The proliferation of smartphones in South Korea is transforming this former walled garden ruled by local players into one of Asia's most promising destinations for global Internet and social networking firms.

A solid, wireless broadband infrastructure, feature-packed new models from homegrown giants Samsung Electronics and LG Electronics, and an explosion in mobile applications and services have all contributed to the breakneck speed of smartphone adoption.

In just 18 months the number of smartphone subscribers in South Korea has exploded more than ten-fold to top 10 million, or around a fifth of the population, according to the Korea Communications Commission (KCC).

South Korea ranks first in Asia and third globally in smartphone penetration, according to eMarketer, lagging only the United States and Western Europe.

All this is music to the ears of handset makers and application developers.

Korea is interesting because it's got a large, tech-savvy and concentrated population, said Andrew Mason, founder and CEO of group-buying site Groupon, which launched services in Korea in March. It's the perfect market for Groupon.

Smartphones have become a Trojan horse into the Korean market for the likes of Google and Facebook, which had a head start on local firms in optimizing their offerings for smartphones, said Richard Min, partner at Seoul-based startup incubator, Seoul Space.

Foreign entrants have moved quickly to capitalize on the changing landscape. Twitter launched a Korean-language website in January after seeing a 3,400 percent spike in the volume of Korean tweets in 2010. It now has around 3 million local users, according to market research firm, Daumsoft.

Facebook opened a Seoul office late last year to seize on the great momentum in Korea, a company spokesperson said.

And Groupon Korea already ranks among the top four players in South Korea's increasingly crowded social commerce market, with a growth rate that is accelerating every week, said local CEO, Hee Seung Hwang.

GOOGLE'S CHANGING FORTUNES

Arguably the biggest beneficiary of Korea's smartphone explosion has been Google, whose previous attempts to woo local Internet users were disappointing. As of March 2011 it held a mere 2 percent sliver of the standard Internet search market, according to Seoul-based research house, Metrix Corp.

But Metrix estimates Google now vies with Korea's Daum Communications for second place in the mobile Internet search market, with a share of more than 15 percent.

Google's Android operating system, on which Samsung and LG's latest smartphone offerings are based, powered only 3 percent of South Korea's mobile phones in March 2010. That figure jumped to 60 percent by January 2011, KCC data shows.

The onslaught of imported competition has rattled local Internet industry leaders Daum, NHN, and SK Communications, whose domestic and PC-based focus may now be coming back to haunt them.

Without a major shift, (Korean Internet firms) are in trouble, says Min of Seoul Space. Their biggest problem used to be their biggest asset -- they built these perfect local systems. But these days Koreans are more international and if they want to reach a global audience there is no contest.

NHN's shares have declined 17 percent so far this year, versus a 0.5 percent gain in the benchmark KOSPI, and Kosdaq-listed SK Communications is down 41 percent compared to the venture market's 7 percent fall. Daum, also listed on the Kosdaq, is a notable outperformer, up 30 percent.

NHN continues to dominate the Korean Internet, with some 75 percent of standard searches conducted via its Naver portal. Its Me2Day microblogging service boasts over 5 million users, well ahead of Twitter. But Metrix data shows the number of visitors to Twitter grew six times faster in 2010.

SK Communications' most iconic product, the Cyworld social networking service, pulled the plug in 2009 on an effort to crack the U.S. market and now appears increasingly threatened by Facebook on its home turf.

SK Communications says Cyworld has 35 million users in South Korea, around 10 times more than Facebook, but its visitor numbers barely budged last year while Facebook's shot up more than 3,000 percent.

INCUMBENTS FIGHT BACK

Korean firms acknowledge that foreign competitors are making inroads, but also say they are taking steps in response.

(Foreign companies) are strengthening their position in the domestic mobile content market with relatively high brand awareness, says Lee Ram, director of NHN's Portal Strategy Department.

But Naver's introduction of new services such as mobile messaging and web storage has resulted in a number of users moving from Google to Naver, Lee added.

Daum has developed new mobile applications such as the Yozm social networking service, which has already signed up more than 2 million users, according to Daum vice president of corporate communications Lee Byung-sun.

SK Comms, meanwhile, is banking on an online marketplace for new games and applications, said CFO Koo Ki-hyang.

The struggle for Korea's Internet users has spilled into the legal arena. In April Daum and NHN filed a complaint against Google with Korea's Fair Trade Commission, arguing the pre-installation of Google Search on Android phones was stifling competition.

Google rejected the allegations.

Android is an open platform...we do not require carriers or manufacturers to include Google Search on Android-powered devices, a spokesperson said.

Few seem ready to count Korea's incumbents out. The healthy performance of home-grown applications like instant messaging service KakaoTalk point to a deep local pool of innovation and the market remains tricky to navigate.

(Korea) is still very closed, said David Lee, a former director at Google and now a partner at Palo Alto-based venture capital firm XG Ventures. If you want to publish a game, you have to go through the game ratings bureau. Payment gateways are difficult...the challenge for overseas developers is to get through those hoops.

For those that do, the Korea experience is likely to inform their strategies in other markets with rapid smartphone uptake and a strong stable of local players, such as Japan and China.

Groupon's Mason says the firm is in a learning phase in Asia and that South Korea is serving as a test-bed for technologies such as SMS distribution, while Google sees South Korea as demonstrating where the rest of Asia is going as well.

But others note China is very different and not just because of censorship.

China's Baidu and Sina have taken the best of Twitter, Facebook and so on and put them all together...adding a lot of innovations that have drawn a ton of Chinese users, said Mike Clendenin, managing director of Shanghai-based RedTech Advisors.

I'm not convinced (foreign social networking services) would do well in China even if they were unblocked.

(Additional Reporting by Seongbin Kang, Taeyi Kim and Jungyoun Park in SEOUL: Editing by Matt Driskill)

Smartphone