(FORTUNE Magazine) – KOREA has caught Web fever. Ten million people already use the Web, 3,500 new high-tech startups were launched last year, and broadband is booming. This may be just what the country needs to keep its economy growing. By Jim Rohwer

It doesn't have quite the evocative ring of Silicon Valley, but a stroll down Tehran Street in southern Seoul will take you past the headquarters of 80% of South Korea's Internet companies--and thus past the main source of what may still be the world's hottest Internet market this year. That claim would have seemed inconceivable even a couple of years ago. Back then Korea brought to mind the chaebol, the huge conglomerates that could no more understand dot-com logic than they could the idea of shareholder value. The chaebol are still there, but Korea itself, driven by an entrepreneurial burst of energy, is being remade with surprising speed in an online image. In fact, it's a good bet that Korea will be seen in a few years as the most successfully restructured economy in Asia.

What's behind this burst of energy? Koreans, it seems, love the Web, and they have taken to it at a pace that is astonishing even by Internet standards. Consider the following:

--In 1997 there were only 1.6 million Koreans online. Today nearly ten million are. That number should hit 20 million--about half the population--sometime toward the end of 2001.

--Mobile Internet use is poised to take off. Already, there are more mobile-phone subscribers than fixed-line ones (and more than half the Korean population is telephonically on the move, twice the U.S. rate).

--Korean mobile-phone makers churn out 70% of the world market for the next-generation CDMA-standard handsets--a technology developed by America's Qualcomm--which will make mobile Internet services fast and easy to get.

--Korea has the world's fastest-growing market for high-speed (broadband) Internet access, with two million subscribers expected by the end of this year and five million by 2002.

--The entrepreneurial spirit has been freed; 3,600 new companies were formed in January alone, with 50,000 expected for the year (relative to GDP, more new businesses than even the U.S. will create). Of the 50,000, about 4,000 are expected to be information-technology firms--in other words, about ten high-tech startups will be born every day this year.

--Every nook and cranny of the economy seems to have succumbed to Internet mania. It has become practically impossible--except for months in advance--to book ad space in papers or magazines, or on billboards or TV, because the dot-coms are promoting themselves so heavily.

Then there is the stock market. Korean Internet stocks as a group rose about 15-fold last year. Lately, though, they too have been badly hit in the global selloff of tech stocks in April. Even so, the volume of online trading is approaching 50% of total market turnover, by far the highest share in the world and within striking distance of the U.S.'s online trading volume even in absolute terms.

How could all this possibly be happening in a middle-income country of 45 million people with an economy notorious in the past for its rigidity and conservatism? A lot of seemingly unrelated pieces locked together in the right way.

First, Korean education levels and technological sophistication are the highest in Asia outside Japan. Not only are primary and secondary standards among the best--Korean kids routinely score at the top in international surveys of competence in science and math--but university education is as widespread as it is in the West. Nor is the Hermit Kingdom keeping to its cave. According to one survey, Koreans account for 8% of all foreign students in American universities. In January alone, says Wonjong Koh, head of research for the Seoul branch of ABN Amro, Korea ran a current-account deficit of $45 million on education services. If they can't go to America, they study in Australia or even in the Philippines--anywhere the language of instruction is English. The reason: The Asian financial crisis convinced Koreans that in this world America calls the shots, and they had better learn how to speak English if they want to compete--a point President Kim Dae Jung even made in his New Year's press conference. And it is not just English the government is pushing. Since the early 1990s it has given incentives for universities and technical schools to turn out software engineers.

One upshot of this: Korea is actually inventing some Internet technologies instead of just applying them. Serome Technology, known in America for Dialpad.com, the world's biggest free Internet phone-service provider, developed its software protocols in Korea. ThinkFree.com is a Silicon Valley firm (with a Korean CEO) hoping for a Nasdaq listing later this year. It offers a free Internet-based clone of Microsoft Office--much like what Sun Microsystems and Microsoft itself aim to provide--but with a Java technology so elegant that the whole of the program takes up only eight megabytes of hard-disk space. And all that software technology, says Tae-Jin Kang, the company's Seoul-based chief technology officer, was created in Korea.

