Incident 191: Korean Internet Portal Giant Naver Manipulated Shopping and Video Search Algorithms to Favor In-House Services

Description: The Korean Fair Trade Commission (FTC) imposed a 26.7B KRW on Naver for manipulating shopping and video search algorithms, favoring its own online shopping business to boost its market share.
Alleged: Naver developed and deployed an AI system, which harmed Naver customers.

Suggested citation format

AIAAIC. (2020-10-06) Incident Number 191. in McGregor, S. (ed.) Artificial Intelligence Incident Database. Responsible AI Collaborative.

Incident Stats

Incident ID
191
Report Count
2
Incident Date
2020-10-06
Editors
Sean McGregor, Khoa Lam

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Incident Reports

South Korea‘s antitrust regulator on Oct. 6 imposed a 26.7 billion won ($22.9 million) fine on Naver, accusing the company of manipulating search algorithms to favor its own online shopping business.

Naver, in response, said the company will appeal the accusation and the fine, a record-high amount imposed on a platform operator in South Korea.

According to the Fair Trade Commission‘s announcement, Naver made changes in search algorithms to have products or services sold by those that are linked to its payment service Naver Pay have better exposure on the company’s online shopping platform. It made products sold by other online shopping competitors, such as Interpark and Gmarket, rank lower on search results, according to the FTC.

Naver made changes to the algorithms at least six times between 2012 and 2015 to favor its own online shopping business, the FTC said in its ruling.

South Korea‘s antitrust watchdog accused Naver of using the changes in its search algorithm to increase its market share. Naver‘s share in the open market sector surged to 21.08 percent in 2018 from 4.97 percent in 2015, while the shares of its competitors went down.

Naver, however, argued that the antitrust watchdog is using a select few algorithmic changes to make the accusation. Naver said the company has made changes in the search algorithms around 50 times from 2010 to 2017, to improve search quality of the goods and services provided on its platform.

Naver also dismissed the charges that the company have made algorithmic changes to show more search results for products provided on its platform, as well as those linked to its payment service.

Meanwhile, the FTC also said it has found that Naver changed its algorithm in favor of videos linked to its video sharing platform Naver TV.

Naver fined for manipulating search algorithms

The Fair Trade Commission (FTC) announced Tuesday that it had fined Korean internet portal giant Naver 26.7 billion won ($23 million) for manipulating its shopping and video services search algorithms to place its own services on the top of search results.

The FTC said this practice has "misled customers to believe the results were fair and objective," and "damaged fair competition in e-commerce and video platform markets."

The punishment came amid the antitrust agency's enhanced efforts to regulate internet and platform businesses. Given the FTC is also looking into Google's policies based on its dominant smartphone operating system, the heavy fine levied against Naver is interpreted as a sign the commission will also take a hardline approach to Google as well.

According to the FTC, it fined Naver's shopping service 26.5 billion won and its video service 200 million won for abusing the platform's market dominance when manipulating the search algorithms.

In its shopping search service, Naver's results contain products sold through various online market places including Naver's own Smart Store, Gmarket, Auction, Interpark and other rivals. Naver takes a fee from those online marketplaces for providing its platform and price comparison services, and these had an 80.2 percent market share as of 2018.

The FTC said Naver has been manipulating its search algorithms since 2012, in order to place products from Smart Store above those from competing online marketplaces in search results, and ensure that 20 percent of products per page were also from Smart Store.

When Naver introduced its mobile payment system Naver Pay in 2015, it also increased the exposure of its own products that could be purchased through the system. Naver expected this would expand customers' use of Naver Pay, the FTC said citing a set of emails between employees of the firm.

The FTC said Naver Smart Store's share in online markets sharply expanded through these practice, because Smart Store occupied the top results on Naver, which retains a dominant market share as a search portal here. According to the FTC, Smart Store's market share by the total amount of transactions within Naver shopping service increased to 21.08 percent in 2018 from 4.97 percent in 2015, becoming one of top three online marketplaces in the country in just three years.

In video search services, Naver also exercised similar practices to improve the exposure of Naver TV.

"By manipulating search results and exposure order, Naver deceived consumers who trusted the results, as well as damaging competition in online markets and video platforms," an FTC official said.

In response to the FTC's fine, Naver said, "it had overhauled the algorithms' search logic in order to show the best results meeting users' demands" and "had done nothing to exclude other online marketplace operators," adding it will take legal action.

The fine is seen as the FTC's latest move in beefing up its monitoring of platform businesses.

FTC Chairwoman Joh Sung-wook said in a September press conference that the agency is "closely monitoring changes in fee systems for app markets." Though Joh did not single out any companies by name, her remarks are interpreted as an apparent warning to Google, which announced Sept. 28 that it would take a 30 percent flat fee from payments made for all apps sold on the Google Play store.

As this stirs has raised concerns among app developers here, the FTC plans to send a review report to Google within this year and take the case to a commissioners' meeting.

Naver fined W26.7 bil. for manipulating search algorithm