South Korean internet giant Kakao recently separated Daum, the operator of the nation’s No. 2 portal site, into an independent in-house company, fueling speculation that Kakao may be losing appetite for the search engine business a decade after their highly publicized merger back in 2014.

Under the new decision announced on May 4, Daum began operating as a “company-in-company” on May 15, a more independent subsidiary with its CEO being appointed by the parent company to maintain control.

The move immediately prompted speculation that Kakao could spin off or sell off the company eventually. But a Kakao official flatly denied the rumors.

“The latest decision aims to promote the values of Daum’s services as a search engine and a content distribution platform by responding to changing trends such as artificial intelligence in a more prompt manner,” the Kakao representative said.

Industry watchers agreed that Daum’s independence from Kakao could speed up the overall decision-making process with better control over business strategies and budget plans. But they added the key to its survival depends on how the portal is able to secure firmer footing in a market dominated by its bigger rival Naver.

“The business environment is becoming more challenging as big global tech firms are also gaining ground in the domestic market, not to mention the No. 1 Naver," an industry source said on condition of anonymity.

"Kakao might want to distance itself from Daum because there is a perception that its portal business is no longer profitable."

Kakao intends to gauge the business potential by adopting the company-in-company system, the source added.

"The first experiment is highly likely to revamp the search engine and offer new content services using AI,” the source said.

Wi Jong-hyun, a professor at Chung-Ang University's College of Business Administration, said Kakao has failed to take full advantage of Daum’s capabilities and undermined its competitiveness as it focused too much on mobile transformation in recent years.

Daum, which had been a leading presence in the country’s internet market in the late 1990s, went through tough times over the two decades. Founded in 1995, it was the top web search portal, coming along with email and other media services. But it was soon caught up by its rival Naver, which now operates the country's No. 1 web portal and search engine.

Kakao, launched in 2006, agreed to take over Daum via back door listing in May 2014. The united company was confident about fueling growth by combining Kakao's strengths in the mobile platform with Daum's competitiveness in content and service businesses. The new entity, Daum Kakao, changed its name to Kakao in the following year to solidify its identity as a mobile platform provider.

Daum has not fared better after the merger deal. Its services that overlapped with Kakao had to shut down. As Naver and Google’s market share in the search engine market increased, Daum lost influence. According to data from market tracker Internet Trend, Daum’s share in the domestic market was 4.61 percent as of Tuesday, plunging from 15.43 percent marked in June 2018.

Wi is also skeptical about Daum’s revamp.

"It is impossible for Daum to overtake Naver in the search engine businesses considering Naver’s prowess in the AI field,” he said. “Adopting the company-in-company scheme can be interpreted as the last chance given to Daum before deciding its sell-off.”