim Dong-won for engaging in an illicit cyber-operation to influence public opinion. Kim ran a computer program to artificially inflate the number of “likes” on online comments to boost positive public sentiment for then-candidate Moon Jae-in ahead of the 2017 election. Although the problem had been previously acknowledged, this scandal created a very public spotlight on the risks posed by digital technology.

Korea View was edited by Yong Kwon with the help of Soojin Hwang, Hyoshin Kim, and Rachel Kirsch.

Picture from user TFurban on flickr

By Yonho Kim 

North Korean leader Kim Jong-un committed to complete denuclearization of the Korean Peninsula at the June 12 summit with U.S. President Donald Trump. Whether Kim has made a shift in his strategic calculus will become clearer depending on the sequence of concrete steps he takes. One of the critical factors in his calculus should be his strong desire to develop the North Korean economy. It is notable that his public commitment to and policy focus on domestic economic development have been consistent, especially since he declared completion of the state nuclear force at his 2018 New Year’s address. In this sense, Kim may have made calculated remarks when he admitted to the embarrassing condition of the roads and railways in his country at his first summit with South Korean President Moon Jae-in.

Since Kim Jong-un took power in late 2011, unprecedented market activities are emerging thanks to the expansion of state-run mobile telecommunications and spontaneously formed private transport services. North Korea’s cell phone subscribers are now estimated to count around 4 million, close to 20% of its entire population, facilitating timely communication of market trends. This allows the merchants to determine quantities and prices of products to trade, as well as shipping and delivery methods over the phone. Merchants can no longer compete in the markets without a cell phone. In addition, Kim Jong-un’s tolerance of private enterprise within North Korea, and the creation of a de facto public-private collaborative operation have helped to foster private transport service enterprises, also known as “servi-cha.” Beset by economic difficulties and poor electricity supply, the railway system has become unreliable, leaving a fleet of vehicles imported mainly from China to rise as the main mode of commercial transport.

The combination of servi-cha and cell phone during the Kim Jong-un era have given birth to a North Korean style innovation in logistics. Assisted by the rapid exchange of information, the system is evolving to create close ties between servi-cha owners and drivers, wholesale and retail merchants, brokers, fuel traders, checkpoints, and other associated actors in the chain. Bringing in new servi-cha customers, pricing freight charges, transferring money, trading fuel, and situations at checkpoints are all being managed efficiently through communications via cell phones. The combination of servi-cha and cell phones has even made possible North Korean style parcel delivery services. Gradually disappearing “door-to-door” merchants who used to travel long distance to make profitable trade, the ability to operate a supply chain through a phone call, connecting traders, drivers, and even checkpoints, has opened up a new business era of “stay-at-home merchants.”

Considering the great increase in the mobility of the North Korean people and products off the regime’s radar, and rapid expansion of market information dissemination through mobile telecommunications, the aforementioned “combination” is a core element in determining the changing direction of North Korean marketization. First of all, the new system in logistics has brought specialization to the process of distribution. Moving away from the previous method of the merchants self-delivering, the actors have divided each step of distribution by roles such as shipping, transporting, receiving and selling. As a result, it has created cost reduction, risk distribution, and the enlargement of cargo transfers, which made possible the quick response of product supply to changes in market conditions. While these structural changes benefit consumers through the stable price of goods, since a sales strategy aimed at regional prices differences has lost its competitiveness, a new sales strategy has emerged where sellers attempt to quickly turnover goods but profit margins are squeezed. In such circumstances, the influence of donju known as the ‘red capitalists’ continues to grow, widening the gap between the rich and poor among merchants.

The combination of servi-cha and cell phones has facilitated long-term and stable trade relationships, and developed a credit-based logistics system. The enlargement in the scale of trade has also increased the risk of business failure, and as a result, it is difficult to guarantee the operation of the new logistics system without credibility. In fact, in order for the market to develop, fulfillment of a contract must be ensured, and the predictability of trade relationship secured through legal and institutional arrangements. However, as evidenced by people’s deep-rooted distrust in the parcel delivery system of Ministry of Post and Telecommunications and the official banking system, the state is unable to properly support its markets with law and the necessary institutions. Instead, ironically enough, declining functions and corruption of the state, such as state institution’s involvement in smuggling and trafficking fuel, and bribery at checkpoints are promoting marketization. The predictability of trade relations in the North Korean market has been made possible through the awakening of the self-interested market participants who realized the importance of credibility in the trade relationship cycle and pressured prevention of fraud using rapid informational exchange via cell phones.

The new logistics system has also greatly improved the mobility of people, products, and information, and unlike in the past, has made possible the sharing of information on the movement of people and products in real-time between average citizens. At least in this respect, North Korea can no longer be seen as an underdeveloped and closed country where freedom of movement and expression is completely suppressed. Certainly, corruption is rampant in North Korea to the extent that there is a running joke, “you have to bribe to move around.” However, ironically, the disadvantages of a failed state are fostering the circulation of people, products, and information. A defector’s statement that ‘to the one who has the ability to purchase freedom,’ North Korea guarantees freedom is full of suggestions.

The specialization in the distribution chains and proliferation of bulk sales will inevitably require the maintenance and development of road infrastructure in North Korea.  The private fuel supply system, which is heavily dependent on smuggling and trafficking from state institutions, will eventually have to be replaced by a legal supply system. As time passes, fuel demand will continue to rise, and as a result, the increase in vulnerability of North Korea to oil sanctions is highly probable. On the other hand, it would be reasonable to assume that increased mobility of people, products, and information has already reached an irreversible level. Kim Jong-un’s regime may be able to take measures against the market in the short-run. However, it is probably aware of the truth that doing so is not sustainable.

The dramatic shift in the geopolitics in Northeast Asia sparked by the PyeongChang Winter Olympics thaw earlier this year has created a new context for economic engagement with North Korea. The international community will have to start considering new economic strategies to facilitate progress on the denuclearization negotiations. In doing so, rather than stereotyped views of the North Korean economy, careful observations of the changes of North Korean marketization on the micro level will have to be adopted.

This article is based on an excerpt from “North Korea’s Mobile Telecommunications and Private Transport Services in Kim Jong-un Era” by Yonho Kim (US-Korea Institute, Johns Hopkins SAIS, May 2018).

Yonho Kim is a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from Lawrence Wang’s photostream on flickr Creative Commons.

By Hwan Kang

Kakao Bank launched its internet-only banking service on Thursday, July 27, meeting unprecedented enthusiasm from Korean users. Within first 8 hours of its unveiling, customers created more than 100,000 bank accounts. After only five days, the number of accounts surpassed the one million mark and then further broke the record by reaching two million thirteen days after the launch. That is approximately 6,400 new accounts per hour. The bank’s cute Kakao Friends debit cards are also said to be out of stock, with one million users applying for their favorite character cards.

The bank’s popularity naturally led to massive active transactions, with 653 billion won ($579 million) being deposited and 497 billion won ($441 million) being loaned to users in just one week. Kakao Bank’s power as a new challenger in Korea’s financial market is so strong that other major banks are quickly rectifying their services to keep up.

