MBW Reacts is a sequence of remark items from the Music Enterprise Worldwide group. They’re our analytical (and typically opinionated) reactions to main current leisure information tales.
“Okay-pop flourished in an surroundings the place we may problem ourselves. We must always preserve the bottom in order that we will stand shoulder-to-shoulder with the world’s main report labels.”
Jiwon Park wasn’t shy in declaring this grand ambition for his firm final week.
The CEO of Korean music large HYBE wrote the above “shoulder-to-shoulder” line in an open letter final Wednesday (February 22) that confirmed HYBE’s acquisition of a 14.8% stake in its rival, the third largest Okay-pop firm in South Korea, SM Leisure.
As you might remember, Jiwon Park’s willpower to “preserve [HYBE’s] floor” in Okay-pop displays a fiery, complicated music biz cleaning soap opera taking part in out in Korea proper now.
Right here’s that story in six straightforward steps:
- That ≈15% stake in SM, for which HYBE paid round USD $335 million, was acquired straight from SM’s founder (and ex-leader) Lee Soo-man;
- HYBE has now said its intention to amass an additional ≈25% stake in SM for about $565 million. If permitted, that transfer would give HYBE a 40% stake in SM, making it the corporate’s largest single shareholder, for a complete consideration of ≈$900 million;
- There’s robust opposition to HYBE’s tried takeover from SM’s present administration, who’ve (a) raised issues over the market energy such an acquisition could convey the house of BTS, and (b) even accused Lee Soo-man of historic tax avoidance. (Naturally sufficient, SM’s administration may additionally be barely fearful for their very own futures ought to HYBE take a controlling stake within the firm);
- These preventing towards HYBE’s try to extend its possession stake in SM Leisure embody SM’s co-CEO, Lee Sung Soo… who occurs to be the nephew of Lee Soo-man (for those who’re maintaining, that’s the founding father of SM, and the man who simply offered HYBE 15% of the corporate);
- Previous to the acquisition of the ≈15% stake in SM by HYBE, Korean tech/leisure firm Kakao purchased a 9.05% stake in SM Leisure for round USD $162 million. HYBE is now contemplating authorized motion towards parts of that Kakao/SM settlement;
- All of the whereas, the Korean markets and competitors watchdog, the Korea Honest Commerce Fee, is retaining a detailed eye on HYBE’s intentions with SM. HYBE reportedly has a 52% market share of the pop market in Korea right this moment, because of BTS – in fact – in addition to different acts together with SEVENTEEN, TOMORROW X TOGETHER, and NewJeans.
HYBE’s largest downside: An over-reliance on BTS
Even when HYBE absolutely acquired SM Leisure within the months forward, it will be a really good distance off rivaling the smallest of the three main music firms – Warner Music Group (WMG) – by way of annual income.
In 2022, in keeping with USD-aggregated outcomes printed in investor filings, HYBE’s total world enterprise generated $1.38 billion within the calendar yr, over thrice smaller than WMG’s turnover in the identical interval.
If HYBE is harboring hopes of rivaling Warner’s measurement over the following few years, at this stage, these hopes appear fanciful (see beneath).
My take: When Jiwon Park stated that HYBE ought to “preserve floor” to face “shoulder-to-shoulder with main report labels”, he was truly talking from a place of fear.
HYBE must up its market share of Okay-pop total, as a result of, briefly, the wheels at the moment are coming off its most bankable asset within the house: BTS.
Final yr, BTS introduced it will be taking an extended break from making music collectively till 2025, following its members’ necessary conscription into South Korea’s military.
That’s a giant situation for HYBE’s buyers, as a result of the agency’s industrial reliance on BTS – regardless of its constant makes an attempt to dilute the boy-band’s inside share of generated income – is obvious to see.
In response to Kim Hyun-yong, an analyst at Hyundai Motor Securities, throughout income sources like information, merch, stay tickets, industrial partnerships and extra, BTS contributed 95% of HYBE’s typical revenues up till 2019.
