[Editorial] Kakao’s takeover of SM

South Korean tech behemoth Kakao is now set to take over major K-pop agency SM Entertainment after striking a deal with Hybe, the fast-growing competitor agency that is home to BTS and NewJeans, to end their competition and cooperate with each other.

The conclusion of the monthlong feud for SM came as welcome news to their respective investors and those who want K-pop to expand further with greater platform power and a deep talent pool.

At some point, Hybe was close to winning the competition, but fortunes reversed as Kakao purchased shares of SM aggressively. It seems that Hybe pulled out of the race largely because the takeover cost jumped beyond its earlier expectation. Media outlets reported that Kakao intends to become the largest shareholder by increasing its stake to 39.9 percent.

In the process, SM’s founder and former main producer, Lee Soo-man, was revealed to have engaged in outdated and possibly unfair business practices, which in turn spawned conflicts within the management of the first-generation K-pop agency.

At the heart of the dispute is that Lee reportedly founded a private firm through which he siphoned off some 15 percent of SM’s revenue in the name of offering consultation and production services. This prompted SM investors to take action amid other controversial allegations emerging against Lee.

The internal conflict initiated by Lee is one of the key reasons SM was left behind in the intensifying competition among local entertainment agencies to attract new K-pop talent and enter overseas markets at a time when Korean music is drawing new fans across the globe with the help of superstars such as BTS.

Some K-pop fans may remember that SM was an undisputed pioneer in globalizing Korean music. SM made the strategic decision to debut BoA -- at the tender age of 13 -- in the Japanese market in August 2000 and pulled off a rare success by helping her become a star there -- a landmark achievement that eventually encouraged other agencies to consider entering the Japanese market.

But the glory of SM has faded visibly in recent years, suffering from a dearth of new talent, while new K-pop heavyweight Hybe rode the global boom of BTS to set up its own digital music distribution platform and invest in future K-pop stars.

SM’s mixed history illustrates the importance of adapting to the new K-pop landscape. The K-pop market is rapidly growing in and outside of Korea. Global music streaming services such as Tidal and Apple Music are offering dedicated categories for K-pop and its diversifying subgenres. Not only well-known bands, but also emerging indie musicians in specialized genres are competing with their unique styles and refined music, targeting global audiences.

Unlike in the past when agencies largely focused on the domestic market, leading agencies have come under mounting pressure to strengthen their presences on the world stage, ranging from YouTube to streaming services to overseas performances customized to K-pop fans.

Another notable change is that Korean agencies are increasingly working with professionals outside Korea. BTS has demonstrated the potential of the global practice by releasing albums in partnership with producers and composers of international repute, along with leading experts in video and dance. Without this type of global cooperation, agencies could not catch up with fast-changing global music trends.

Digital platforms and technologies are likewise becoming more important than ever for K-pop. The takeover of SM by Kakao is an example in which major K-pop intellectual property is being combined with advanced digital technologies.

Kakao appears to be aware of the synergistic effect in the entertainment business. By acquiring SM, Kakao is expected to shore up its competitive edge in music content and talent. In addition, Kakao and Hybe agreed to work together in the music platform business, suggesting a new mix of technology and global stars led by BTS.

K-pop is certainly a promising market full of growth potential. It is hoped that more Korean agencies and musicians will be able to broaden their reach by teaming up with both local and international partners.