Second, Korea's government "gets it" in all sorts of ways. President Kim, a septuagenarian former dissident, was elected in December 1997 to much groaning by businessmen because of his union ties and supposed socialist leanings. But whatever the motivations of the longtime chaebol-unfriendly President, the result is that he has been trying with some success to destroy out-of-date business structures and industries instead of protecting them--in glaring contrast to his undistinguished counterparts in Japan over the past decade. That has helped clear the way for new businesses.

Kim has also been good at pushing things ahead in more direct ways. He has ordered state-owned firms to move half their purchasing online by 2001--a directive that will produce a lot of business for American companies active in Korea, like Commerce One and Oracle, which are vastly more experienced at setting up such systems than any local competitor. And, pointing to the indispensability of computer literacy for everybody these days, Kim started a program last year that allows poor families to buy $900 computers for their children on a 36-month installment plan.

Third, the financial crisis did Korea a lot of good. Low-return Korea Inc. started mending its ways and restructuring. One result was the release--at first involuntary--of many skilled workers onto the job market. At the high end, engineers left chaebol systems-integration units to join Internet startups; Samsung Display Devices alone lost 20% of its engineers. Lower down, says ThinkFree's Kang, laid-off middle managers set up Internet cafes--of which there are now 15,000, one of the world's highest concentrations--and thus helped bring an already tech-savvy younger generation further into the e-culture.

Last, Korea's cost structures favor the Internet. The monthly fee for Internet access over regular phone lines is one of the lowest in the OECD. Broadband access costs less than $40 a month, significantly cheaper than in America. Even the boom in online stock trading has, in part, been driven by price. Whereas in most countries outside the U.S. brokerage commissions for online and offline trades are pretty similar, in Korea online trades cost less than a quarter as much to execute. Maybe the most important price of all--that of money--has also fallen sharply since the financial crisis, with interest rates now around 5% to 6% instead of their 15% level three years ago; this has opened the floodgates for both startup financing and widespread stock market investing.

As elsewhere in the Internet world, capital is easy to come by. Kap-Soo Suh, the head of Korea Technology Investment Corp., the country's first and biggest venture fund, guesses that the cash available for private-equity investment in Korea this year may reach $10 billion, up from $500 million only two years ago. Which lines of business that money can best be invested in, however, is a matter of much dispute. Despite amazing growth, the Internet in Korea got a late start and many kinds of e-business are hardly developed at all.

Greg Moon should know. He is in the process of setting up Softbank Ventures Korea, the Korean arm of Japan's powerhouse global Internet investment firm. Moon, who spent three years learning the trade in Softbank's Silicon Valley-based venture outfit, hopes by the middle of the year to have a fund of $400 million to deploy in Korea. But, he points out, the Internet business in Korea is immature. Online stockbroking may be flourishing, but because of strict financial regulations, online banking is nonexistent. And although Korea last year accounted for about a quarter of Asia's e-commerce market (Japan claimed a bit over half), revenues were still a trifling $720 million, in part because auction sites and electronic malls are still rare. The B2B market that President Kim is promoting is all well and good, but Moon still cannot think of a good independent B2B company that is up and running.

One problem is people: Korea has a relative abundance of engineering talent, but thanks to the chaebol's lock-step employment practices, it has produced few managers capable of running small and flexible organizations. Moon's idea is to steer Softbank away from dot-coms as such and toward Internet infrastructure and "enabling technology" companies that develop database and server technology--the backbone of the Internet.

Some think the Korean Internet industry may evolve in a somewhat different way from its American or even Japanese precursors. For instance, Paik Kyung Hwa, who runs his own investment advisory firm, believes pure portals (think the Yahoo model) will not thrive because "people here are not attached to portal sites individually." In other words, he believes that Koreans won't be loyal to brands like Yahoo because these pure portals act as nothing but a gateway to a million services. If a portal is to succeed in this market, it must have the content to attract eyeballs.

The stock market doesn't agree. Take Daum Communications, the country's second-biggest portal after Yahoo. Its market cap rose from $50 million just before listing on Kosdaq (the Korean Nasdaq) in November 1999, and until April's volatility hovered in the $2 billion to $3 billion range.

