thereport ISSUE 360 | 18 FEBRUARY 2015

Seoul music

Korea and K-pop’s remarkable rise

Contents05 Beyond music: Peter Molyneux/ Kickstarter06 Pinboard: Stats, deals, startups and more 08 Country profile: Brazil

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Psy might be consigned to the heap marked One-Hit Wonder but he has helped kick open the doors for K-pop internationally. Local production companies, which launch upwards of 30 new acts a year, are thinking globally now, especially as the cost of developing a K-pop act can spiral into the tens of millions. There is also a profound knock-on effect in terms of how the major labels in the country are looking to reinvent themselves. The West is now shifting to grab a piece of this boom with both Kanye West and Louis Vuitton making strategic investments here recently. That said, while K-pop is expanding internationally, neither Western musicians nor Western digital services are going to find it easy to have any impact in this market that has reached a fascinating point of maturity without their involvement.

COVER FEATURECOVER FEATURE

Korea and K-pop’s remarkable riseIt is estimated as being a $3bn industry

and Time has called it “Korea’s greatest export”, now K-pop is going through its imperial period – growing sharply and

exporting into whole new markets outside of Asia that were previously oblivious to the genre.

A recent survey in the country found that 21% of pre-teens in South Korea want to be K-pop stars, by far the single biggest career ambition. Its dominance in the local market is staggering – jumping from around a 50% share a decade ago to 83% in 2014.

A report by the National Tax Service in South Korea found that the average annual income earned by K-pop stars rose 72% between 2010 and 2013 – where they make 46.74m won (£27k), up from 26.97m won (£16k). To put that in context, the average income for salaried workers in the country is 30m won. And, for the biggest acts, there are considerable sums being generated. Super Junior made 31.4bn won (£18.5m) in the first six months of 2014, Girls’ Generation made 30.3bn won (£17.8m), Big Bang made 29.4bn won (£17.3m) and 2NE1 made 27.5bn won ($16.2m).

Se ul music

Boys Republic

Girls Generation and Super Junior

The cost of entry, however, into the market is phenomenal. It is estimated that it can cost up to $3m to develop each member of a K-pop group (and many have five or more members). They are often signed up by management companies/production houses – notably SM Entertainment, YG Entertainment and JYP Entertainment – at the age of 9 and put through what is ostensibly a K-pop boot camp where they learn to sing, dance, do interviews and also have lessons to become fluent in multiple languages – including Japanese, Mandarin and, increasingly, English. These production houses have an A-Z policy where they cover everything from talent spotting right through to TV promotion – operating like super-charged cottage industries.

The rewards here, if you get it right, are considerable. SM Entertainment, for example, has a market cap of $660m. This is only going to grow as the world comes round to this most particular of genres.

ORIGINS OF K-POP

The international success of Psy’s ‘Gangnam Style’, a huge hit and by far YouTube’s most watched video, helped throw a spotlight on both Korea and K-pop, but this is a genre with a long and fascinating history.

The arrival of Seo Taiji & Boys in 1992 is commonly regarded as the start of modern K-pop, causing a massive change in how the South Korean record industry was structured and how domestic acts were subsequently developed.

The style was a fusion of many Western genres – such as pop, rock, hip-hop and,

recently, electronic dance music – with an indigenous leaning. Beom-Joon Yang, the CEO of Universal Music South Korea, describes K-pop as “a globalised music” and the “Koreanisation of international music”, suggesting an inherently hybrid form that draws on other countries’ music and then starts to export it back to them, much as The Beatles and The Rolling Stones did with R&B to Sixties America.

K-pop started to be exported in East Asia at the end of the 1990s and by the

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ISSUE 36018.02.15 COVER FEATURE

early 2000s had moved into Japan. This was partly down to the Asian financial crisis in 1997 where local labels had to start to seriously think internationally in their signings and find ways to break into new markets.

The genre now gets a great deal of backing from the South Korean government because of its accelerating export power. The Ministry Of Culture & Tourism, for example, has set up multiple Korean Cultural Centres around the world

as part of this drive. There is now an accepted three-step

process for the exporting of Korean music (under the “Cultural Technology” concept developed by Lee Soo-man who set up SM Entertainment):

1 exporting cultural products by bringing Korean singers to other markets;

2seeking out international collaborations to boost local acts’

profiles overseas;

3 globalising the music by working with acts from other countries to make the

music multicultural.

India is another territory in the sights of many K-pop acts and companies, with N-Sonic being the first group to play there (in 2014) and the first K-pop tour of the country happening this January.