Why the sudden popularity? After all, Koreans are probably the most IT-accustomed people in the world. Another internet-only bank, K-Bank, launched earlier this year and it took 100 days for them to gather 400,000 account users. It also took four months for the bank to achieve similar amount of deposits and loans as Kakao Bank. Convenience is the key to the bank’s runaway success – Kakao Bank focuses mostly on providing user friendly mobile services by reducing the hassle of having to go through rigorous procedures to open an account or borrow money. To create your first account, all you need to do is log in with your Kakaotalk ID and confirm your identification with your phone number via text message. Considering that about 84 percent of the population in Korea uses Kakaotalk daily, almost anyone with a smartphone can create an account without additional effort.

This process eliminates the painful procedure of dealing with Active X, an outdated way of installing security programs that only Windows users can download, and then having to get a special financial certificate issued, which takes another half-hour. It is also much easier to get immediate cash if you have an account with Kakao Bank. The bank boasts that it takes only 60 seconds to borrow up to 3 million won ($2,655) without any paperwork. The cash will be available on your debit card with daily interest of up to 273 won, less than a quarter a day in U.S. dollars. All of these services are something that internet banking services like K-Bank could not provide before in Korea.

However, that does not mean that the bank is giving up on price competition. It currently offers a higher interest rate for deposit accounts (2.0 percent per year), which is 0.2~0.9 percent more than other major banks. Its loan interest is relatively lower than other competitors as well with a 2.84~9.80 percent rate and no prepayment penalty, which is 0.5 to 2.7 percent lower than other major competitors. In terms of fees, they do not charge anything to send money regardless of the bank, and wiring fees are cheaper than other similar services (5,000 won, or $4.40). Kakao Bank also decided not to charge any withdrawal fees from all ATM machines until the end of the year as a promotional event.

Kakao Corporation’s recent efforts to expand into the fintech area mirror similar moves by Tencent and Alibaba in China. Both companies are pioneers in the mobile payment system in China, implementing QR codes to make daily transactions with smart phones easier and ironically driving the communist society to develop the most advanced electronic monetary system. The two companies competitively increased their market dominance almost to the point that QR code payment is quickly replacing conventional methods of payment such as cash or credit cards.

In the case of Tencent’s WeChat Pay, WeChat messenger was the catalyst for increasing its user base in China, while its internet-only bank WeBank supported users with easier access to bank accounts. The two Chinese fintech giants are now turning their eyes toward other countries, investing in Southeast Asia and the U.S. while striving to support other currencies and expand their services.

It is safe to say their ventures have now reached Korea. Tencent and Alibaba each has major shares in Kakao Bank and Kakao Pay, Kakao Corporation’s payment service. It is no coincidence that both companies are backing Korea’s biggest mobile platform as it launches Kakao’s equivalent of WeBank and Alipay. This way, Tencent and Alibaba can recreate their success in China and perhaps connect China and Korea in a ubiquitous QR code system. With such support, Kakao Bank will have great power in the consumer market, maybe even more so than in than China considering that Korea has a denser population that is already familiar with smartphones.

Of course, behind Kakao Bank’s success is skepticism that the hype will only be temporary. One of the most critical shortcomings that the bank has to overcome is its lack of verification system for foreigners living domestically and abroad. Foreigners usually use alien registration cards or passports for identification in Korea, but Kakao Bank, along with other banking services, does not provide means to confirm it online. While it is hard to confirm whether the problem lies in the bank itself or with government regulation, it will definitely raise questions for the bank, whose strongest appeal is its ease and convenience. This obstacle is particularly unfortunate given that it can ease transactions for foreigners who are not yet accustomed to spoken Korean.

Another shortcoming that is causing doubt is the bank’s financial stability. Because it is so convenient to borrow money, users are actively getting loans from the Kakao Bank up to the point that its loan-to-deposit ratio has reached 94 percent. If people decide to borrow more money than they have deposited, the bank might face a shortage in capital. A report from the Korea Institute of Finance noted the reason some other internet-only banks failed was because of riskiness in managing their assets. They may have had the advantage in attracting customers, but poor investments and unreliable deposits ultimately undermined their long-term profitability. Kakao Bank claims that it has no plans to stop their loan services, but they have set new limitations on the total amount of money customers can borrow. Meanwhile, Kakao Bank is also trying to avoid this kind of situation by raising more capital through new shares.

Although it is still unclear whether Kakao Bank will remain a major contender against Korea’s conventional banks, Koreans are no doubt drawn to it because of Kakao Corporation’s reputation of going against the norm. It has already proven other banks wrong by providing better service and accessibility with reasonable interest rates. It has in turn driven its competitors to follow Kakao’s example and reminded them that tech complacency will not be an option in the future.

Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. The views expressed here are the author’s alone.

Photo from badtaste64’s photostream on flickr Creative Commons.

By Troy Stangarone

With the arrest of Lee Jae-yong on charges of bribery, embezzlement, perjury, and the illegal transfer of funds abroad, Samsung faces a period of uncertainty at a critical time for South Korea’s leading chaebol. Last year, Samsung had begun to turn around declining trends in earnings and seemed to turn a corner on product design until the failure of the Galaxy Note 7 damaged Samsung’s image. At the same time Samsung was managing these corporate challenges, it was also undergoing a multiyear transition to the leadership of Lee Jae-yong from his father Lee Kun-hee, who has been incapacitated since a heart attack in 2014. Now, Samsung faces the prospect of being without its new leadership before the transition has been completed.

Lee Jae-yong may ultimately be found to be innocent, but his temporary removal raises questions for Samsung’s near-term future as well as for the impact of a potentially more permanent departure from Samsung’s leadership.

Who Will Run Samsung in the Short-Term?

With Lee Jae-yong expected to be in custody at a minimum for up to 21 days as prosecutors prepare formal charges plus the length of any trial, Samsung will likely be run by a trusted caretaker. In the past, when Lee Kun-hee was unable to run Samsung due to convictions on bribery and tax evasion, lieutenants ran Samsung as caretakers. With Lee Jae-yong at least temporarily removed from the scene we should expect a similar arrangement. As was the bribery and tax evasion case with his father in 2008, multiple executives are also under investigation, meaning that Choi Gee-sung, the number two at Samsung, may not end up serving as the caretaker depending on how the investigation into Samsung’s ties to Choi Soon-sil develop.

While Samsung has delayed conducting its annual management reshuffle and setting business targets for the year in light of the crisis, keeping key people in place might actually add stability to Samsung at an uncertain time. At a division level, Samsung is run by professional managers who should be able to keep things moving forward, limiting the impact of Lee Jae-yong’s absence in the near-term. The real question for Samsung will be whether any caretaker is empowered to make strategic decisions, something which has not been the case in the past.

What Does this Mean for the Succession Plan?