Lee Jae Woong, Daum's French-educated CEO, thinks customers will stay hooked in part because of the bother involved in switching from Daum's community-chat and free e-mail sites to somebody else's. Jin Yeom, the head of Yahoo Korea, does not sound worried either. Yahoo Korea, 60% owned by Yahoo itself (Softbank Korea, Softbank, and Yahoo Japan own the rest), started in September 1997 with 50,000 page views a day and is now at about 30 million. Yeom says confidently that the portal model is "already proven," and the only real question is how to make Yahoo an indispensable online marketing tool for all sorts of would-be e-commerce sellers.

There are those, however, who part company with the pure portals. These dot-coms believe it is important to have a lot of businesses effectively in one pair of hands. Their argument is that Korea should take advantage of its relatively high penetration of broadband and build delivery systems that are entwined with content, an issue addressed most spectacularly by AOL's proposed acquisition of FORTUNE's parent, Time Warner.

One of these companies is Dreamline. Instead of trying to own everything on the Web, Dreamline thinks it makes more sense to do joint ventures, alliances, and leasing deals. Dreamline thinks the AOL/Time Warner deal doesn't make sense, because you can't own everything. In other words, the Korean firm likes the broad approach but not the ownership aspect.

The company is involved in everything from leased lines to broadband Internet access to online communities to B2B commerce to multimedia content to being an applications service provider. It runs backbone fiber-optic lines on routes of its own as well as on ones leased from its second-biggest shareholder, the Korean Highway Corp., and from Korea Electric Power Co. (Kepco). It also has three- to five-year exclusive leasing deals with 40 cable operators, which have the right to operate cable TV networks in designated geographical areas.

Beyond that, though, it hopes to have deals in place this year with 200 content providers--among them Cheil Jedang, a midsized chaebol that is Dreamline's biggest shareholder and that has various media interests, including exclusive Asian distribution rights outside Japan for America's DreamWorks movie-production studio.

One of Dreamline's stiffest competitors is Thrunet, 11% owned by Microsoft and, as of last year, the first Korean company to be listed on Nasdaq. Like Dreamline, Thrunet also provides distribution and content. Jay Lee, a Boston Consulting Group alumnus who is a Thrunet managing director, argues that having a unique interface is immensely valuable to consumers--so that everything, from physical access to portal to content, comes in one package (and is payable on one bill).

But then there's the question that vexes everyone in the Internet business--how can you get some unique advantage out of content without owning it? Lee's answer is that a monopoly on content is neither necessary nor desirable. All a site need do is provide content in an attractive, easy-to-use format, and all those eyeballs will stick. Think of it as having a good library card catalog, where you can find things easily and it looks pretty--qualities not often found on the Net.

Like Dreamline, Thrunet is busy trying to do deals with cable operators for access to their systems, though it seems disadvantaged by having mostly one-year leases. (By contrast, Dreamline managed to negotiate three- to five-year contracts.) The worry is that the cable operators can throw it out after a year or raise its rent sharply.

Another peculiarly Korean issue is how the chaebol will fit into the Internet revolution. At first the Internet seemed a disaster for them in all sorts of ways (and hence an advantage for Korea as a whole). The conglomerates' ponderous and status-obsessed bureaucracies made them incapable of fast moves, and they were losing many of their best people. They are also grossly inefficient. Yahoo's Yeom suggests that, if floated, his firm with 60 employees would have roughly the same $3 billion market cap as LG Electronics, with 30,000 employees.

One response was to start spinning off Internet units--as Cheil Jedang did with Dreamline. Another was to let up a bit on the formality and the seniority worship. Many of the chaebol retain huge financial clout and have been using their own venture and other arms to explore Internet investments. Most significant, though, both New Korea and Old began realizing that with the chaebol's distribution power and brand names, the startups and the old-timers could be of use to each other. A lot of the marketing integration that Yeom envisions for Yahoo is with the chaebol, and when Jerry Yang visited Seoul in February, one of the things he did was to sign a deal with Samsung.