IMPORT AND EXPORT

It is not just one-way traffic here, with local acts being developed to sell at home and in as many international markets as possible. Kanye West Creative Team, for example, announced it was going to set up a JV in Korea by the end of January.

Known as 10-Jones, it is the company’s

From left – SM Entertainment, YG Entertainment and JYP Entertainment

Now the international labels are doubling down here and looking to change the way they do business in the country, no longer just relying on the independent production houses to source and develop acts they can partner with”

Seo Taiji & Boys

first move into Asia. It is designed to help break its own acts (notably Iggy Azalea and Drake) in the country but also to spot and develop Korean acts for crossover in other markets. It will have brand, agency and entertainment arms and there are also plans for a fashion division.

Actor and film director Jackie Chan has interests here, helping to launch JJCC there in 2014, a hip-hop boy ground managed by Jackie Chan Group Korea. Even Vuitton Moet Hennessy, Louis Vuitton’s company, has also made an $80m investment in YG Entertainment.

Now the international labels are doubling down here and looking to change the way they do business in the country, no longer just relying on the independent production houses to source and develop acts they can partner with. Universal Music South Korea, for example, set up its own development arm several years ago and Boys Republic were the first fruits of that shift, having been in development for two years, before putting out music in 2013. Several other acts are being developed by Universal in this way.

“We have been here more than 20 years and are focusing on being a 360-degree rights company,” explains Yang. The

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dominant revenue format in Korea for record companies and, by 2014, digital was making up 60% of the market, according to IFPI numbers.

“It is not like five years ago where we would focus on getting an article in a newspaper or magazine,” says Yang on how the marketing and promotion of acts has had to change. “We are focusing on mobile and online promotion as well as the music platform side.”

He says that 90% of Koreans now own a smartphone and this has caused a fundamental shift in marketing. “It is no longer mobile-first in Korea,” he says. “It is mobile-only.”

Neither iTunes nor Spotify are in the Korean market yet, which means that everything leans towards local services. MelOn, developed by SK Telecom, is the leading digital music platform, followed by KT Music, part of Korea Telecom. “The mobile carriers’ promotions have been very successful in the music industry,” Yang says, noting that the country has 5m paying music subscribers, which is equal to 10% of the total population.

The model is, however, changing as the leading players slowly move from a subscription bundle business (offering a set number of downloads along with streaming each

month) and more towards a pure access-based approach. “Because of the high-speed internet in Korea, everyone can stream tracks,” explains Yang, meaning technological advances are making streaming seem more attractive and viable.

With local services having such a dominance in the country, it will mean the likes of Spotify and (depending on Apple’s plans) Beats will have a serious challenge on their hands to break into the market. “Korean players are strong enough with the big mobile carriers,” says Yang. “If Apple was to bring an iTunes track-only download service into the market, it would not work. A Spotify streaming-only service could work, but it would not be able to compete [easily] with the local players.”

He also notes that, while YouTube was key in breaking Psy internationally, it is actually Facebook that now dominates in Korea for short-form video content.

Korea has been exporting its music across Asia for over two decades and now has the West firmly in its sights. The West, however, is going to find it difficult to get a foothold into the country – in terms of its music and also in terms of its digital music services. That is the profound tension at the very heart of this most singular of markets. :)

company is concentrating on developing its own domestic acts with a view to growing its share of the K-pop market. It is also moving deeper into live and artist management, indicating a significant structural change at the company in recent years.

COMPETITION AND STANDING OUT

“The Korean market is totally dominated by K-pop – which includes lots of boy groups and girl groups,” says Yang. “There are over 200 groups in the market right now and they are attracting lots of fans from high schools and universities.”

He estimates that around 30 new groups are looking to enter the market each year. All of them will have been in development for several years and have had millions of dollars poured into them – so the stakes are incredibly high.

“Every week there are new groups coming in and the market is full of idol stars right now,” he says. “But there is supply based on the demand. There is still some room for new acts, but it is not like it was five years ago.”

DIGITAL AND THE STRATEGY OF MOBILE-ONLYIn 2006, digital overtook physical to be the

If Apple was to bring an iTunes track-only download service into the market, it would not work. A Spotify streaming-only service could work, but it would not be able to compete [easily] with the local players”

COVER FEATURE

Mel-On

KT Music

JJCC

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As first questions in a press interview go, “Do you think that you’re a pathological liar?” takes some beating. Yet that was the opening

salvo in a recent interview with veteran games developer Peter Molyneux by the Rock, Paper, Shotgun website.

