4 The Economics of the K-Pop Industry

The Economics of the K-Pop Industry By: Adisri Swain, (Christ University, Bengaluru)

Introduction

Ever since Korean Pop (K-Pop) grew in popularity in the 2000s, it has evolved into a 5-billiondollar global industry.

HYBE Corporation, formerly known as Big Hit Entertainment ranked number one in business sales in 2018, according to South Korea's Financial Supervisory Service. The sales amounted to over ₩64.1 billion, which is seven times their main competitor— YG Entertainment's sales.

HYBE’s value rose over ₩1 Trillion and is expected to grow in value with its ever-growing acquisitions and success.

However, HYBE was on the verge of bankruptcy in 2007 and barely managed to survive in the competitive oligopoly market dominated by other recognised entertainment agencies, namely: SM Entertainment, JYP Entertainment, YG Entertainment. Although HYBE had multiple artists under them, it was not until their main band— BTS launched in 2013 that HYBE’s financials flourished.

Currently, the founder, Bang Si-Hyuk, is worth $770 million while HYBE Entertainment is worth an estimated $2 billion.

By 2019, the company's profit soared 97% from the year prior, hauling in around $57 million in pre-tax income— which made them the 43rd highest-paid entertainers in the Forbes list.

Most attribute this growth to the differentiation strategies and positive image HYBE adopted to market BTS to the public. An environment was created for artists at HYBE to have the freedom to write and produce their music with a focus on performance. This was observed in contrast to their competitors who micromanaged every aspect of the artist's lives.

While HYBE was still a start-up company, its competitors were established agencies with funds allocated exclusively for influential promotion and marketing. Since it was difficult for HYBE Entertainment to match the same level of media exposure as their competitors, they effectively used social media to adopt an unconventional expansion approach targeting non-price

competition.

Recent Developments

In October 2020, Big Hit went public by launching its IPO and collected $50 billion in deposits. The shares were oversubscribed at a rate of 606.97: 1, the second-highest subscription amount to date. Based on the finalised subscription rate, the investors who made a ₩100 million deposit

yielded two shares worth $232 since Big Hit previously set the IPO price to $116. In Q1 2021, HYBE had the highest net income of $14 million, an operating profit of over $19 million, and its revenue amounted to $158 million. This amount of revenue is even more impressive considering that HYBE didn't have any comebacks from its labels artists. It underwent a major change this year after a rebrand from Big Hit entertainment to HYBE, which included the acquisition of US company Ithaca Holdings. Compared to the company’s performance in Q1 2020, the figures

marked a 29% rise in revenue and a 9% increase in operating profit. HYBE also reported that it had seen a significant increase in revenue from merchandise sales, licensing, and artist-related content. Revenue from artist-related merchandise sales rose by 89% to $57.5 million, while revenue from artist-related content soared by a whopping 360% to $33 million. Revenue from advertising and artist appearances also rose by 63%, while revenue from fan clubs increased by 24%. Additionally, the global fan community platform Weverse reported an average of 5 million monthly active users for Q1 2021.

Graph 1: (October 2020-Present) Big Hit Entertainment Stock (Source: markets.businessinsider.com)

Strategies of Expansion

BTS reached out to their global fanbase during the early stages of social media, much earlier than their competitors. This plan of action not only made their success and growth rise exponentially but also helped in being accessible to a broader group of people, all while being profitable. Starting in 2010, HYBE Corporation built a professional video content team that created exclusive content for its target fans.

Incorporating an effective consumer engagement strategy proved to be immensely successful as it led to sold-out concert stadiums, historic sale records and being the most admired celebrities on Twitter, all as a result of a loyal consumer base.

Television was the traditional primary platform to gain visibility which determined the survival of K-Pop artists in the cutthroat music industry. In contrast, BTS used social media to make themselves recognisable in every part of the world through active interaction with their audience. As opposed to their competitors, HYBE did not spend a fortune on forgettable advertising which made their operations much more cost-effective in comparison.

Although SM Entertainment, a rival to HYBE, had an infrastructural head start advantage, HYBE quickly caught up. It later surpassed them with a 26% net profit margin in 2018 and much larger audience retention.

Graph 2: HYBE vs SM Entertainment Closing Price (Source-The Korea Economic)

The expansion priorities for HYBE to appeal to transnational markets are to expand its value chain and enhance the audience experience. HYBE proceeded to enter the US and global market directly, in contrast to other agencies which tend to restrict their foothold to the Asian market. YG Entertainment and JYP Entertainment had previously attempted to enter the western markets but had failed in doing so. The arrival of HYBE’s BTS during the right time helped maintain a global

as well as local presence. It made them known as the flag bearers of facilitating the globalisation of the Korean Pop industry. Subsequently, a magnifying domino effect marked the significant

success of the Oligopoly industry as a whole.

By collaborating with influential music personalities and incorporating English in their songs, the group ensured their presence as a household name in the US too.

For concerts held in May 2019 in the US, the individual tickets had costs ranging from $55 to $250, and over 200,000 people combined were a part of the concerts. Sales from the two concerts amounted to $14 million. Their tour grossed around $44 million from merely six shows in the US.

BTS also released two concert films which combinedly added another $30 million to their cash flow. eBay Korea witnessed a 50% increase in April 2019 in their merchandise sales.

The main contributors to the success of HYBE are primarily through music, merchandise and album sales, concerts, brand collaborations. Their collaborations are varied with diverse retailers such as Hyundai, Coca-Cola, McDonald’s, Louis Vuitton, Samsung, Puma, Converse, which helps

reach a wide-ranging audience across all age groups.

BTS alone contributes about $3.6 Billion to the Korean Economy every year, which continues to increase with each passing year. In addition to this, it also contributes around $1 billion in consumer exports. The influence of BTS is extensive to the point where 1 in every 13 or 800,000 foreign tourists visited South Korea due to them.

BTS partnered with the government for a tourism campaign named Visit Seoul, which further boosted tourism. The band releases music in abundance throughout the year, which ensures powerful consumer loyalty.

HYBE’s value chain activities utilised their demand remarkably to acquire, train, develop,

market, target, and distribute their brand value. They observed the market and anticipated the decisions of their competitors strategically, which made them outmatch the rest.

According to Hannah Financial Group, HYBE’s sales and operating profit in Q3 2021 are expected to record high returns of ₩342.6 billion and ₩72 billion respectively, contributing immensely in

economic value for the South Korean economy.

References

● https://www.musicbusinessworldwide.com/bts-label-big-hit-hybe-generated-161m-inrevenues-in-q1-up-29-year-on-year/ ● https://www.billboard.com/articles/business/9466518/bts-big-hit-entertainment-ipostock-market-debut-share-price ● https://time.com/5899791/bts-bighit-ipo/ ● https://youtu.be/4BRRtTVdkJk ● https://youtu.be/vpNlwap2YoQ

● https://www.researchgate.net/profile/KerenObara/publication/350185731_Big_Hit_Entert ainment_evolves_into_HYBE_Corporation/links/6054b28ba6fdccbfeaf0a379/Big-Hit-

Entertainment-evolves-into-HYBE-Corporation.pdf