In 2021, says Kim, that proportion fell to 70%. In 2022, it stood at round 50%.
One essential motive for HYBE’s means to shortly scale back BTS’s proportional contribution to its revenues these previous two years? Scooter Braun.
HYBE’s USD $1.05 billion acquisition of Braun’s US-based Ithaca Holdings in 2021 introduced varied profitable non-Okay-pop operations into HYBE (by way of HYBE America).
These included nation music large, Large Machine Label Group, plus Braun’s personal administration firm, SB Tasks (dwelling to Justin Bieber and Ariana Grande).
As you may see within the beneath slide from HYBE’s newest monetary outcomes (FY 2022), its Ithaca acquisition – mixed with the acceleration of Okay-pop’s reputation in the USA – has helped catalyze HYBE’s worldwide enterprise to the purpose that industrial exercise in North America made up practically a 3rd of the agency’s world revenues final yr.
Nonetheless, although, the issue of BTS’s absence for HYBE’s world enterprise in 2023 looms giant.
If Hyundai Motor Securities’ estimates are proper, then BTS’s proportional contribution to HYBE’s revenues (50%) in 2022 signifies that the boyband generated over USD $680 million for HYBE final yr.
That’s some asset to should kiss goodbye till 2025.
In October final yr, within the wake of the information that BTS had been endeavor their navy service, HYBE CEO, Jiwon Park, shortly issued a reassuring letter to shareholders. He famous that HYBE had a plan to melt the blow of BTS’s inactivity – together with solo initiatives from the band’s members, plus precedence initiatives from different artists (together with SEVENTEEN and TOMORROW X TOGETHER).
There was even speak from Jiwon – as predicted by MBW two years in the past – that HYBE would mix its “content-creation capabilities” with its in-house generative AI platform, Supertone, by way of its “AI-based talking and singing vocal synthesis know-how”.
Yup: robotic BTS. You actually learn it right here first.
An important post-BTS technique talked about by Jiwon Park in that open letter final yr?
HYBE’s “multi-label construction” which, he stated, would “proceed to create music and set up artists that may resonate with our followers”.
“We wish to [merge with/acquire] varied labels, administration [firms] and some other firms that pursue companies associated to musical mental property.”
HYBE assertion, November 2022
This concept was additional fleshed out by HYBE for its buyers a month later (November 2022), with the corporate telling shareholders that it was actively and strategically “seeking to M&As and establishing joint ventures in order that we could develop on our multi-label construction each in and out of doors of Korea”.
Added HYBE: “We wish to [merge with/acquire] varied labels, administration [firms] and some other firms that pursue companies associated to musical mental property.”
Enter High quality Management.
Scooter Braun’s massive wager
The final time that Scooter Braun was concerned in an acquisition within the $300 million vary, all hell broke unfastened.
That acquisition was the US entrepreneur’s $330 million buyout in 2019 of Large Machine Label Group, which, on the time, included the grasp recordings to Taylor Swift’s first six studio albums.
Swift famously publicly protested towards the acquisition, even blocking the usage of the recordings in syncs, and re-recording a lot of her earlier materials below ‘Taylor’s Model’-branded information (that she absolutely owned).
Braun, realizing when a scorching potato is turning into scolding to the contact, offloaded his possession of the Swift recordings in November 2020 to Shamrock Holdings for round $300 million.
Now the mud is settled on this run of occasions, analyzing Scooter Braun’s enterprise savvy is an attention-grabbing train.
On the one hand, by flipping the Taylor Swift property for practically the identical worth he paid for the entire of Large Machine, Braun basically acquired Scott Borchetta’s total nation label group (minus the Swift recordings) for simply ≈$30 million. That’s a really canny little bit of deal-making.
Alternatively, what worth would HYBE – an organization determined to unfold its inside danger away from BTS and in direction of different superstars – placed on possession of Taylor Swift’s first six albums right this moment?
