MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next.
South Korea’s major K-pop labels are working to transform themselves into global music giants. The latest move in that effort came when Kakao Entertainment and SM Entertainment announced last Tuesday (August 1) that they’re setting up a joint North American division.
The move marks a milestone in the integration of Kakao with SM, which the former effectively took control of earlier this year, following a contentious battle for control with rival and leading K-pop label HYBE.
The new company will promote artists from both firms’ rosters, such as Kakao-owned Starship Entertainment’s girl group IVE, and SM groups like Girls’ Generation, aespa and NCT.
But that’s just the beginning. The larger point of this new North American corporation is to act as the springboard for a global expansion of Kakao/SM that will reach well beyond K-pop.
“With North America being the hub of the global entertainment industry, the integrated corporation will serve as a solid foundation for business cooperation and knowledge sharing,” Kakao and SM explained in a joint statement.
“The companies plan to expand their reach into global markets, including Europe, in order to strengthen their presence as a key player [in the] global music industry.”
The move ratchets up the pressure on HYBE to accelerate its own global expansion plans. HYBE is South Korea’s biggest-selling K-pop label, and its flagship group, BTS, is the world’s number-one K-pop act. In 2018, BTS alone accounted for 1.7% of South Korea’s consumer goods exports.
Amid its battle with HYBE for control of SM Entertainment earlier this year, Kakao had telegraphed its intentions to build a joint North American venture with SM, announcing it had set up a joint company with SM last December, and that Joseph Chang, Kakao Entertainment’s Global Strategy Officer, would head the new firm. (Chang is now also Chief Business Officer for SM Entertainment.)
Those plans were almost scuttled by HYBE, which made a play for SM Entertainment when it agreed in February of this year to buy 14.8% of the company from SM’s founder, Lee Soo-man. The fight between HYBE and Kakao, which involved litigation and public accusations of wrongdoing, ended in March, after HYBE gave up on its takeover bid and Kakao took a 39.9% stake in SM, effectively giving it control of the company.
Though the dust has settled in the fight for control, the fallout continues. This past April, South Korea’s financial regulator raided the offices of SM Entertainment, reportedly as part of an investigation into alleged stock price manipulation by Kakao during the takeover battle.
WHAT’S THE CONTEXT?
Like other successful South Korean businesses before them (think Hyundai, Samsung and LG), the largest K-pop labels are engaged in a race to become major global players.
So far, HYBE has made the most progress. Its biggest move so far was the 2021 acquisition of Ithaca Holdings – the company run by famed music manager Scooter Braun, known for managing Ariana Grande, Justin Bieber, Demi Lovato and others – for USD $1.05 billion.
With Braun at its head, HYBE’s new US subsidiary, now dubbed HYBE America, earlier this year acquired Atlanta-headquartered rap powerhouse QC Media Holdings, aka Quality Control, home of hip-hop acts such as Lil Baby, Migos and City Girls.
The following month (and days after HYBE dropped its bid for SM), Bang told South Korean journalists the company wants to acquire two music labels in the Americas.
“We are considering the acquisition of a top-tier label in Latin America that shares a similar philosophy to ours and is interested in future innovation,” Bang said. “At the same time, we are keeping an eye on one or two labels of hot producers in the US.”
This indicated that HYBE may be looking to capitalize on Latin music, which – like K-pop – has experienced a worldwide boom in popularity in recent years. Around the same time, Bang told CNN he’s interested in both Latin music and afrobeats as areas of potential investment.
According to a report at Bloomberg, HYBE has been busy raising some $380 million for its acquisitions in the Western Hemisphere – although sources told MBW that amount may actually be closer to $1 billion.
Meanwhile, Kakao and SM Entertainment have been making their own moves into the broader global music business.
Kakao Entertainment announced in January of this year that it had secured investments worth the equivalent of $966 million from “leading sovereign wealth funds,” money it plans to use to accelerate global growth in its three business divisions – Story (webtoons and web novels), Media and Music.
The Korea Herald described this as the largest cash injection “ever received by a content company” in South Korea.
“We are considering the acquisition of a top-tier label in Latin America that shares a similar philosophy to ours and is interested in future innovation. At the same time, we are keeping an eye on one or two labels of hot producers in the US.”
