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In the world of K-pop, tattle about the latest scandal or rumour involving a Korean pop star is not just light entertainment — it’s market-moving information. Even the smallest details of a star’s personal life can affect share prices of South Korean entertainment companies. Yet, there is a risk greater than celebrity drama: political tensions.
For K-pop entertainment companies, fandom has become as valuable as album sales and streaming revenue. K-pop groups make their fortune through a combination of concerts, brand endorsements, merchandise sales and sponsorships, which account for about three-quarters of total revenue. All this is fuelled by fan engagement.
This model relies on scale. The larger the fan base, the more opportunities for revenue generation. K-pop’s biggest constraint, at present, is the size of its home market.
South Korea’s population of about 52mn limits domestic growth, making exports crucial to the business model. China, with 1.4bn people, was the main driver behind K-pop’s international growth until 2016. Beijing imposed an unofficial ban on the industry after South Korea agreed to host the US military’s Thaad missile system.
Since then, the industry has faced significant challenges, with performances and content blocked and entertainment companies suffering a drastic drop in concert sales and overall revenue. Hopes of recovery have been repeatedly delayed, as ongoing uncertainty and false starts have stalled the industry’s efforts to reclaim once lucrative Chinese revenue streams.
It might finally be time for a comeback. Last week, Chinese tech giant Tencent, bought a nearly 10 per cent stake in SM Entertainment, one of the largest names in the sector, for about $180mn. That was a 15 per cent discount to the market price, reflecting geopolitical risk and the liquidity constraints associated with large private placements.
This rare move signals a potential thaw in K-pop’s relationship with China and gradual return of K-pop’s presence in China, albeit with a slightly different dynamic. Tencent, one of the largest Chinese groups in music and social media, could now pave the way for a new model of K-pop distribution across China leveraging its vast platforms, and help bypass some of the past geopolitical friction.
For Tencent, it represents a low cost, low risk entry into a global growth trend. The share prices of the four largest K-pop entertainment groups, SM, YG, JYP and Hybe have gained more than 30 per cent in the past year, reflecting renewed optimism.
So it seems the clouds are lifting for K-pop — although the industry is growing more dependent on overseas markets and cross-border partnerships for growth and profitability. The industry will continue to generate masses of entertainment gossip, but the political kind increasingly matters too.
june.yoon@ft.com