At this time, Scooter Braun is concerned in one other $300 million acquisition. This one’s significantly much less controversial than his final… however no much less discussion-worthy from a music biz standpoint.
On February 8, Braun – now the only real CEO of HYBE America – introduced that his agency had acquired the corporate greatest generally known as High quality Management (QC), the Atlanta-born hip-hop specialist created by native legends Pierre “P” Thomas and Kevin “Coach Okay” Lee.
The deal was value $300 million in complete, in keeping with Korean regulator filings – with $250 million of that determine paid in money, and the remainder in HYBE inventory. (Raine Group is known to have priced QC.)
This nine-figure acquisition clearly follows HYBE’s said technique in 2023, each by way of diversifying its portfolio past Okay-pop, but in addition by way of its keenness to take action by way of “M&As and… joint ventures [that] develop on our multi-label construction each in and out of doors of Korea”.
The QC purchase can also be Scooter Braun’s first massive wager as an government at HYBE, practically two years on from his Ithaca Holdings being acquired by the Korean firm (a transfer led by HYBE founder and now-Chairman, Bang Si-Hyuk).
HYBE X High quality Management: The bear case
Some within the business who MBW has spoken to in current weeks have argued that $300 million is a cumbersome sum for Braun and HYBE to pay for QC, an organization that has developed quite a few established stars of contemporary hip-hop.
These stars embody Migos (who tragically misplaced a member in Takeoff, shot useless in Houston final yr), plus Lil Child, Lil Yachty, and Metropolis Ladies.
What recorded music catalog rights has HYBE acquired by way of High quality Management’s label operation?
That’s a tough query to reply, particularly since QC’s label entered right into a JV with Motown / Capitol Music Group / Common Music Group for future releases in 2015.
For instance, let’s take a fast take a look at quite a few QC label’s largest hits to this point, and their copyright data on streaming companies:
- Migos’ Unhealthy and Boujee (feat Lil Uzi Vert), launched in 2016 (on the time by way of 300/Warner/High quality Management) has over 850 million Spotify streams to this point. Possession of the observe (and others on its related album, 2017’s Management) seems to have absolutely reverted to High quality Management Music, in keeping with credit on Spotify;
- Nonetheless, later Migos hits from 2018’s Management II album – together with Stroll It Speak It (681m Spotify performs) and Stir Fry (567m Spotify performs) – are copyright-credited as “High quality Management Music LLC and UMG Recordings Inc”. The “and” there could counsel the joint possession of recording rights, relatively than a more-typical license settlement;
- Elsewhere, Lil Child’s largest hit to this point (and in addition, it seems, High quality Management’s largest hit to this point) is Drip Too Onerous (with Gunna), with 1.15 billion Spotify performs. This time, the observe and related album (2018’s Drip Tougher), like hit 2020 album My Flip, are credited as “High quality Management Music LLC, below unique license to UMG Recordings”.
- Lil Child’s second biggest-hit, 2018’s Sure Certainly (with Drake, 860m Spotify streams, from the 2018 album Tougher Than Ever) is, like Migos’ Tradition II, credited as: “High quality Management Music LLC and UMG Recordings Inc”.
- As well as, the “below unique license to UMG Recordings” credit score seems for the largest (non-feature) hits to this point for Lil Yachty (2018’s Yacht Membership) and Metropolis Ladies (2018’s Act Up).
Common Music-related issues RE: the possession (and royalty assortment) of High quality Management’s largest catalog hits was nodded to within the press launch saying HYBE’s acquisition of the corporate final month.
In that PR, Coach Okay stated: “An added bonus of this partnership is the truth that each QC and HYBE have present relationships with the UMG household and that can create a simple move that can profit the artists.”
Presumably, at a sure level within the years forward, full possession of these “unique license” recordings will revert again to QC from UMG.
A part of HYBE’s gamble on the corporate, subsequently, is a wager that, when these catalog rights do ultimately revert, they’ll stay common sufficient on streaming companies to be profitable lengthy into the longer term.