However embryonic the shape of Korea's Internet industry, its basic strengths make it certain to be of major importance soon--provided a stock market derailment does not put the day off. Actually, cooling the feverish pace would be a good thing. Kosdaq IPOs like Daum and Dreamline routinely rise 50-fold or more in the first couple of months after going public, and stocks listed there turn over on average 12 times a year, three to four times as fast as on Nasdaq. This is especially alarming because, as Softbank's Greg Moon puts it, too many new companies are built on stock "supply and demand" models rather than on concrete business plans.

Not everyone agrees this is a bubble--the Dutch bank ABN Amro argues that on an earnings basis, Korean tech stocks as a whole are actually cheaper than the still miserable nontech ones and will continue to be through 2001--but to an outsider it shimmers and squeaks like one. At the least, Kosdaq is extremely volatile: After rising 240% in 1999, in ten days in mid-March the index fell 20%--and in early April swung violently in Nasdaq's wake. Worse yet, the entire matter is becoming politicized as the government frets about how much Kosdaq is outstripping the traditional Korean stock exchange, where most Koreans still have their savings, and calls in big stockbrokers to discuss it. Yahoo Korea--which should be by far the hottest Korean IPO this year--is being very tightlipped about where it is going to list (if at all), and this may be the reason why.

Even so, the odds are that none of this will shake Tehran Street for long. One thing though: They might think--and in fact already are thinking--about coming up with a new name for it. Clerics and clicks don't naturally mix.

TAIWAN is no longer just a center for high-tech manufacturing. Its software engineers and entrepreneurs are turning it into a dot-com startup machine. In the forefront of this movement is Jeffrey Koo and his Internet empire. By Neel Chowdhury

As Jeffrey Koo Jr. tells it, he stumbled onto the Web through dumb luck. About three years ago, just before Asia's financial crisis hit, this young heir to Taiwan's venerable conglomerate, the Koos Group, was poised to invest the $430 million in cash he had raised for his new venture capital fund in all sorts of old-economy companies. Luckily for Koo, disaster struck. "A week after our fund closed, Thailand collapsed," recalls Koo. "I couldn't do a single investment for more than six months. My father insisted we just watch."

As Koo scanned Asia's horizons for deals amid the financial carnage, his eye kept wandering to the fortunes being made by Asians in Silicon Valley. "I knew Softbank's Masayoshi Son and Yahoo's Jerry Yang personally, and I was astounded by their success," Koo says.

Today the 35-year-old Koo has become the Internet king of Taiwan. He controls Bex.com, an online company that acts as middleman between Western computer makers, such as IBM and Hewlett-Packard, and their Asian suppliers. He also founded GigaMedia, which delivers broadband services like online karaoke and on-demand movies to PCs (and, in about six months, to televisions and mobile phones as well). "We'd love to be the Chinese AOL Time Warner," he declares.

It's no surprise that Koo has gotten off to such a quick start. After all, Taiwan has been a hotbed for other high-tech businesses, like PC screens and microchips; why should e-commerce be any different? In fact, Taiwan has nourished thousands of new e-company startups over the past two years by offering low corporate taxes, a minimum of red tape, and as much as $3 billion in venture capital raised by more than 100 private funds. That money is chasing a fast-growing market of Internet users. Today nearly two million people use the Net, giving Taiwan the fourth-largest online population in Asia. Goldman Sachs estimates the pool will grow on average 37% annually for the next three years.

Jeffrey Koo was in a great position to capitalize on these trends. He is the scion of a tightly controlled family empire that got its start in the 19th century on the rugged western coast of Taiwan, where Koo ancestors loaded gems and timber onto the ships of passing Dutch and Portuguese traders. Over the years the family grew into a powerhouse, controlling not only trade and banking but media and broadcasting as well. Koo believed he could meld his family's media empire with the Web and create a blockbuster Internet company.

This Wharton MBA says that the idea for his new company was hatched in 1998 after he traveled to the U.S. to meet with Microsoft's Bill Gates and Steve Ballmer. As Koo recalls, "The visit to Microsoft was a turning point. I saw Microsoft's vision for cable in the U.S., and that really opened my eyes." Like Gates, who has spent billions buying cable systems in the U.S. to control the fat pipes that will carry broadband services, Koo is also betting big on cable TV-based and wireless broadband services. But unlike Gates, who must do deals with other cable giants like Time Warner and AT&T to reach a critical mass of customers, the Koos family singlehandedly owns big stakes in Taiwan's cable television system. That made it easy for Koo to persuade local cable operators to carry GigaMedia's broadband service. In less than a year he signed up 100,000 customers out of 3.4 million cable subscribers in Taiwan.

