August 15, 1999

How Korean Pride Rallied to Save a Software Maker

By CALVIN SIMS

EOUL , South Korea -- As the Microsoft Corporation expands its dominance of the world's computer software markets, it has tried hard not to ruffle the feathers of foreign governments and nationalists, who often view the American software giant as a predator.

Nevertheless, in maneuvering to gain control of the lucrative market for Korean-language word processing software, it set off a groundswell of opposition.

"No one could have predicted that Koreans would have responded the way they did to Microsoft," said D. H. Oh, managing director of IDC Korea, a brokerage house here. "It was probably the first time that an entire nation, from the central Government to corporations to private citizens, combined forces to save a local industry."

The tale began a year ago, when South Korea's leading software developer, the Hangul and Computer Company, was one step from bankruptcy, a victim of poor management, Asia's financial crisis and rampant software piracy.

Microsoft agreed to inject $20 million into the Korean company. In return, Hangul and Computer was to stop producing its own popular word- processing software, which commanded 80 percent of the word-processing market, and start selling Microsoft's Korean-language Word, which then had less than 15 percent.

For a rather small investment, Microsoft seemed about to gain control of South Korea's word-processing software industry, one of the few markets in the world that the company did not dominate.

Microsoft was already by far the biggest player in the overall Korean software market, which is estimated to be worth $5 billion to $6 billion, but it played second fiddle to Hangul and Computer in the word-processing sector.

Once South Koreans -- well known for their nationalistic fervor -- got wind of the deal that would have extended Microsoft's dominance, public outrage was so strong that Hangul and Computer left Microsoft standing at the altar.

Instead, the company accepted a $10 million investment raised by Korean computer-related businesses and associations that led a nationwide campaign to save Hangul -- which many Koreans regarded as a national technological treasure -- from foreign control.

As part of the campaign, the central Government promised to crack down on software piracy and began with its own computers, many of which used unlicensed versions of Hangul and Computer's software. Legitimate copies of the software -- named Hangul after the Korean language -- were installed.

Following that lead, thousands of guilt-stricken South Koreans who were using pirated Hangul software either bought authorized versions or donated money to the campaign.

Now, bolstered by a surge of Government orders and a new management team, Hangul and Computer has made a remarkable turnaround. "Our sales have climbed through the roof, we've reduced our debt, we are attracting foreign investment and we are developing new products," said Ha Jin Jhun, Hangul and Computer's new president. "You can say that we've fully recovered."

After reporting a net loss equivalent to $3.8 million for 1998, the company projects that it will have net income of $4.9 million this year. Revenues, which had tumbled to $11.7 million last year -- down nearly $7 million in two years -- are expected to reach $28.3 million this year.

In the year since Hangul teetered on the verge of bankruptcy, its market capitalization has grown fivefold, to $16.7 million.

Jhun, who was brought in to restructure the company after it backed out of the Microsoft deal, said his first order of business was to refinance the company's debt and reduce its costs. He cut the work force of several hundred by about 10 percent and shut down unprofitable businesses, including publications, educational programs and hardware distribution. He also slashed research and development efforts.

Jhun then sought to capitalize on the national campaign to save the company. The campaign encouraged Koreans -- both businesses and individuals -- to destroy pirated copies of the software and buy legitimate ones. (Last year, industry analysts estimated that 60 percent to 70 percent of all software programs in use in South Korea were pirated.)

To facilitate the purchases of legitimate copies, Jhun cut prices, began selling the software in places as diverse as banks and supermarkets and introduced a special edition that sold a record 700,000 copies.

Seeking to assure Hangul's long-term success, Jhun said, he plans to turn the company into South Korea's "largest and foremost" Internet service provider.

"We see our major revenue growth coming from the Internet," he said, "and we will soon introduce a one-stop-package service that provides electronic commerce, cybertrading, e-mail, advertising, and a virtual office all in one."

Do Haeng Heo, an analyst for Daewoo Securities, has issued a buy recommendation for Hangul and Computer, which he predicts will post a net profit of $9.25 million this year. He cited "the possibilities behind a take-off of the Internet business," which, he said, is still in its formative stage in South Korea.

Microsoft, meanwhile, has continued its aggressive pursuit of the South Korean software market, and its revenue has soared, too.

Geun Kim, director of marketing for Microsoft Korea, said that while South Korea is currently a marginal market for Microsoft in dollar value, it has great potential because of the country's high rate of personal computer use and high level of education.

A move by Microsoft set off a national reaction.

Microsoft Korea's revenues increased 110 percent last year, Kim said, buoyed by rising orders from the public sector and individual users. He expects revenues to reach $100 million this year, a 5 percent to 10 percent increase over last year. About 55 percent of Microsoft Korea's total revenues come from software products like Word and Office that compete directly with Hangul and Computer.

Both Microsoft Korea and Hangul and Computer have been able to register growth in revenue, analysts say, as the Korean software piracy rate has fallen 10 percent in the last year, thanks in large part to the campaign to save Hangul.

"I think this affair had a very positive impact on the industry," Kim said. "The industry and the public are better served by having two healthy competitors."

Hangul and Computer's view is not so convivial. It has filed a dumping charge against Microsoft.

Microsoft recently introduced a new version of its Korean-language software -- one that offers many of the features that have made Hangul's product so popular with South Koreans, including a graphics function that allows users to incorporate boxes, tables and graphs within the text.

Also, the new version of Word can express the Korean alphabet in more than 11,000 combinations, including those needed to represent archaic words and expressions. Microsoft's previous version was limited to a few thousand combinations and was viewed by many Koreans, especially academics, as insufficient.

Microsoft's new program has been selling well, especially since the company slashed prices last month to match those of Hangul and Computer. Microsoft says that it is offering discounts to schools in an effort to capture young computer users.

Those discounts led Hangul and Computer to file the dumping charge against Microsoft with the South Korean Fair Trade Commission, accusing the American company of selling its educational software package at a steep discount to gain market share in South Korea. The trade commission says that an investigation of Hangul's complaint is under way.

Microsoft said that under a program started in July, schools can buy any piece of its software for an up-front payment of 10 percent of the normal end-user price, calculated on an annual license-fee basis. Hangul had pioneered the use of such yearly license fee arrangements in South Korea.

"To pay $20 million to buy an entire software market is not only cheap; it's unfair and it's wrong," Jhun said.

"Microsoft is not content with just killing off local software companies," he added. "It wants to wipe out an entire industry, and Koreans did not stand for that."