Kakao
After the anticlimactic ending of HYBE vs. Kakao rivalry, Kakao will acquire SM Entertainment. What does it mean?
It was a tough week for me. I was completely consumed by my other line of work day and night while noticing the perfect timing to cover this topic was slipping away. I wished I had written this newsletter while the rivalry was going on — which would have made it much more interesting than it should be.
I will quickly review the development after I sent out the last newsletter. I hastily concluded that HYBE had the upper hand after the court blocked SM Ent. from selling new shares to Kakao. However, after all, the share that HYBE secured — which was slightly less than 20% due to the failure of the tender offer — was far from enough to declare victory. The court decision wasn’t that helpful when Kakao upped the ante. The following is what happened:
3/7/23
Kakao made a tender offer to buy SM Ent. at 15,000 KRW per share. The price was justifiable because the stock price was already approaching 15,000 KRW on March 7. However, the price tag is colossal. To secure the acquisition, it would have to spend 1.25T KRW, which is equivalent to 1B USD. It’s a lot of money even with the investments from Saudi Arabia and Singapore.13/12/23
After the meeting between the executives from HYBE and Kakao on March 10, each company made a statement on March 12. They had agreed that HYBE wouldn’t compete against Kakao for the acquisition of SM Ent., although both companies will cooperate on their “platform”2 business. In their statements, HYBE put stress on the “shareholder value” and Kakao doubled down on its “SM 3.0”3 roadmaps.
In short, Kakao went all-in and HYBE folded. Spectators went home. The winners included those who bought SM Ent. cheap and made a profit, enjoying the sweet volatility.
Finally, after two and a half newsletters, I can stop beating around the bush.
Now, what is Kakao?
KakaoTalk is a messenger app that is widely used in South Korea. Ten years ago, Kakao was just a company with a hugely successful messenger app. Then it merged with Daum in 2014. Daum is one of the oldest internet portals in South Korea, which was a distant second following NAVER in 2014. A conglomerate was born with the merger.
Kakao subsequently launched KakaoPay (2014), an Apple Pay-like service, Kakao T (2015), Uber, and KakaoBank (2017), Chime. It is well established in South Korean society that Kakao is dipping its “octopus’ legs”4 into many lucrative businesses in the domestic market.5
What matters to the entertainment industry is Kakao’s affiliate company called Kakao Entertainment. Kakao Ent. began when Kakao acquired Melon, a long-standing leader in the South Korean music streaming market. From then on, it acquired film studios, talent management companies, webtoon6 companies, record labels, etc.
“Value chain” and “IP (intellectual property)” are two favorite words of Kakao and its likes. Kakao literally went on to subjugate every step across the value chain in the entertainment industry: it owns a creative powerhouse thanks to its webtoon platforms7; its subsidiaries make films or series with the stories of webtoons; and they hire talents represented by Kakao's other subsidiaries.
Regarding the SM Ent. acquisition by Kakao, it is often highlighted that Kakao owns Melon, a streaming service. However, it is less often talked about that it also owns 1theK, the most influential distributor of K-pop music videos on YouTube which has 24.4M subscribers as of today. It is not enough talked about that Kakao also is a music distributor that once pulled some five thousand songs from Spotify.
That gives a basic idea of what Kakao is. Imagine a hybrid corporate monster made of Yahoo, Uber, Spotify, PayPal, UTA, A24, XL Recordings, etc. That’s the kind of company we’re talking about.
Thus, Kakao’s SM Ent. acquisition is a story where the hybrid monster gets bigger. However, there are some other perspectives from which we can look at the acquisition:
Kakao Ent. is preparing to go public, and the acquisition of SM Ent. is a crucial event that will significantly raise the value of the company.
The company doesn’t want to remain a conqueror of the domestic market anymore. Its management has been chanting the slogan, “Beyond Korea,” since early 2022. Acquiring one of the most successful K-pop companies with global hits8 is a big part of their “Beyond Korea” plans.
The acquisition saga started when the management of SM Ent. announced its SM 3.0 plans in partnership with Kakao. What is “SM 3.0” and how will it fit into the overall picture?
Kakao has some new projects for which it can utilize the global brands of the SM Entertainment artists, such as its metaverse project and the open chat9 function on KakaoTalk.
It is often overlooked that Kakao’s character licensing business played a significant role in turning the company into the giant it is today. Monetizing “IP,” as they call it, might really be in their corporate DNA. Will it somehow affect how SM Ent. operates under Kakao?
As mentioned above, Kakao Ent. owns the #1 end-user music streaming service in Korea and is a major distributor of K-pop music and music videos. Now they have control over some of the most powerful K-pop artist brands. How will it affect the Korean music industry?
We will talk about some of these in detail in the upcoming newsletters. However, since I myself am getting bored with this issue, I will take a break from it for a while and cover some lighthearted topics in the next newsletter or two.
My first newsletter on this topic explains it near the end.
It’s one of the interesting sub-topics related to the issue, and not a lot of people delved into it. I won’t be able to cover it this time, but it’s one of the topics that I want to dig much deeper into.
We will come back to it later.
A Korean idiom.
If you want to know more about it, this article contains a lot of information.
An online comic format common in South Korea.
“IP,” a word that is used in a vague manner by South Korean executives, is sometimes used to refer to the stories of webtoons. This is what these giant companies see as a gold mine for some reason, which raises a lot of questions. This is another topic that I will dig deeper into in the future.
The management of Kakao calls it “super IP.”
Telegram-like anonymous group chat function. It’s already pretty successful, but Kakao wants to make it bigger and more global. So it circles back to the conversation about the “platform.”