In fact, Microsoft was so impressed with GigaMedia that in mid-1999 it bought 9% of the company for $35 million, a stake now worth upwards of $300 million, thanks to Giga's successful initial public offering on Nasdaq last February. The Koos' 60% stake in GigaMedia, whose stock has more than doubled since the IPO, is now worth more than $2 billion. "We can do a lot of things with this funny money," says Koo, perhaps only partly in jest. Acquiring cool content, though, won't be a big expense. Because the Koos also own Taiwan's most popular television and radio stations, as well as a gaggle of cable-based sports and news channels, they were able to stuff GigaMedia with Chinese-language content almost from the start. Being based in Taiwan, a fountainhead of pop music and movies for the entire Chinese-speaking world (the "Hollywood of the East," as GigaMedia CEO Raymond Chang describes it), also means there's a plethora of relatively cheap content providers nearby.

Here's the real clincher, though. Because the Koos-owned Chinatrust bank is one of the biggest banks and credit card issuers in Taiwan, Koo has managed to integrate his e-commerce billing systems with his customers' bank accounts almost seamlessly, a feat that has eluded most Web ventures in Asia. Says GigaMedia's Chang: "Chinatrust has played a very important role in the growth of GigaMedia. To make e-commerce safe over our network, we needed a strong financial institution like them behind us."

There's just one tiny problem for Koo. He lives in Hong Kong, and his name is Richard Li. Since Li's audacious acquisition of Cable & Wireless Hong Kong Telecom (a $35 billion bauble, purchased largely with stock from his company, Pacific Century Cyberworks), Li's business model is beginning to mirror Koo's.

Both men are betting big on broadband. And both realize that to create killer content is not enough. Both must also possess the cable and telecom infrastructure that will carry the content. The question is, though: As both Koo and Li venture out of their home turf and try to grab the Greater China market, an ambition neither has been shy about, who will walk away with the big prize of China?

By 2003, China will be the third-largest e-commerce market in Asia, according to International Data Corp., with annual e-commerce sales exceeding $3.8 billion. More significant, analysts predict that most of that coming e-commerce traffic in China will be conducted over broadband devices like mobile phones and televisions. Why? Partly out of a cultural affinity for high-tech gadgets and partly because PCs are still a novelty item in most Chinese households, whereas mobile phones and televisions are not. (There are 50 million mobile-phone users and 450 million television sets in China, vs. only 20 million PCs, estimates Credit Suisse First Boston.) If Koo and Li can grab a big chunk of broadband e-commerce in China--and so far their Chinese-language content has made them the most powerful players in this market--both could walk away with a fortune.

When it comes to attacking the Chinese market--not to mention the rest of Asia-- Koo has an extra arrow in his quiver. Koo's Bex.com, headquartered in Singapore, is positioning itself as an indispensable middleman between Asia and the rest of the world. The company, with revenues in 1999 of just under $30 million (the company is private and won't release profits), handles online what can be an arduous billing and payment process between Asian suppliers and Western multinationals.

The company hopes to capitalize on the red-hot computer and electronics market. Of Singapore's $100 billion in exports last year, for example, 66% was in electronic goods. Even in Indonesia, Asia's economic laggard, a tenth of all exports are electronics-related. For Asian economies, hugely dependent on a constant two-way flow of cash and components, middleman services are vital. "America is the biggest buyer of electronic goods in the world, and Asia is the biggest seller," Koo says. "Bex is where they will meet."