The prospect of Lee Jae-yong spending an extended period of time behind bars raises questions about the viability of completing the succession plan. If he is ultimately exonerated, the succession plans can continue to move forward. At a minimum, the succession plan will slow down, but may have to be rethought if Lee Jae-yong is convicted.

Given the current uncertainty, the initial default option will likely be to follow the path of his father and leave Samsung in the hands of a caretaker until Lee Jae-yong’s legal situation is resolved and a future Korean president has granted a pardon allowing Lee Jae-yong to resume control. If a conviction requires an alternative plan, one option would be to continue with the succession process, but transition control to another family member such as Lee Boo-jin or Lee Seo-hyun. A third option would be to maintain family ownership, but transition the company to permanent professional management. In this scenario, the family would likely need to make clear that any professional manager was empowered to make strategic decisions for Samsung moving forward.

Will Samsung Continue Internal Reforms?

The charges against Lee Jae-yong may provide insight into whether the internal reforms at Samsung were supported by the entire Lee family or were the sole initiative of Lee Jae-yong. Under his leadership, Lee Jae-yong has sought to modernize and move Samsung’s internal culture to one more akin to a start-up to help spur innovation. Some of the moves included more flexible working hours, reducing management levels, loosening the use of titles, encouraging more discussion, and limiting the pressure to attend after work functions.

While Samsung has been successful with its traditional corporate culture, it also faces a more competitive international environment and change will likely be a key to long-term success. With Lee Jae-yong removed from Samsung’s day-to-day operations, will management begin to slip back into more traditional management styles, or has there been a broader decision made to reform Samsung’s internal culture in a way that would survive Lee Jae-yong’s absence?

How Will this Impact Samsung’s Brand and Growth?

Samsung took a hit to its reputation last year with the Galaxy Note 7’s battery issues. The Galaxy Note 7 aside, as long as Samsung continues to produce quality, innovative products its reputation is unlikely to take much of a hit internationally. Domestically, however, because of the ubiquitous nature of Samsung and the ties of the scandal to the impeachment of President Park Geun-hye, its reputation will face greater challenges.

While the Samsung brand is unlikely to be significantly damaged from the scandal internationally, efforts to reshape Samsung and find new areas of growth may face a more significant challenge. Lee Jae-yong had been trying to reshape Samsung by selling off unprofitable divisions or ones that seemed to have limited growth prospects, such as its printer business, while at the same time move into promising new fields like autonomous driving. Will shareholders of companies such as Harmon International * reconsider selling to Samsung and will other potential acquisition targets in promising areas look to more stable situations for merger partners instead of entertaining an offer from Samsung? Given the potential constraints on Samsung’s leadership, the reshaping of Samsung as a corporate entity is likely to slow.

Should Samsung Take Risks or Be Risk Averse?

The natural instinct of a company in a crisis is to minimize risks. Since the product design for this year’s new Galaxy and Galaxy Note models has already begun, any new features under consideration will likely be included in the Galaxy 8, since it release is expected to be in either March or April. However, in light of last year’s troubles with the Galaxy Note 7, there may be a temptation to play things safe with this year’s Note model and only include tested features that are popular in the Galaxy 8.

Playing it safe on design, though, could be the bigger risk for Samsung. The smartphone industry is quick moving, and if Samsung does little to innovate and differentiate itself from up and coming producers like Xiaomi, while allowing Apple to gain a bigger lead, it could find itself in the same position it was until recently with an increasing challenge from both high end producers and low end producers to its market share. Nokia and Motorola were both once dominate producers and were quickly surpassed by others. Regardless of the duration of Lee Jae-yong’s absence, Samsung will need to avoid becoming risk averse in the smartphone industry to maintain its position.

While South Korea has a complicated relationship with the chaebol, should Lee Jae-yong be convicted it would perhaps be a sad irony that one of South Korea’s most progressive third generation chaebol heirs would be taken down by scandal that represents much of the old Korea – in which there was an expectation that for companies to get along they had to do favors for the government and that the government could do them favors in return.

*Shareholders of Harmon International approved the sale to Samsung after this blog was initially published.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from JCDecaux Creative Solution’s photostream on flickr Creative Commons.

By Juni Kim

The runaway success of Kakao’s mobile messaging app can be easily seen by its near universal use in South Korea. From high school students to working professionals, three-quarters of South Korea’s 50 million residents use Kakao’s free messaging service monthly with an additional 10 million monthly users outside of South Korea. Despite rapid growth over the past decade, Kakao faced a daunting hurdle when the South Korean Fair Trade Commission (FTC) labeled it and other similarly– sized companies as “big business groups” this past April. The new designation subjected Kakao to the FTC’s antitrust regulations, which also applies to South Korea’s much larger chaebol conglomerates like Samsung and Hyundai.

The FTC designation illustrates the fear that smaller Korean companies hold of potentially being caught by tighter regulations after continued growth. Companies like Kakao are caught in the crossfire of the Korean government’s efforts to promote growth in smaller firms while simultaneously attempting to manage antitrust regulations.

Criticism and controversy surrounded the new designation, which also labeled companies Celltrion, Harim Group, Korea Investment Holdings, Kumho Petrochemical, and SH Corporation as big business groups. Industry analysts noted the unfair grouping of Kakao’s total assets with much larger companies. According to Kakao’s website, the company’s total assets are about 5.19 trillion won ($4.5 billion US), easily dwarfed by conglomerate companies such as Hyundai Motor’s reported total assets of 165 trillion won ($143 billion) and Samsung Electronic’s assets of 230 trillion won ($200 billion).

In the wake of the FTC designation, the Federation of Korean Industries (FKI), a lobbying group for South Korean companies, released a report critical of the new designation. It stated that the designation excessively regulates companies like Kakao, citing the total of 60 newly assigned regulations authorized through 27 acts. Lee Chul-haeng, the FKI head of corporate policy, publicly stated, “We demand that the government either raise the asset floor for large corporation from 5 trillion won to 10 trillion won, or limit the list of large companies to the top 30 in terms of asset size.”

Concerns of excessive regulations on companies like Kakao have not gone unnoticed by South Korean President Park Geun-hye. Since March 2014, President Park’s administration has held five top-level meetings to discuss and encourage deregulation reform in an effort to encourage economic growth among burgeoning industries. The most recent meeting occurred at the Blue House only a few weeks after Kakao’s designation as a big business group. President Park specifically addressed Kakao’s growth challenges in that meeting by stating, “Companies like Kakao will be restricted if they are labeled as big business groups. In this situation, what company would want to continue to grow?” She further added, “Labeling big business groups as conglomerates is a system only found in Korea, and it needs to change according to the times.”

The FTC ultimately yielded and announced this month that the designation of big business groups will be changed from combined company assets of 5 trillion won to 10 trillion won, which effectively removes Kakao from the list. FTC Secretary General Shin Young-sun acknowledged industry criticisms of the previous designation by stating, “If the same level of regulation is applied to all these companies, it could affect the growth of the smaller members of the group, and we have decided to raise the standard.”