Molyneux has the kind of reputation that should set him above this kind of question – and the just-as-hard interrogation that followed.

In the 1980s and 1990s, games like Populous, Powermonger, Theme Park and Dungeon Keeper made his name, while the 2000s brought titles like the Black & White and Fable series that set out his stall as a creatively ambitious auteur of the games industry.

What went wrong for Molyneux? In a word: Kickstarter. And his fate is a lesson for creators of all kinds, musicians included, rather than just his fellow games developers.

In 2012, Molyneux’s studio 22cans raised just over £526k on Kickstarter for a game called Godus – “a delightful reinvention” of the god games that brought him his original fame.

Players would oversee a pocket-sized world, sculpting the landscape for their tribe, and waging war on other gods and their followers. It would be available for Mac, PC and mobile devices – a stretch goal later added Linux – with the promise of a multiplayer mode to go alongside its rich

BEYOND MUSIC

Peter Molyneux’s Kickstarter disasterVeteran gamer boss late for £500k-funded development

and being late for half a million pounds that gamers gave you?”

And there’s the lesson. Think of the traditional dynamic of a band pushing back against a label’s demands that they finish their album; or an author railing against a publisher’s desire to cut their flights of verbal fancy; or, indeed, a game developer wildly underestimating the time and overestimating the cost of a project and then asking a publisher to indulge them.

Traditionally, many fans’ sympathies would be with the creator in those situations. Yet when those creators go direct to fans through something like Kickstarter, those fans find themselves in the traditionally exasperated role of the publisher.

Crowdfunding seems like a marvellous idea for many creators, but bringing down the barriers to your audience – as Peter Molyneux has found – can backfire considerably. Their expectations that you deliver on your promises aren’t so different from those of the old middlemen. :)

When creators go direct to fans

through something like Kickstarter,

those fans find themselves in

the traditionally exasperated role of the publisher”

solo campaign. Meanwhile, the ‘winner’ of Molyneux’s previous mobile game Curiosity, 18-year-old gamer Bryan Henderson, would be anointed “God of Gods” in Godus, including getting a share of the game’s revenues during their reign.

Fast forward to 2015. The PC and Mac version of Godus was only released in early-access form; the Linux version is missing in action, as is the multiplayer mode; and Henderson hasn’t seen a penny from his prize.

Appropriately enough, given the site’s name, Rock, Paper, Shotgun’s journalist John

Walker gave Molyneux both barrels in the interview over his string of broken promises to the gamers who backed 22cans on Kickstarter.

“Why are you beating me up on these dates things? You sound like a publisher,” said Molyneux at one point in the interview, which was published as a verbatim Q&A.

“It’s three years later! People gave you half a million pounds and you’ve taken their money,” replied Walker, before returning to the theme later. “Do you not see the difference between being late for a publisher

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ISSUE 36018.02.15 TOOLS Pinboard » Deals

Samsung has launched its Milk Music service in Australia – the only other country outside of the US that has both Pandora and iTunes Radio. Samsung folded its Music Hub service last year.

After launching in the US last year, Deezer has brought Deezer Elite, its high-definition premium streaming

service, to 150 markets. It will allow Deezer subscribers with a Sonos system to upgrade to the high-audio version for no extra cost.

In a similar move, Tidal (whose parent company Aspiro was recently acquired by Project Panther, a

company headed up by Jay Z) is launching in 22 countries in Q1 this year, bringing its total market footprint to 30.

Messaging service Line has raised €37m in a new funding round. This comes after a deal with Sony Music Entertainment and Avex Digital to develop a new music streaming service.

SAMSUNG MILK MUSIC

LINE NICHE

TUNEGO

Twitter has bought Niche, a company that links celebrities to brands and major advertisers, for a rumoured $30m. It will be focused around the Twitter-owned Vine platform.

@garydbales But Zane’s move to iTunes radio... that’s one to watch

and inevitable there would be a first

@jukevox Expect more DJ and talent “defections” from broadcast

radio/TV to tech companies. But expect the graft to fail often

@DavidEmery: I for one am looking forward to reading “secure Zane

Hottest Record on Apple Beats” on every album marketing plan...

Follow Music Ally on Twitter...twitter.com/musically

Tweets#ZaneDEEZER ELITE

TuneGo, a platform aimed at discovering emerging acts, has raised $1.3m in new funding. It has also signed deals with Spotify, Slacker and APM Music as distribution partners.

