KFTC Publishes a Policy Report on Generative AI and Competition

On December 17, 2024, the Korea Fair Trade Commission (the “KFTC”) published a policy report titled “Generative AI and Competition” (the “AI Policy Report”) that analyzes the competitive landscape and potential competition and consumer issues in the Korean generative AI market.

The AI Policy Report is based on the results from the AI market survey of major domestic and overseas business that the KFTC conducted in August 2024 (the “AI Survey”), as well as the opinions of experts from industry, academia, research institutes, etc., and a literature review. The key contents of the AI Policy Report are as follows.

1.	Current Status of Generative AI Value Chain The AI Policy Report classifies the value chain in the AI market into three main levels with six key components – “AI infrastructure” (AI chips, cloud computing, data, experts), “AI development” (foundation models), and “AI deployment” (AI services).

Value Chain Level	Details
AI Infrastructure	Where the essential elements needed for AI development and deployment, including computing resources such as AI chips and clouds, data, and experts, are formed
AI Development	Where foundation models are developed independently, or fine-tuned from existing models created by other companies, to serve as the basis for implementing a specific AI function
AI Deployment	Where AI functions implemented by foundation models, such as text or image creation, are utilized to provide services to consumers

Analysis of the Competitive Landscape in the Korean Generative AI Market

The KFTC analyzed the competitive landscape of the Korean market for AI chips, cloud computing, foundation models, and AI services, which are relatively more developed compared to other segments of the AI value chain. The key points are as follows:

Area	Assessment of Market Situation and Competitive Landscape
AI Chips	Market for the supply of various types of AI accelerators such as GPUs and NPUs. While there is high demand and preference for the products of certain companies, the KFTC will monitor changes in the competitive landscape due to advancements in AI semiconductor technology.
Cloud Computing	Market for computing power based on AI chips in the form of cloud services. Overseas cloud service providers have a relative advantage over domestic providers in terms of established infrastructure and capabilities for expansion.
Foundation Model	Market involving AI service providers developing their own foundation models or utilizing third party models. Although there is active competition among service providers, “big tech” companies that have already secured essential infrastructure dominate the market and have a relative advantage over domestic service providers.
AI Services	Market offering two types of AI services: (i) horizontal AI, such as LLM services or AI agents, for general-purpose services, and (ii) vertical AI services tailored for specific areas. The market is competitive, with domestic conglomerates and startups participating alongside domestic and overseas companies that own foundational models.

The KFTC’s assessment is that the competitive landscape in Korea is similar to that of the global market since the products and services across each segment of the value chain are generally available worldwide. In particular, the AI Policy Report noted that while some companies choose to focus on only specific areas of the value chain to establish transactional relationships, others pursue a strategy of vertical integration by entering into all areas of the value chain.

Analysis of Competition and Consumer Issues and Related Challenges

Structural Factors: The AI Policy Report identifies structural elements that could affect competition in the generative AI market, including: (i) barriers to entry resulting from high capital and technological requirements, (ii) competitive advantages held by large firms due to economies of scale or economies of scope, and (iii) first-mover advantages enjoyed by leading firms.

Concerns Regarding Competition and Consumer Interests: The AI Policy Report lays out potential avenues through which competition and consumer interests could be undermined in the generative AI market as follows:

Classification	Details
Unilateral Conduct	The report points out several types of unilateral conduct that could harm competition, such as when: A dominant player in the market for essential inputs abuses its market position by coercing certain trading terms, such as price and volume (restriction of access to essential inputs) A player that has considerable market power in a main product/service market coerces the counterparty into purchasing ancillary products (bundling/tying) A company provides unfair or excessive incentives to secure or retain customers, or requires exclusive dealing to maintain business relationships (customer solicitation or retention) Technology is misappropriated, especially in the context of recent business partnerships aimed at developing or improving AI technology and services (misappropriation of technology) A company unfairly solicits or hires another company’s core AI workforce, etc., thereby making it difficult for the other company to carry out its business activities, which may constitute an unfair means of competition (Solicitation of workforce)
Merger	There are concerns that substantial investments in and acquisitions of start-ups in the AI market by vertically integrated companies with significant financial resources, along with the recruitment of key personnel and the establishment of partnerships, may result in the formation or strengthening of market dominance and related abuse.
Undermining Consumer Interests	Consumer interests could be undermined if an AI service provider does not obtain valid consent for data collection.

The AI Policy Report outlines the KFTC’s plan to establish a framework for promoting fair competition in the AI ecosystem. Specifically, the KFTC has plans to assess whether the existing merger regime should be updated to allow the agency to review various partnerships among AI companies that have effects that are similar to mergers. The KFTC also intends to strengthen its oversight over various other types of conduct in the AI market that could be anti-competitive.

The KFTC stated that the AI Policy Report is the first in a series of reports aimed at assessing the market situation, legal issues, and challenges within the Korean AI market. The agency plans to conduct more in-depth reviews and research on the AI market, including additional studies on data collection and usage issues.

Given the rapid evolution and expansion of generative AI technologies and services, the market landscape, competition, and consumer protection issues are also evolving at an unprecedented pace. Therefore, we advise that companies in this space continue to monitor the direction and details of upcoming regulations, identify potential violations in advance, and prepare appropriate mitigation measures if necessary.

[Korean Version]

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