Kakao executives surely welcomed the news of the raised FTC designation. Kakao’s current plans for a web-based bank would have been subject to stiff restrictions if the FTC designation remained in place. However, challenges still remain for Kakao as it continues to expand. Despite its relative small size compared to larger chaebols, Kakao has been investigated before for possible abuses of its dominant market power in South Korea. Any further similar actions by Kakao may put it under the scrutiny of the FTC again and justify restrictive measures. Although it may be far from becoming its own chaebol, Kakao is not immune to future antitrust regulations.

Juni Kim is the Program Manager and Executive Assistant at the Korea Economic Institute of America (KEI). Jiwon Nam, an Intern at KEI and graduate student at the University of Maine, also contributed to this blog. The views expressed here are the author’s alone. 

Photo from Ben Hancock’s photostream on flickr Creative Commons.

By Mark Tokola, Phil Eskeland, Troy Stangarone, Jenna Gibson, and Kyle Ferrier

In the aftermath of North Korea’s nuclear test, 2016 has already begun with a new crisis on the Korean peninsula. As the United States, South Korea, and the rest of the international community work together to address the growing threat from Pyongyang’s expanding nuclear and missile programs, one of the top issues to follow for 2016 will be whether increased pressure through sanctions can bring North Korea back to the negotiating table. However, 2016 will also see elections in both the United States and South Korea, as well as Korea potentially playing an important role in China’s hosting of the G20 later this year. With that in mind, here are 10 economic and foreign policy issues to follow:

No Significant Progress with North Korea

North Korea’s nuclear test makes the need for progress both more necessary and increasingly difficult. However, even in the absence of North Korea’s nuclear test the structural nature of politics in the United States would have made significant progress difficult. With only a year left on President Barack Obama’s term in office there is little incentive for North Korea to engage in a sustained way and the Obama Administration may be increasingly tied up with the worsening situation in the Middle East.

At the same time, while South Korea has seen moments of potential progress with North Korea over the last two years, such as the surprise visit by senior North Korean officials to the Incheon Games, North Korea has quickly backed away from more sustained progress. While the Park Geun-hye Administration will continue to try and engage North Korea at an appropriate time in the future, expect Pyongyang to continue to back away from sustained engagement.

Key things to look for include whether talks restart with North Korea on its nuclear program, how potential unilateral sanctions by the United States impact North Korea, whether South Korea is able to separate humanitarian issues from the nuclear issue, and how North Korea responds to increasing pressure from the international community.

If There Will Be Another Round of Family Reunions

In October, around 100 South Koreans were able to cross the DMZ to reunite with members of their family that they haven’t seen since the peninsula was divided 65 years ago. The occasion was emotional for those who went, but also for the growing number of Koreans, now in their 80s and 90s, who may not have the chance to participate.

This has become a priority for the Park Administration, particularly after the August agreement. With the successful organization of one round of reunions a few months later, things seem to be looking up and there is a strong possibility of at least one proposed trip in 2016. The problem is precedent and North Korea’s nuclear test – although these reunions have happened sporadically over the past decade, no amount of dedication on the part of the South Korean government has made them a regular occurrence.

Whether we will see another reunion in 2016 depends on the willingness of the North Korean regime and the ability of the two governments to separate the humanitarian issue and the nuclear issue. Unfortunately, Pyongyang has tended to see these reunions more as a bargaining chip. This means these meetings, which are becoming more urgent by the day, may only happen as long as North Korea feels they can get something in return.

Could a China-North Korea Summit Still Happen?

Chinese President Xi Jinping has now met South Korean President Park Geun-hye six times, and remarkably has yet to meet North Korean leader Kim Jong-un.  Might 2016 be the year when President Xi finally meets the leader of the only country with which China has a military alliance?  Prior to North Korea’s nuclear test improving ties made it seem as though it could happen, but now there is no reason to believe that a meeting is in the offing, and probably would require a change of circumstances to occur.

Beyond the nuclear test, Kim Jong-un has shown a reluctance to travel outside of North Korea, having passed up opportunities in 2015 to attend high-profile World War II commemorations in both Moscow and Beijing.  In Beijing, President Park stood adjacent to Xi Jinping at the ceremonies, while North Korean representative Choe Ryong Hae was over forty protocol places away.  Some commentators believed that the appearance of China’s number five official, Liu Yunshan, next to Kim Jong-un at the October 2015 Pyongyang parade marking the 70^th anniversary of North Korean People’s Party rule might have signaled a warming of Chinese-DPRK relations, but the Liu’s official ranking simply mirrored the relatively low level of Chinese Embassy attendance at official events in Pyongyang – showing more a frost than a thaw.  So long as North Korea pursues the acquisition of nuclear weaponry, a program which China opposes, association with North Korea will remain China’s preeminent foreign policy failing – one which China will be reluctant to spotlight.

Korea-Japan Relations

In 2015, Northeast Asia saw several steps to improving Korea-Japan relations during a year that marked the 50^th anniversary of the re-establishment of diplomatic relations and the 70^th anniversary of the end of World War II, celebrating the liberation of the Korean peninsula from Imperial Japan.  Two notable steps were a bilateral summit meeting held in November between ROK President Park Geun-hye and Japanese Prime Minister Abe Shinzo and the year-end agreement on the “comfort women” issue.  While these actions will help the two governments to work together on other issues of mutual interest, particularly in confronting the threat posed by North Korea to peace in the region in light of its fourth nuclear test, it is not a given that relations between Korea and Japan, particularly among its citizenry, will advance to the level sought by the United States.  Key benchmarks to look for in the coming year to determine the level of improvement will be action by the Japanese Diet to appropriate $8.3 million for the reparation fund; the receptivity of surviving Korean comfort women to accept the reparations (if approved) from Japan; and the status of the comfort women statute in front of the Japanese Embassy in Seoul.

How the U.S. Elections Could Impact Policy

The U.S. campaign season will kick into high gear shortly after the holidays when the first votes will be cast in the presidential caucus in Iowa on February 1^st.  Unlike some other foreign policy issues, there is little difference between the two main parties in the U.S. regarding the U.S.-Korea alliance.  Relations between the U.S. and the Republic of Korea (ROK) are excellent and should not be an issue in the U.S. elections.  In addition, as the fastest growing racial group in the United States, candidates will make specific appeals to Asian-Americans for votes, particularly in the politically-sophisticated Korean-American community.

Nevertheless, the U.S. presidential elections will have a robust debate on the use of military force and diplomacy in response to terrorist and other national security threats (“hawks” vs. “doves”) and the stand-off on the Korean peninsula may be used to support their point of view.  However, because Kim Jong-un started the new year with yet another nuclear test, expect legislative action in Congress to strengthen sanctions against the DPRK and GOP presidential candidates (and, to a lesser degree, the Democratic candidates) to criticize the Obama Administration’s policy of “strategic patience” with the North as “benign neglect.”  Nonetheless, the underlying strategic importance of Asia will remain a cornerstone of U.S. foreign policy regardless of who is in office because America’s long-term challenges come from larger mega-trends that emerge from Pacific Rim, such as China’s assent on the world stage and various other economic, demographic, and environmental issues.  Also, because of the political sensitivity of trade agreements in the U.S., do not expect a Congressional vote on the Trans-Pacific Partnership (TPP) until the “lame-duck” session after the November 8^th election at the earliest.  Finally, because of the lack of trust in the Obama Administration in numerous areas by the Republican-led Congress, no further legislative action on immigration reform (except more restrictions) is likely until a new president is sworn into office.