Bang Si-hyuk, HYBE
A few months later, Kakao inked a partnership with Sony Music’s Columbia Records, which would begin with joint global management of K-pop group IVE, one of the rising stars at Kakao’s Starship Entertainment.
For its part, SM Entertainment has been following a global expansion strategy that includes establishing a Southeast Asian headquarters in Singapore and a strategic partnership with Tencent Music Entertainment, one of the key players in China’s music streaming industry.
In 2022, SM announced plans to expand into the Middle East. In a memorandum of understanding (MOU) with the government of Saudi Arabia, SM said it would promote S-pop (Saudi pop) artists through the discovery and production of local artists. The company also said it plans to establish “a metaverse platform to share Korean and Saudi culture.”
And in March of this year, SM revealed in an investor presentation that it plans to spend 200 billion South Korean won (roughly USD $150 million at the time) on acquisitions in the US. The company said it’s specifically eyeing investments in hip-hop and R&B.
The company also said it’s looking at investment opportunities in Japan and Southeast Asia.
All of which means that the new team of Kakao and SM are nipping on the toes of HYBE, and the latter could find itself under pressure to show results from its overseas acquisitions – and to move more aggressively in pursuing further acquisitions.
And it’s worth noting that HYBE and Kakao/SM aren’t the only K-pop labels looking for a foothold in the global music market.
One example: JYP Entertainment – generally considered to be the number-three K-pop label, behind HYBE and SM – inked a strategic alliance with Universal Music Group’s Republic Records back in 2020, and announced an expansion of that partnership in June of this year. The new, expanded deal will see Republic and JYP jointly manage and promote JYP’s roster of artists worldwide.
WHAT HAPPENS NEXT?
All eyes will now be on HYBE and Kakao/SM to see where they put their hundreds of millions of investment cash.
It may prove to be the case that the two rival entities will find themselves competing for acquisitions in the US market and beyond – which would be to the benefit of any music companies that put themselves up for sale, as this much interest from deep-pocketed buyers is sure to inflate their selling price.
So far, analysts are optimistic about HYBE’s and Kakao/SM’s prospects. Thanks to solid cash flow from their Korean acts, both companies are seen as having significant leeway for future investments. Both companies have seen recurring upgrades to their earnings outlook from analysts.
However, both HYBE and SM suffer from a similar weakness – their stocks trade at very high multiples relative to earnings. That makes them particularly vulnerable to any future market downturn. Should investors sour on them, their ability to raise money for acquisitions could evaporate quickly.
Analysts have also noted that both companies’ earnings tend to come in below estimates, making them even more vulnerable in a market downturn.
“With North America being the hub of the global entertainment industry, the integrated corporation will serve as a solid foundation for business cooperation and knowledge sharing. The companies plan to expand their reach into global markets, including Europe, in order to strengthen their presence as a key player [in the] global music industry.”
Kakao, SM Entertainment
But for now, the music industry is showing strong earnings growth quarter after quarter, and as long as that remains the case, investor cash for acquisitions is likely to remain plentiful.
Even so, the K-pop companies may run into a problem with acquisitions, namely the market dominance of the big three recording companies.
Should those companies smell a threat to their market position, they may become far less open to signing deals with their South Korean challengers. They may also choose to compete against the K-pop labels in the acquisitions of indie labels.
Which brings us to a final thought…
A FINAL THOUGHT
Over the past several decades, South Korean businesses – particularly the giant chaebol that dominate the country’s economy – have proven truly adept at global expansion.
Witness, for instance, the incredible success of Samsung, a company that has built itself into a consumer electronics powerhouse in the space of a few decades, controlling between 20% and 22% of the smartphone market today – the only company in the world that can credibly claim to be a rival to Apple’s iPhone.
Meanwhile, LG – a chaebol whose name was largely unknown in the world outside South Korea until the 2000s – has established itself as a market leader in home appliances, frequently outselling the once-dominant Whirlpool in the US. It now controls 17% of the global television market (including a whopping 60% of the OLED TV market).
All of which is to say that a concerted push for global expansion by deep-pocketed South Korean companies should not be underestimated.
Today’s giants of music may feel little pressure at the moment from music companies known primarily for their K-pop acts. But a few decades ago, Panasonic and Whirlpool saw little threat from LG.Music Business Worldwide