MegaZone Cloud, a cloud management service (MSP) corporation, has thrown down the gauntlet to internet banks. This has led to discussions within and outside the industry about how MegaZone Cloud, which has suffered losses for six consecutive years since its establishment, is seeking to improve profitability through entry into the financial sector. However, there are also significant concerns that this move represents an expansion geared towards an initial public offering (IPO) rather than a new venture aimed at creating synergy with existing businesses.
◇ Choosing the financial sector as a breakthrough to escape losses?
According to the industry on the 16th, MegaZone Cloud is participating in the Korea SOHO Bank consortium to pursue the establishment of an internet bank. In this preliminary licensing competition for internet banks, a total of four consortia, including Korea SOHO Bank, Soso Bank, Grape Bank, and AMZ Bank, have entered the fray. Among them, Korea SOHO Bank is being cited as a strong candidate. Initially, the U Bank consortium, which included Naver Cloud, was considered a strong candidate; however, it declared its withdrawal from the preliminary licensing application and dropped out of the competition.
What stands out is that MegaZone Cloud is the only cloud company among those competing for the preliminary licensing of internet banks. An industry source noted, "As major IT corporations such as Samsung SDS, LG CNS, and SK C&C are aggressively expanding their MSP businesses, MegaZone Cloud's market position is being shaken." They suggested that the strategy seems to be diversifying revenue sources by spreading cloud management services into the financial sector through entry into internet banking.
Despite a 12.7% increase in revenue to 1.4264 trillion won in 2023 compared to the previous year, MegaZone Cloud's operating loss rose to 69 billion won, approximately double the previous year's loss of 34.6 billion won. Since its establishment in 2018, MegaZone Cloud has not managed to escape losses for six consecutive years. The performance for last year has not yet been disclosed, but the industry estimates that the company did not turn a profit.
◇ "Business synergy is not strong, making a rebound in performance difficult"
Even if the consortium that MegaZone Cloud is part of establishes an internet bank and the MSP business is handled by MegaZone Cloud, there is a prevailing view that expecting a meaningful performance rebound would be difficult. This can also be confirmed through the case of Kbank, established by KT. Although Kbank was established under the auspices of KT in 2016, last year, KT's revenue from transactions with Kbank was only 31.7 billion won. Critics argue that for MegaZone Cloud, which generates annual revenues exceeding 1 trillion won, the scope is grossly insufficient to seek a performance rebound through entry into the financial sector.
Unlike KT, a cloud service provider (CSP) offering cloud services, MegaZone Cloud operates in managing clouds, making it unlikely to achieve significantly higher revenue than KT. The profit margins for MegaZone Cloud, as an MSP operator, are also lagging behind those of CSP companies like KT. According to the cloud industry, the typical commission margin for MSPs is reported to be between 5% and 7%, while in the CSP industry, it is known to range from 10% to 20%.
In terms of business synergy, the benefits MegaZone Cloud can expect from entering the financial sector are also projected to be limited. KT, a B2C (business-to-consumer) company, has maximized business synergy by offering interest discounts to its communication subscribers and expanding its subscriber base through its collaboration with Kbank. However, for MegaZone Cloud, a B2B (business-to-business) company, the business synergies available beyond MSP project contracts with the financial sector are bound to be restricted.
◇ Is the real purpose expansion for an IPO?
Nevertheless, the industry perspective is that MegaZone Cloud's entry into the establishment of an internet bank was necessary for expansion towards an IPO. The high dependency on revenues from large clients such as Amazon Web Services (AWS), Microsoft (MS), and Google necessitates diversifying revenue sources to pass the listing examination, according to this view. There is also analysis suggesting that the poor financial state has hampered the IPO process, making a turning point imperative.
Ryu Jong-ki, an adjunct professor at Sogang University, noted, "While establishing an internet bank is a method to quickly broaden the business scope and revenue sources, from a long-term perspective, it does not root in the growth of core services and only enhances corporate management risks." He added that if they expand their business scope just to get listed, it would lead to a collapse of their original business. He emphasized that considering the characteristics of the MSP business, which incurs high operational costs but has low margins, it is essential to find fundamental ways to improve profitability.
In July last year, MegaZone Cloud finalized its selection of underwriters and officially initiated preparations for an IPO, aiming for a listing this year. The results of the preliminary licensing assessment for the internet bank are due to be announced in June.
A representative from MegaZone Cloud stated, "We deemed it a good opportunity to broaden our understanding of the banking business and to accumulate know-how in cloud and AI within the financial sector, and thus decided on a minimum equity participation of 1.7%." They added, "The IPO is a matter that should be closely considered in light of the domestic and international macroeconomic conditions and capital market trends, and our participation in the internet banking consortium is unrelated to this."