South Korean National Assembly Elections

On April 13, 2016, a national election will be held in South Korea to select all members of the National Assembly.  Because National Assembly elections are held every four years, and presidential elections every five, the two elections rarely fall in the same year and even when they do, they are not held concurrently because the former are in April and the latter in December.  The election to select President Park Geun-hye’s successor will be held in December 2017.  Presidents may only serve one term.

As in U.S. politics, South Korean National Assembly elections have the character of mid-term elections, with more attention paid to presidential elections.  They are nevertheless important because presidents have difficulty enacting legislative programs if control of the National Assembly passes into opposition hands.  The April 13, 2016 elections will be worth watching for three reasons:  (1) They will be a test of political sentiment heading into the 2017 presidential election year; (2) Because of a Constitutional Court ruling that the largest constituencies can have no more than double the population of the smallest constituencies, boundaries are now being redrawn with uncertain consequences for the parties and even the total number of National Assembly membership; and (3) They will test yet again whether the habitually riven center-left and left elements of South Korean politics are able to pull together to challenge the more unified, ruling Saenuri Party.

Cooperation Between Korea and China in the G20

Though China will utilize the G20 presidency to promote new agenda items that will prove to be far too ambitious, the need for cooperation in the forum on key issues will help foster closer ties between South Korea and China.

As the co-chair of the International Financial Architecture Working Group (IFA WG), South Korea will play an important role in China’s G20 presidency. The IFA WG is charged with advancing proposals in areas that are likely to be priorities for Beijing’s agenda, including strengthening the role of the IMF’s Special Drawing Rights and global financial safety nets.

Additionally, China and South Korea have incentives to work more closely on development and trade as slowing global trade disproportionately impacts the domestic growth of both economies. While resolving the divide on development-related trade norms continues to be too onerous, Seoul’s addition of development to the G20 agenda in 2010 help make it a potential mediator between advanced and emerging economies like China on trade issues in a period of uncertainty in the WTO.

K-Pop’s Next U.S. Breakthrough

People have been predicting the demise of the Korean Wave almost as soon as the term was coined. But there is no doubt that awareness of K-Pop has reached new heights in the United States in 2015 – with popular site Buzzfeed sending a team to LA’s KCon, Big Bang holding K-pop’s largest ever American tour, and of course Psy releasing his new video, which racked up more than 64 million views in under a month.

However, while awareness of K-pop has surely grown in the United States in the aftermath of Gangnam Style, we may not be hearing Korean on the radio again any time soon. Many Korean artists have tried and failed to make it big in the American market. 2ne1’s CL is the next at bat and may be the one to break this trend once her much-anticipated American debut album gets a release date. In many ways she is the ideal candidate to break the trend. Fluent in English, free from the bubblegum cuteness of many idol groups, and supported by some of the most successful producers and collaborators in the world. Her success will largely depend on how well she is able to mold herself to the American taste – but she may just bring a little bit of her Korean pop roots into the public awareness as well.

South Korea’s Trade Policy

Because of the aforementioned political reality in the United States, South Korea will not join the TPP in 2016.  In fact, it may take a few years for Korea to formally join the TPP because of the difficulties surrounding the ratification process in TPP member countries.  As a result, after ratifying Free Trade Agreements (FTAs) with China, Vietnam, and New Zealand in 2015, the ROK is expected not to wait for the TPP and continue to negotiate a free trade agreement with five countries in Central America, a trilateral FTA with China and Japan, and the Regional Comprehensive Economic Partnership (RECP).  Because overseas markets are critically important to Korea’s domestic economy, the ROK is expected to at least make measurable progress on concluding these talks in 2016.  Because the President Park Geun-hye only has two more years left in office, it is important for these talks to conclude before then; otherwise, the benefits of these agreements will be further delayed as the new administration will review previous policies for possible adjustment.  In addition, if Korea is not able to join the TPP by December 2017, a new Korean administration will take some time to review the efficacy of joining this agreement.

Has Samsung Turned the Corner?

After nearly two years of negative earnings, Samsung saw revenue and profits increase in the 3^rd quarter of 2015. The increase in profits, however, was due to growth in Samsung’s semiconductor and display divisions. The smartphone division, which faces high end challenges from Apple and low end challenges from Chinese and Indian firms like Xiaomi and Micromax, saw revenues increase but profits continue to decline as it made a misstep by under producing the popular new Edge line of phones and the Galaxy 6 underwhelmed. At the end of 2015 Samsung replaced the head of its smartphone division with Koh Dongjin who previously headed up Samsung’s mobile research and development, to return the division to profitability. With increasing competition and two years of decline, Koh’s efforts to turn Samsung’s smartphone division around will be one of the key economic issues to watch in South Korea.

Mark Tokola is the Vice President of the Korea Economic Institute of America, Phil Eskeland is the Executive Director of Operations and Policy,  Troy Stangarone is the Senior Director for Congressional Affairs and Trade, Jenna Gibson is the Director of Communications, and Kyle Ferrier is the Director of Academic Affairs and Research. The views expressed here are the authors’ alone.

Image designed by Jenna Gibson of the Korea Economic Institute of America.

By Chad O’Carroll

On Friday the Associated Press Pyongyang bureau reported that North Korean authorities will allow foreign visitors to access the internet using cellular devices from March 01. Predictably, the news was published with the caveat that access conditions will not change for local citizens, who will remain cut off from internet access and remain unable to make calls to foreign countries for the foreseeable future. As such, the news triggered skepticism in some quarters that the step was undertaken simply to encourage tourism and increase revenue for the North Korean government. But even if that is the case, there are nevertheless several reasons why we should be encouraging the relaxation in North Korean telecommunications.

Just four weeks ago, rules that prevented tourists bringing their cell phones in to North Korea were finally relaxed, a development that meant foreigners would no longer have to surrender their devices upon arrival in Pyongyang. Coming just weeks after Google Chairman Eric Schmidt’s recent trip to North Korea, many may now be wondering if his visit was behind the cellphone and internet access developments. But while some might see the recent news as evidence that Pyongyang took heed of Schmidt’s pronouncements, comments made by Orascom staff to Xinhua News suggest these changes had been long planned and were not consequently related to the Google trip.

Over the past four years Egypt’s Orascom Telecom Company has been working closely with North Korea to develop and expand the KoryoLink cell phone network. Run as a joint venture based on 75% Orascom and 25% North Korean ownership, the Cairo based tech firm put a strong focus on ensuring the DPRK cell network would use the latest 3G cell tower technology from the outset. As a result of this step, the North Korean network was always going to be ready for internet access, provided of course there was sufficient political will in Pyongyang. Now, with 92.9% of population areas covered by KoryoLink’s network, as a result of today’s news it seems that foreigners should be able to access the net wherever they go.