TIDAL

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ISSUE 36018.02.15 TOOLS

FINLAND: RECORDED MUSIC SALES REALNETWORKS 2014: GLOBALPAYING SUBSCRIBERS

REVENUES (US$ millions)

Source: IFPI, Feb. 2015

2013

2014

January June December

millions of users(Rhapsody + Napster)

Source: RealNetworks, Feb. 2015

1.5

2.0

2.5

Total

Physical

Streaming

Downloads

815

Recorded music:

physical

FINANCIAL RESULTS (US$ millions)

4Q-2013 4Q-2014

Revenues

Costof

revenue

Selling &general

expenses

Otherexpenses

Netloss

829

-441 -445 -293 -296 -117 -129 -36 -41

273

256

84 78

128

293

272

76 73

Source (both graphs): Warner Music Group,

February 2015

WMG FINANCIALS 4Q-2014

Recorded music: digital

Artistservices &

expanded rights

Licensing Musicpublishing

119

(intersegment eliminationsin each quarter: US$4m)

2.9

2.0 (–29%)

11.5

13.8 (+20%)

26.8

17.6 (–34%)

41.8

35.9 (–14%)

(€ millions)

Pinboard » Stats

NEW SERVICE QTRAX

What is it?Yep, Qtrax. One of the biggest flops in a digital music industry that’s hardly been short of failures down the years. It’s back, with claims of “paradigm shifts” and the suggestion that “to revolutionise the industry, all it takes is one digital music company to be the size of Facebook”.

The industry could be forgiven for waiting to see if Qtrax can strike licensing deals this time round, as well as coming up with a service as slick as established and upcoming rivals in the streaming space.

Even artists tempted by Qtrax’s promise to set aside 30% of its equity for musicians would do well to read up on its history: the maths for how that 30% sits alongside the slices that would be expected by major labels and funding providers if Qtrax has a realistic shot at competing remains to be seen, too.

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Following a decade of virtually non-stop growth, Brazil’s economy is facing challenging times. The country’s new finance minister

recently forecast GDP to remain almost flat this year, echoing the 2014 results which saw a mere 0.15% expansion. Rising inflation and the decline of the local currency (the real) are also impacting on consumers’ purchasing power.

The context is somewhat reflected by the performance of music sales: although local body ABPD has not yet published its full figures for 2014, music:)ally understands that the recorded music market’s trade

value grew by just under 1.2% last year to R$378.6m. As of today this would equate to $133.8m, falling by more than 15% in this currency from 2013.

Going into more detail, physical revenue fell 15% to R$200.9m, which was made up for by digital sales growing 30% to R$177.6m. The market was thus split 53% physical and 47% digital.

In talks with music:)ally, Sergio Affonso (president of Warner Music Brazil) said, “The Brazilian market is continuing to change and evolve. We’re seeing a decline of traditional physical sales alongside a significant increase in the number of

music fans engaging with digital formats. The download business is still solid and important while streaming goes from strength to strength thanks to the arrival of new partners such as Spotify, Google Play and Deezer. The good news is that, overall in 2014, the market performed well. We experienced an increase in total industry revenues, which is great; but what is especially encouraging is that digital sales are experiencing continuous growth.”

He added, “The biggest opportunity and challenge is A&R. At Warner, we’ve significantly invested in local A&R. This has resulted in in an impressive roster and some

amazing new artists breaking through, such as Anitta. But we need to continue to find exciting emerging talent and help them to succeed in this high-speed world and thrive on an international stage. One of the great tools we have in this ‘age of information’ is increasingly sophisticated methods of analysing snowballing amounts of data and performance metrics, so we can be sure we’re best promoting and marketing all of our artists – wherever they are in the world.”

music:)ally’s sources on the ground indicate that downloads were slightly down in 2014 and that streaming was the key driver of growth. Although specific figures for the formats are yet to be published, digital revenues are still led by iTunes, which continues to dominate the downloads market virtually single-handedly.

It comes as a bit of a surprise that Apple has not changed its approach since launching its music store in Brazil towards the end of 2011: tracks are still charged for on iTunes in US dollars, requiring users to have international credit cards. Thus the downloads consumer segment in the country is almost entirely composed of affluent Brazilian iOS users. In this regard, it is worth bearing in mind Apple’s latest financials, in which the company revealed that in Q4 2014 iPhone sales in Brazil doubled year-on-year.

