MBW Explains are a series of analytical features that explore the background behind major music industry stories and suggest what might happen next.
what’s happened?
South Korea’s leading K-pop label is gearing up to transform itself into a global music giant. The latest move in the effort was Kakao Entertainment and SM Entertainment’s announcement last Tuesday (August 1) to establish a joint North American division.
The move marks a milestone in the integration of Kakao and SM. Earlier this year, Kakao effectively took control of SM after a fierce battle for control with rival K-pop label HYBE.
The new company will promote artists from both companies, including Kakao’s Starship Entertainment girl group “IVE” and SM groups such as Girls’ Generation, aespa, and NCT.
But that’s just the beginning. The primary purpose of this new North American corporation is to be the starting point for global expansion of cacao/SM far beyond K-POP.
Kakao and SM explained, “North America is the center of the global entertainment industry, and the combined corporation will be a solid foundation for business cooperation and knowledge sharing.” Joint statement.
“Both companies plan to expand their presence in global markets, including Europe, to strengthen their presence as major players.” [in the] global music industry. “
The move will put additional pressure on HYBE to accelerate its global expansion plans. HYBE is his highest-grossing K-pop label in South Korea, and its flagship group, BTS, is his number one K-pop artist in the world. Only BTS in 2018 1.7% of South Korea’s consumer goods exports.
Earlier this year, during a dispute with HYBE over control of SM Entertainment, Kakao struck by telegram It announced its intention to launch a North American joint venture with SM, and announced that it would establish a joint venture with SM in December last year and that Joseph Chan, Kakao Entertainment’s head of global strategy, would lead the new company. (Mr. Chan is also currently the Chief Business Officer of SM Entertainment.)
Those plans were nearly derailed by HYBE, who toyed with HYBE when SM Entertainment agreed to buy it in February of this year. 14.8% The company received praise from Lee Soo-man, the founder of SM. The dispute between HYBE and Kakao, which involved lawsuits and public accusations of wrongdoing, ended in March when HYBE abandoned its tender offer and Kakao made a takeover offer. 39.9% Acquired SM shares, effectively giving SM control of the company.
The struggle for control has subsided, but its aftermath continues. In April, South Korean financial regulators reportedly raided SM Entertainment’s office as part of an investigation into allegations of stock manipulation by Kakao, which is in the midst of a takeover bid.
what is the context?
Like other successful South Korean companies (Hyundai, Samsung, LG, etc.), the biggest K-pop labels are also in the race to become global powerhouses.
So far, HYBE has made the most progress. The biggest move so far is the 2021 acquisition of Ithaca Holdings, a company run by renowned music manager Scooter Braun, known for managing Ariana Grande, Justin Bieber and Demi Lovato. $1.05 billion.
Led by Brown, HYBE’s new U.S. subsidiary, now called HYBE America, was acquired earlier this year by rap giant QC Media Holdings, headquartered in Atlanta, home to hip-hop artists such as Lil Baby, Migos and City Girls. (also known as Quality Control) was acquired.
Around the same time, HYBE founder and chairman Bang Si-hyuk said in an open letter that the company aims to “stand shoulder-to-shoulder with the world’s major record labels.”
The following month (and days after HYBE withdrew its bid for SM), Van told Korean journalists The company wants to acquire two music labels in the Americas.
“We are looking to acquire top Latin American labels that share similar philosophies with us and are interested in future innovation,” Bang said. “At the same time, we’re keeping an eye on one or two of his favorite producer labels in the US.”
This suggests that HYBE may be looking to capitalize on Latin music, which has become popular globally in recent years, similar to K-pop.Around the same time, Ban also told CNN He is interested in both Latin music and Afrobeat as potential investment areas.
according to report and bloombergHYBE is busy with several fundraising. $380 million Western Hemisphere deal value – though sources told MBW that amount may actually be closer to that billion dollars.
Meanwhile, Kakao and SM Entertainment are making their own moves into the broader global music business.
Kakao Entertainment announced in January that it had secured an investment worth $20 million. $966 million Funding from the “Leading Sovereign Wealth Fund” will be used to accelerate the global growth of its three business divisions: stories (webtoons and web novels), media and music.
korean herald explained this as the largest cash injection ever “received by a content company” in South Korea.