While only 30,000 tourists visit North Korea per year, their potential to access the internet could prove to be the first step towards a gradual opening up of the DPRK telecommunications infrastructure. North Koreans already comprise some two million KoryoLink subscribers, though currently they can only use their devices to communicate internally. However, some of these subscribers can already access limited domestic data services, to find weather reports or local news, for example. Looking to the medium to long-term future, it’s therefore quite possible that this latest move could pave the way for North Korea to roll out a limited internet service (perhaps similar to Iran) to its own citizens as a logical next step.  The same thing has already happened in Cuba, where tourist based access paved the way for increasing domestic access and even the emergence of blogs written by Cubans, but published via USB keys passed to foreigners who have net access in international class hotels.

Another benefit of foreigners being able to access the internet while in North Korea is that it could seriously catalyze the speed at which important world news gets to the country. While those coming into regular contact with foreigners tend to come from the top tiers of North Korean society, that foreigners will now theoretically be able to spread news as it happens means the development will lead to a new and credible addition to the country’s infamous “bush telegraph”. And though little is known about how the North Korean government intends to prevent local citizens from ever using approved devices to access the internet, we can bet that some will find a way. To be sure this will be a tiny fraction of people, but given North Korea’s history of an impermeable iron curtain, it is meaningful in any case.

It will be particularly interesting if foreigners will be able to access South Korean news and information websites through the KoryoLink infrastructure. Even if these and other websites do turn out to be blocked, it won’t take long for crafty visitors to get around the rules using VPN and other IP proxy technologies. As such, the only way Orascom will really ever be able to assure its North Korean hosts of absolute control will be to shut off access for everyone, completely.  Such a move can’t be discounted, with cell usage having been dramatically curtailed in a u-turn policy change on made by Pyongyang in 2004, the year an explosion took place allegedly near to Kim Jong Il’s passing train.

Another benefit of the move will be that it will be easier for visitors to share with the world the reality of life in North Korea. With photography having long been restricted and visitors subject to random photo deletions by over-zealous border guards, the latest development should theoretically allow foreigners to upload pictures straight to the internet, as quickly as they take them. Naturally, it is likely that access will be monitored to some degree, but the more widespread access becomes, the harder it will be for DPRK authorities to track use.

One potential hurdle to the above advantages relates to costs.  To date foreign residents and business people have been able to access the internet access using satellite technology, but the costs have been so exorbitant that it has significantly reduced the potential for the internet to have many of the positive effects described above.  Unfortunately, figures obtained by the Wall Street Journal suggest that for its part, the new mobile internet service will not be cheap, with a set up fee of around 150 EUROS for the SIM card, then data fees of around 150 euros for 2GB of bandwidth. Prices this high mean it will be expensive for people to get the type of access required to create the various impacts detailed above, but it’s a start nonetheless. And while the high fees reflect that access is currently aimed more at long term residents than tourists, a KoryoLink technician said that his team was working to persuade the North Korean government to get permission to introduce cheaper and short-term tourist focused services. Time will tell how significant Friday’s development is, but it seems clear that any opening, no matter how small, should be welcomed and encouraged vigorously.

Chad 0′Carroll is the Director of Communications for the Korea Economic Institute. The views expressed here are his own.

Photo from djking’s photostream on flickr Creative Commons.

By Chad 0’Carroll

In light of a California jury ruling Friday, Samsung now looks set to have to pay Apple more than $1 billion in damages for violating hardware and software patents following the conclusion of what may well be seen as a landmark case.  With the verdict seen as a big win for Apple, Samsung shares took an immediate dive of nearly 7.5% on the news, despite their reported intention to appeal the ruling.  But with the U.S. case representing just one of over fifty lawsuits being pursued in ten countries across four continents, what are the implications of the California judgment and what will be the consequences for the two companies and smart phone industry as a whole?

What the U.S. Ruling Means

The California jury found that Samsung infringed upon Apple’s physical design and user interface patents, often willfully, and that several of its products replicated Apple’s trade dress, especially with regarding the iPhone product series.  While Samsung had argued that Apple infringed several of its own patents related to utility and design, the court instead found that its products actually infringed Apple patents in those areas. As such, the jury rejected all of Samsung’s claims against Apple while upholding all of Apple’s patents. The implications for the South Korean conglomerate are therefore substantial.

Most damning of all, of 21 Samsung smartphone and tablet designs raised in the case by Apple, 100% of them were found to breach Apple’s patent 381 (pertaining to a “bounce-back” scroll feature). And on Apple’s two other main claims, an overwhelming majority of Samsung products were shown to have breached patents, with just a handful in each category escaping the breach.

In Samsung’s marginal favor, it was established by jurors that the Galaxy Tab 10.1 tablet (recently banned in the American market by the same judge – Ms. Koh) did not infringe on any physical design patents.  This means Samsung will now be allowed to sell the Galaxy Tab 10.1 on the U.S. market.  But while Samsung may be able to recoup some lost sales profit from Apple, the amount will likely be extremely low in comparison to the $1billion it now owes.

The bottom line is that in the eyes of one patent expert, Samsung has been shown by the outcome of this case to be a “reckless copycat”.  And because some of the infringement is related to Google’s Android operating system, it seems the jury agreed with Steve Jobs’ claim that Android is a “stolen product”.

Reports now suggest that both sides will file for a preliminary trial injunction, which is set for 20 September. That will decide the fate as to which products, if any, will face a ban.  Apple has already outlined 8 Samsung products that they want banned as a result of the California ruling. But as an immediate consequence, Samsung will at the very least be required to pay out $1 billion dollars – although this could potentially be tripled due to Samsung having willfully infringed the patents.

What the ROK Ruling Means:

Before the announcement of the California jury ruling, a Seoul court ruled Friday on a case brought to it by Apple regarding Samsung cell phone and tablet designs.  In contrast to the U.S. case, the South Korean court said that Samsung’s cell phone and tablet computer designs did not copy the look and feel of Apple products, adding that Apple had in fact infringed on several of Samsung’s wireless technology patents.  However, reflecting the unanimity of one element of the California court’s decision, the Seoul court did rule partly in Apple’s favor, saying that several Samsung devices had infringed Apples “bounce-back” scroll feature.

In contrast to the vast volumes of money involved in the California case, as a result of the Seoul ruling Apple will pay 40 million won ($35,400) for infringements while Samsung will pay 25 million won for violating just the one patent.  More cumbersome for both companies is the fact that the court also ordered a ban of a handful of Apple and Samsung cellphone and tablet devices implicated in the patent infringements.  However, given that none of the two manufacturer’s latest devices were implicated, the impact of this development could prove minor.