Here's why he thinks so. Take, for example, Tatung, a diversified Taiwanese electronics supplier. Recently it got an order for color monitors from IBM. Because Big Blue needed those monitors quickly to graft them onto its laptops before expensive inventory piled up, Tatung turned to Bex, which has devised an Internet-based payment system allowing Tatung to bypass time-consuming letters of credit and invoicing hassles. According to Bex CEO Yong Voon Fee, Bex's Internet service will eventually replace the older electronic data interchange (EDI) systems that now largely control supply-chain management in Asia. If Bex fulfills that promise (a Nasdaq listing is in the cards before the end of this year), it could be the leader in a critical niche of Asian B2B e-commerce. So far the odds look good. Says Pratik Gupta, a Singapore-based Asian Internet analyst for Salomon Smith Barney: "Bex is in the same league as Ariba and Commerce One in the U.S."

One thing the story of Jeffrey Koo suggests is that Taiwan is no longer just a maker of chips and PCs. Today the island is brimming with talented software engineers and entrepreneurs who are likely to transform the place into a global Internet player. And Koo wouldn't have it any other way.

HONG KONG is buzzing with risky dot-com startups that may--or may not--turn into great companies. The real action, however, may be in old-line firms like Li & Fung that are finding new ways to expand their business on the Web. By Louis Kraar

Hong Kong has gone Internet-crazy. Over the past few months a slew of startup Web companies with lots of promise but no products or profits have been driven to sky-high valuations, only to shed billions in the recent market meltdown. Yes, the dot-com game will continue, but a new trend is emerging. It seems that some old-line Hong Kong companies with solid profits are now getting into the game.

No one fits this description better than Li & Fung, a 94-year-old family trading company that manages the global production of items like clothes, sneakers, and teddy bears for big multinationals such as the Limited and Reebok. Li & Fung has just launched a new B2B company called lifung.com that caters to small retailers and promises to dramatically expand its traditional business. Says William Fung, 51, managing director: "The Internet gives us a cost-effective tool for reaching a whole new segment of customers." In fact, brokerage house HSBC Securities expects that within five years, lifung.com will generate $2 billion in annual sales--the parent company's total revenues last year.

One thing investors like--especially those who have been bruised by Hong Kong's brutal dot-com selloff--is that Li & Fung is no Internet fly-by-night. In late March the company announced that its earnings last year rose 26%, to nearly $74 million. Goldman Sachs then placed $250 million of Li & Fung shares with institutional investors--within 20 minutes. Proceeds from the stock sale will fund the lifung.com business. Remarks Tim Dattals, head of investment banking in Asia for Goldman Sachs: "This isn't some fluffy, hyped-up company projecting a great future, but a proven and profitable operation that is using the Internet to reach a whole new universe of customers." In fact, Li & Fung has handily outperformed the market over the past six months, rising 104%, vs. only 23% for the Hang Seng index.

The market seems to be betting on the Fung brothers, William and Victor. Both have Harvard MBAs, and lots of energy and ideas. Victor Fung, 54, is the company's chairman and chief strategist, as well as chairman of both the investment bank Prudential Asia and the Hong Kong Trade Development Council; William runs the business. As William half-jokingly puts it, "Victor is the deep thinker, and I just make the money."

The younger Fung does just that by quickly and cheaply delivering distinctive products for each of his clients. With 47 offices in 31 countries, Li & Fung links clients to some 6,000 independent suppliers, from Mauritius to Mexico. Costs are squeezed by breaking production into stages and assigning parts to the most economical locations. Lately the best combination for turning out polo shirts, for example, has been shipping American cotton to China for weaving and dyeing, then to Bangladesh for sewing.

Beginning this summer, the new lifung.com will offer some of the same big-client service to small and medium-sized retailers. Right now, a small retailer that orders merely 1,000 polo shirts via an importer, for instance, usually can get them in just one color. The lifung.com Website is designed to take fairly small orders, consolidate them for mass production, and still offer the little guy some choices for customizing products. Clients can order polo shirts, for example, on a Web page that provides a 3-D picture of the basic product, with choices of fabrics and prices. Each buyer can design his own polo shirt online by choosing from among 14 colors, plus many options for collars, buttons, pockets, and have his own logo placed on the garment. Most of this limited customizing will add nothing to the cost.

How will Li & Fung keep that Internet service from cannibalizing its main business? William expects that a few large companies, such as a supermarket that needs a small order of toys, will use the Web service. Most big clients, however, order such a broad line of goods that they require a lot more personal attention, which Li & Fung will still deliver in its usual hands-on way.