“We are considering acquiring a leading Latin American label that shares similar philosophies with us and is interested in future innovation. We are also looking at one or two labels.”
Bang Si Hyuk, HYBE
A few months later, Kakao formed a partnership with Sony Music’s Columbia Records, beginning with the joint global management of K-pop group IVE, one of Kakao’s Starship Entertainment highlights.
SM Entertainment established its Southeast Asia headquarters in Singapore, strategic partnership Partnered with Tencent Music Entertainment, one of the leading companies in China’s music streaming industry.
SM has announced plans to expand into the Middle East in 2022. In a memorandum of understanding (MOU) with the Saudi government, SM said it would promote S-POP (Saudi Pop) artists through discovering and producing local artists. The company also said it plans to establish a “metaverse platform for sharing Korean and Saudi cultures.”
And in March of this year, SM revealed in an investor presentation that it planned to spend: 200 billion Korean Won (almost US$150 million (at the time) about acquisitions in the United States. The company said it was particularly interested in investing in hip-hop and R&B.
The company also said it is exploring investment opportunities in Japan and Southeast Asia.
All of this means that the new teams of Kakao and SM are gnawing at HYBE’s toes, with the latter doing well with overseas acquisitions and under pressure to be more aggressive with further acquisitions. may be exposed.
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, commonly regarded as the third-largest K-pop label after HYBE and SM, entered into a strategic partnership with Universal Music Group’s Republic Records in 2020, and announced that partnership in June of this year. announced an expansion. . With this new expanded deal, Republic and JYP will jointly manage and promote JYP’s artist roster around the world.
what happens next?
In the future, attention will be focused on where HYBE and Kakao/SM will invest hundreds of millions of dollars in investment funds.
The two rivals could compete for acquisitions in the U.S. and other markets. With so much interest from well-funded people, this would be a boon for music companies that put themselves up for sale. Buyers will inevitably inflate the selling price.
So far, analysts are optimistic about the outlook for HYBE and cacao/SM. Both companies are believed to have plenty of headroom for future investments, thanks to strong cash flows from their operations in South Korea. Both companies have seen repeated upward revisions to their earnings forecasts from analysts.
However, both Hibe and SM They suffer from a similar weakness – their stock trades at a very high multiple to earnings. That makes them particularly vulnerable to future market downturns. If investors get frustrated with them, their ability to finance acquisitions can quickly evaporate.
Analysts also say the companies’ earnings tend to be lower than expected, making them even more vulnerable during market downturns.
“With North America being the center of the global entertainment industry, the combined entity will serve as a solid foundation for business collaboration and knowledge sharing. We plan to expand our presence in the global market, including [in the] global music industry. “
Kakao, SM Entertainment
But so far, the music industry has shown strong quarterly profit growth, and as long as that continues, investors will likely continue to have plenty of money for acquisitions.
Still, K-pop companies may run into the issue of takeovers, or market dominance of the big three record companies.
If these companies feel threatened to their market position, they may become less aggressive in signing deals with South Korean challengers. They may also choose to compete with K-pop labels in acquiring independent labels.
Here we come to our final thoughts…
final thoughts
Over the past few decades, Korean companies, especially giants, have zaibatsu The companies that dominate the nation’s economy have proven to be truly adept at global expansion.
Witness, for example, the phenomenal success of Samsung, which has grown into a powerhouse in the consumer electronics industry over the decades. while 20% and twenty two% In today’s smartphone market, it’s the only company in the world that can definitively claim to be a competitor to Apple’s iPhone.
Meanwhile, LG, a conglomerate whose name was largely unknown outside of South Korea until the 2000s, has established itself as a leader in the consumer electronics market. frequently sold out Whirlpool once ruled the United States.now it controls 17% Global TV market (inclusive) how 60% top of the OLED TV market).
All of this means that the coordinated efforts of well-funded South Korean companies to expand globally should not be underestimated.
Today’s music giants may feel little pressure right now from a music company known primarily for K-pop artists. But decades ago, Panasonic and Whirlpool saw little of LG’s threat.global music business