It is nevertheless of interest that this case result occurred in South Korea, Samsung’s home territory. Patent attorney Jeong Woo-sun said,  “Out of nine countries, Samsung got the ruling that it wanted for the first time in South Korea.”  Some experts have since expressed concern that the ruling might invite a trade war in which South Korean consumers could ultimately lose out.  If Samsung and LG now move to block rivals’ entrance to the ROK market if they do not agree to licensing terms related to some of the standard patents involved in this case, then those companies would either have to bow to the demands or abandon the South Korean market entirely.

What’s Happening Around the World

While developments in the U.S. and South Korea last week reflect two important territories involved in the dispute, there are similar cases taking places across a total now of four continents.  According to Florian Mueller of FOSS Patents, there are over 50 cases open in ten countries, meaning that things could still change in dramatic ways depending on the countries involved.  As of now, the next Apple vs Samsung case set to take place will be in Mannheim in Germany, on September 14.

The evidence so far shows Samsung losing the vast majority of its offensive cases against Apple, having lost three times in Germany, and once in France and Italy.  In the Netherlands it won a tiny amount of damages, but not an injunction, while in the U.S., all claims Samsung raised have now been lost. As indicated above, the only country Samsung has prevailed in cases against Apple has been South Korea.

But Samsung has nevertheless overturned a number of legal challenges raised by Apple, with one notable case in the UK in which the judge said Samsung could continue selling its Galaxy 10.1 tablet because its design wasn’t as “cool” as Apple’s (meaning it could not be confused with the iPad series).

Whether the outcome of the U.S. or ROK decisions will influence other open cases around the world remains to be seen, but right now things do look to be moving in Apple’s favor on a global basis.

Moving Forward

The immediate effect of both cases, should appeals by either company prove unsuccessful, will be payment of the immediate fines as issued by both courts.  But even $1 billion is nevertheless small peanuts for the South Korean conglomerate.  More important is the lasting effect on Samsung’s share price as a result of the legal action in California.  Having lost 7.5% on Friday, should Samsung continue to suffer in the mid to long-term, then investors may lose confidence in the South Korean firm.  One issue that may cause longer term losses is whether or not Apple succeeds in getting Samsung devices banned from sales in the U.S.

Should Apple succeed in banning products from the U.S. or other national markets, then Samsung will have to either update software or even change design elements to ensure their products do not violate Apple patents. Samsung has a proven history in rapidly working around patents, having redesigned software to ensure its products can stay on shelves after the cases that have shown them to have infringed on Apple’s patents. However, in the case of hardware redesign obligations, it can be extremely costly to make the necessary alterations to make a product acceptable for sale, for example by changing the casing or packaging design.  As such, if Apple succeeds in banning some of Samsung’s better selling cell-phones in the U.S. market from a hardware perspective, it could take significant resources for Samsung to get those same products back on shelves.  But Samsung can still take comfort in the fact that its newest models are not on the Apple ban “hit-list” and that it has a strong history in rapidly releasing revised products (unlike Apple’s slow iPhone release pace).

From a more general perspective, moving forward one can expect Samsung to be a lot more careful in the design of its cell phone and tablet devices as a result of the Californian ruling.  Forms of Samsung phones will likely be a lot rounder than Apple devices moving ahead, and from a software perspective we can expect increasing differences between functionality. On the flipside, it is likely Samsung will become even more protective about their own technology, raising the potential for even more litigation between the two companies in future.

In terms of the broader industry, many have been viewing the Apple vs. Samsung case as a proxy war between Apple and Google.  With Android accounting for over 85% of the smart-phone market, consumers currently have few options between iPhone and Android cell-phones.  Confident from this legal win, Apple may now be at pains to prove Steve Jobs’ allegation that Android is a “stolen” operating system, something that if they succeed in proving from a legal perspective, could open up a whole can of worms with regards to the myriad hardware manufacturers that use the Google Android system in their phones.   This could be especially troubling for Samsung, as a legal battle over operating systems could be crippling. While Microsoft’s new Windows Phone has been praised for its innovation, few customers have adopted the phone’s running Microsoft’s platform.  So, was this case really Apple vs Samsung, or the successful start of Apple vs everyone that uses Android? Interestingly, Google is already trying to distance itself from Samsung to avoid just that possibility.

Chad 0’Carroll is the Director of Communications for the Korea Economic Institute. The views represented here are his own.

Photo from Siddartha Thota’s photo stream on flickr Creative Commons.

By Matthew Tranquada

On Monday morning, in a federal courtroom in San Jose, lawyers for Samsung and Apple met to pick a panel of 10 jurors to decide a case worth $2.5 billion in damages for patent infringement. At the heart of the case is Apple’s contention that Samsung’s designs of its Galaxy series of smartphones and tablets infringes on the look and feel of Apple’s devices, many elements of which are patented. This has already resulted in preliminary injunctions against the import and sale of Galaxy Tab 10.1” tablets and Galaxy Nexus smartphones.

Of course, this is far from the only legal battle being waged by the two companies in what has alternately been referred to as a “mobile device war” or “mobile patent war”. Since April 2011, Samsung and Apple have launched over 30 lawsuits on four different continents, with both sides arguing that the other has infringed their intellectual property. At stake are the lucrative profits in the rapidly expanding mobile device space, especially as consumer adoption of smartphones increases and the functionality of tablets improves to rival traditional PCs.

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While the two companies lock horns in courtrooms around the world, though, they have quickly gobbled up 54% of the global smartphone market by some estimates. At the same time, several other phone makers have seen their share of the market severely diminished as Samsung and Apple pump out popular handset after popular handset. Nokia and Research in Motion (RIM) have moved from dominant positions within the smartphone market to near paupers, forced to layoff workers and drastically alter their business plans to counter their decline. Taiwanese manufacturer HTC, once the darling of the Android OS segment of the market and partners with Google on the Nexus One phone, has seen sharp declines in sales. Motorola Mobility and Palm, Inc. were swallowed up by Google and HP, respectively, after their smartphone strategies failed to win over consumers. And Sony and LG have, for the most part, failed to find solid footing in the smartphone market space outside of their home markets.

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The lead that Samsung and Apple have in the smartphone market is so pronounced that, according to at least one analyst examining the top eight mobile companies, they account for 99% of profit made on smartphones. This works out to 73% of operating profit for Apple and 26% of operating profit for Samsung, with HTC accounting for the remaining 1%. According to results for the second quarter of 2012 released on Friday, mobile device sales have helped boost Samsung to a record profit of $5.9 billion dollars, with the mobile division accounting for nearly 70% percent of earnings. In comparison, the first three months of 2012 saw a profit of $11.6 billion for Apple, driven by $22.7 billion dollars in revenue from iPhone sales and an additional $6.6 billion in iPad revenue.

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The importance of mobile profits to both companies’ bottom lines is fairly clear from the earnings data, and the ongoing legal battles may simply be about safeguarding those profits. But the combination of huge profits and extensive patent portfolios also has more sinister implications for competitors to Apple and Samsung in the mobile market. Both companies have ample capital to reinvest into technological innovation while their competitors struggle to stay afloat, and their patents could also provide a legal impediment to new challenges in the market.