One other factor of HYBE’s gamble on High quality Management: braving the declining – however nonetheless dominant – share of hip-hop music in the USA.
In response to Luminate’s end-of-year studies, ‘R&B & Hip-hop’ music claimed 31.2% of all on-demand audio streams within the US in 2019. However by 2022, this determine had fallen to 28.7%.
To be clear: ‘R&B and hip-hop’ (a class that mushes collectively two distinct genres) was the most well-liked style within the States by far final yr, claiming over 1 / 4 of all audio streaming performs within the States.
However the constant route of journey for the class, market-share-wise, is downward (see beneath).
Right here’s further meals for thought for HYBE, which to a level is speculating on hip-hop’s future reputation with its $300 million acquisition of QC: Within the two years from 2020 to 2022, in keeping with Luminate’s studies, ‘R&B and hip-hop’ misplaced 2% market share of on-demand audio performs in the USA (from 30.7% to 28.7%).
In the identical timeframe, Latin music grew its US market share by the very same share: +2% (to 7.30%, see beneath).
HYBE x High quality Management: The bull case
There’s, although, one other perspective on Scooter Braun and HYBE’s $300 million wager on High quality Management: it’s all in regards to the future.
One much-missed factor of HYBE’s acquisition of QC is that the deal spans past simply the latter firm’s report label.
QC Holdings Inc is the mother or father firm to the High quality Management label, however it’s additionally the mother or father to quite a few different related companies arrange by Coach Okay and P, together with these spanning each movie & TV (High quality Movies) and sports activities expertise illustration (QC Sports activities).
With this in thoughts, Scooter Braun and HYBE are making a $300 million wager on Coach Okay and P (and their group) having the ability to replicate their historic success in highlighting rising expertise earlier than it explodes into the big-time. Solely this time, they’re doing so throughout music, movie, and sport.
On this regard, one apparent analogous bull case to HYBE x High quality Management is Stay Nation Leisure’s long-running, and wildly profitable, funding in Roc Nation.
The historic pedigree of Coach Okay and P find and creating expertise inside sub-cultures, after which serving to that expertise go blockbuster, is unquestionable.
Coach Okay, for instance, was a standout impresario inside Atlanta’s lure scene when it first bubbled into the US mainstream a decade-plus in the past. One of many area’s best-known artist managers, he dealt with the careers of each Younger Jeezy and Gucci Mane.
Then, at High quality Management, Coach Okay and P as soon as once more confirmed their intuition (and urge for food for danger) for handpicking on-the-rise artists who’d go on to hassle the higher realms of the Billboard Scorching 100.
Migos burst onto the “mumble rap” scene in 2013 with Versace, earlier than happening to safe quite a few multi-platinum information within the US over the next decade.
Discussing High quality Management’s determination to speculate closely in Migos’ promotion and lavish-looking movies at an early stage – a vital a part of the trio’s aspirational attraction – Coach Okay instructed Music Enterprise Worldwide in 2017: “I’m gonna be actual: it was check-to-check at occasions.
“With Migos, we had been scratching our heads like: ‘We have now $150,000 in our [business] account, however we now have to go along with this report to radio now. It may wipe us out… F*ck it. Let’s put it on the road.’”
To ensure that High quality Management to really transfer the dial for HYBE – particularly in the case of the non-BTS income combine on the Korean firm – it’s going to wish Coach Okay and P to search out a number of extra acts, like Migos, who it could actually springboard from niche-scenesters to megahit-icons.
Saying the acquisition of QC in February, HYBE’s founder and Chairman of HYBE, Bang Si-Hyuk, stated:”This partnership is a crucial a part of our progress plan to innovate the leisure business via a diversified portfolio and superior know-how. We’ll work collectively to proceed including depth of hip-hop to the worldwide music business.”
HYBE is getting into the US hip-hop house from a standing begin. It’s banking on QC to unlock a profitable world with which the Korean firm has hitherto had little connection.Music Enterprise Worldwide