On the streaming side, Brazilians are spoilt for choice. All major international on-demand services are now available in the country, including some with telco partnerships with a range of extended trials, telco billing and data allowance options: Deezer with TIM; Napster with Vivo/Terra; and Rdio with Oi. Google

MARKET PROFILE Brazil

In the context of a flattening economy and a digital divide, music sales in Brazil face a challenging time, barely growing in 2014. The live sector, on the other hand, continues to be a massive business.

STATS

f Population 202md GDP per capita US$12,100h Internet users 107.8mc Broadband households 22.2mj Mobile subscriptions 273.6mi Smartphone users 46.3mSources: IFPI, CIA World Factbook

BRAZIL

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Play Music also announced a six-month free bundling promotion with flagship Samsung Devices in September. A notable exception to such partnerships is Spotify, which remains standalone. We understand, however, that the company has been growing rapidly in Brazil since launching there in May 2014. All streaming services charge a standard R$14.90 ($5.25) per month.

Discussing some of the peculiarities of the Brazilian market, Alexandre Schiavo (president of Sony Music Entertainment Brazil) told us, “Although local repertoire continues to account for 70-80% of the physical market, digital sales are mostly comprised of international catalogue.” This again resonates with the aforementioned divide around the iTunes demographic.

It will be worth watching how consumption evolves in this regard: Schiavo forecasts that 2015 will be the first year in

which digital revenues overtake physical sales in Brazil, so for a country where four out of the top 10 CD sellers in 2014 were from members of the religious orders (Catholic priest Marcelo Rossi being the top one) it will be intriguing to see if and how such features translate to the digital side.

An interesting aspect about the operation of Sony Music Brazil discussed by Schiavo revolves around the company adapting its physical operations in a market that is clearly moving away from CDs. “We acknowledged the challenges in the country, but, rather than freeze, we looked for ways to evolve,” he said. “For instance, we are the largest physical distributor of music, CDs and DVDs. Our logistical strength and relationships with retailers and media have allowed us to make a move into videogame distribution. We entered this business in Brazil in 2014 with five titles

and will distribute 15 Xbox and PlayStation games in 2015. Looking at other revenue streams we have also been growing our live business considerably.”

Brazilian live promoter Time For Fun (T4F) announced that, in the first nine months of 2014, its revenues saw a 38.3% increase year-on-year to R$455m (by means of comparison, as aforementioned recorded music sales for the whole year totalled R$378.6m in trade value). Live growth saw a strong push in the first half of the year from tours by the likes of Metallica and One Direction.

Another sign of the vibrant live sector in Brazil comes from American media conglomerate SFX Entertainment acquiring Brazilian talent agency Plus Talent in 2014. The latter represents several local DJs and produces events in the country.

Its Tomorrowland festival will hold 180,000 visitors in May 2015, selling out in three hours, with 870,000 people signing up to purchase tickets in September 2014 (without yet knowing the line-up). Last year, SFX also acquired a 50% stake in Rock In Rio.

It remains to be seen how the new economic realities will impact on the live sector. In the meantime, it is clear that bringing live into the equation of music business opportunities in Brazil is just as important (or arguably more so) than whether or not streaming and download services can win the hearts of music fans in the country. :)

MARKET PROFILE Brazil continued...

2010 2011 2012 2013 2014

136.3953.96 60.85 111.44

177.66

305.80 319.48281.42

200.92237.75

TOTAL359.76

TOTAL380.33

TOTAL374.14

TOTAL378.57

TOTAL392.86

Physical

Digital

Brazil: recorded digital music sales by format Source: IFPI

Brazil: recorded music sales (R$ millions, trade value) Source: ABPD, Music Ally

2009 2010 2011 2012 2013

Subscriptions

Mobile

Ad-supported

Downloads

Other

2,079

24%

15%

14%16%5%

25%

34%

20%101

133

208347

183111

35%

9%60%

8%11%

33%13%

27%

23%

26% 19%

22%57%

ISSUE 35821.01.15

We acknowledged the challenges in the country, but, rather than freeze, we looked for ways to evolve”Alexandre Schiavo, Sony Music Ent.

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Music Ally is a music business information and strategy company. We focus on the change taking place in the industry and provide information and insight into every aspect of the business, consumer research analysing the changing behaviour and trends in the industry, consultancy services to companies ranging from blue chip retailers and telecoms companies to start-ups; and training around methods to digitally market your artists and maximise the effectiveness of digital campaigns. We also work with a number of high profile music events around the world, from Bogota to Berlin and Brighton, bringing the industry together to have a good commonsense debate and get some consensus on how to move forward.

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