But the litigious character of the battle for mobile supremacy between Apple and Samsung is increasingly earning them the ire of judges all over the globe. In June, Judge Richard Posner, presiding over a patent lawsuit between Apple and Google’s Motorola Mobility in California, scrapped the case and prevented both sides from refilling. Since then, he has appeared in the press as a staunch critic of patent infringement lawsuits and an advocate of patent reform. In Australia, Judge Annabelle Bennett has called the ongoing suits “ridiculous” and suggested that mediation should be the proper legal remedy. And in the United Kingdom, in perhaps the most embarrassing blow for Apple, Judge Colin Birss ordered that Apple must post a notice on their U.K. website for six months declaring that Samsung did not copy the design of the iPad (albeit his ruling stated that Samsung’s tablets would not be confused with Apple’s products because they are “not as cool” as the iconic iPad).

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The $2.5 billion lawsuit set to begin in California is certainly the largest case currently ongoing in the battle between Samsung and Apple, but ultimately it may prove to be a drop in the bucket in terms of money. Samsung and Apple are jockeying for position within advanced cell phone markets in developed nations, but this is only a prelude to the expansion of smartphones into developing markets such as Brazil, India, and the world’s largest cellphone market, China. The success of Apple and Samsung in dominating the smartphone market may be fleeting if up-and-coming rivals such as Chinese electronics manufacturers Huawei and ZTE, who are beginning to introduce capable smartphones at aggressive prices, can penetrate developing markets where consumer preferences may be influenced more by value than by brand loyalty or the “cool factor”. We shouldn’t forget that it was just over five years ago that Apple introduced the iPhone and upended popular notions about what a smartphone was.

The relative advantage that Apple and Samsung enjoy in terms of mobile device profits, as well as their sizable R&D operations and legal battles, may make it prohibitively expensive for others to enter the smartphone market, but it is not yet an insurmountable obstacle for other challengers. It may delay the emergence of a legitimate competitor for the two companies, but it is unlikely to stop other companies from trying to grab a piece of the multibillion dollar market they dominate. In the meantime, the questionable lawsuits and worldwide courtroom dramas will continue to define the terms of competition in the marketplace for years to come.

By Chad O’Carroll

After last week’s news that Apple had successfully won an injunction to block the sale of Samsung’s Galaxy Tab computers in the United States comes another major legal development also in Apple’s favor.  As of close of business on Tuesday, Galaxy case judge Judy Koh effectively banned sales of the Samsung Galaxy Nexus cell phone in the U.S. market through an injunction that cited “probable” infringement of four Apple patent claims. With Apple having posted a bond of $96 million to cover any profit that Samsung would lose in the event the ruling is later overturned, the injunction has now come to life and Galaxy Nexus sales are now effectively banned in the U.S.  This is a worrisome development for Samsung in its continuing legal battle with Apple which may also hinder the evolution of the Android and even iPhone mobile operating systems.

The Galaxy Nexus was developed by Samsung in partnership with Google, forming the third generation of the two firms ever-evolving Nexus smartphone series.  During the design phase of the latest offering, Samsung and Google collaborated in creating a new search feature known as the “Quick Search Box”.  Using the “Quick Search Box”, Galaxy Nexus users receive search suggestions before typing is completed and answers to queries based on an aggregation of data from the web, installed apps, and from contact information. According to Apple, the “Quick Search Box” is too much like Apple’s own Siri search tool and Judge Koh’s decision appears to confirm their claim that it may represent a patent infringement. Even some third-party reviews of the Galaxy Nexus (cited in the actual case) appear to validate Apple’s claim that “Quick Search Box” could reduce iPhone sales, with one review saying it adds a “whole new layer of functionality” that would help Android phones “win new customers, even ones with iPhones.”

While Google has already removed the Galaxy Nexus smartphone from its “Play” store, the wording it uses to explain the move, “Coming Soon”, suggests that it has plans to get the phone back onto the market as soon as possible. Already reports are emerging that it is working on a software patch for the Nexus that will undermine Apple’s patent infringement claim and allow for a resumption of sales, although this will seemingly result in some decrease in functionality in the Samsung phone: “Once the patch is rolled out, devices that are updated will see the home screen-based quick search option simplified so as to only show results from the Web, with local search options disabled entirely on the device. The voice search option will also be restricted to retrieving results from the Web”.  So while Samsung and Google may be able to get around this ruling, the solution will be to the detriment of the design and functionality of the Android operating system.

As I have outlined before in two other Peninsula articles, it seems Apple is really trying to prevent Samsung – its biggest competitor – from selling phones in cases that seek to prove patent ownership of extremely general concepts. The idea that an aggregated search facility can only be the sole purvey of Apple iPhone is difficult to comprehend , inferring that it was Apple who invented the actual concept of information aggregation.  And a look at the three other patent infringement claims that form the basis of Apple’s Nexus Galaxy litigation underscore their general concept approach.  These claims argue that the Galaxy Nexus cannot have a slide to unlock the phone, cannot have auto-fill search, and cannot have data underlined and made actionable (i.e .the ability to click a number in a text to call it). As one programmer put it, “Apple seems to own every graphical user interface ever invented”, adding that if features like these can be patented, “it should be possible to patent the idea of [having] text or images in web pages.”

As Apple continues putting legal pressure on Samsung, it is important to remember that the iPhone itself has benefited from bringing together many technologies that were preexisting. Many researchers and companies invented technologies that predate the iPhone and one of the reasons the iPhone was originally so successful was because it drew together these extremely innovative technologies in one place. But that shouldn’t mean other manufacturers cannot also build touch screen smartphones that have user friendly interfaces.  Indeed, that Android smartphones have similar functionality to iPhone should come as no surprise because both devices have the same purpose – to facilitate mobile communication.

Take a look at software products in other areas and you will also find many similarities. Internet Explorer, Google Chrome and Mozilla Firefox all have striking similarities. But imagine if the inventor of the “bookmark” wanted to sue them all as a result of patent infringement? In short, when programmers write software, it is natural for similarities to exist. And while Android may have been inspired by some iPhone functionality, Google have often refined that functionality to the point it has even copied back by Apple and ported to newer iterations of the iPhone.

Up to now, Apple has spearheaded the main body of patent litigation in the smartphone market and this has encouraged Google and Samsung to do the same, motivating them to patent every innovation they come up with. The result is that if the legal fracas between the companies continues, we may arrive at a situation where Apple could be boxed into a position where it cannot add a lot of the newer and yet to be released Google innovations that one might have previously considered as “general” features.  Already this is happening, with Apple’s iPhone lacking Google Map 3D navigation or voice translation capabilities.  And if Apple keeps winning cases like this one, Android customers will also eventually be locked out of basic functionality that makes owning a touch screen phone practical to use.

Chad 0’Carroll is the Director of Communications for the Korea Economic Institute. The views represented here are his own.

Photo by PopCultureGeek