MBW Reacts is a sequence of remark items from the Music Enterprise Worldwide group. They’re our analytical (and generally opinionated) reactions to main current leisure information tales.

“Ok-pop flourished in an atmosphere the place we might problem ourselves. We must always preserve the bottom in order that we will stand shoulder-to-shoulder with the world’s main document 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 Ok-pop firm in South Korea, SM Leisure.

As chances are you’ll bear in mind, Jiwon Park’s willpower to “preserve [HYBE’s] floor” in Ok-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:

1. 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;
2. HYBE has now said its intention to amass an additional ≈25% stake in SM for about $565 million. If authorised, 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;
3. There’s robust opposition to HYBE’s tried takeover from SM’s present administration, who’ve (a) raised considerations over the market energy such an acquisition could carry 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);
4. These combating 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 (in the event you’re maintaining, that’s the founding father of SM, and the man who simply bought HYBE 15% of the corporate);
5. 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;
6. All of the whereas, the Korean markets and competitors watchdog, the Korea Honest Commerce Fee, is maintaining an in depth eye on HYBE’s intentions with SM. HYBE reportedly has a 52% market share of the pop market in Korea in the present day, due to BTS – after all – in addition to different acts together with SEVENTEEN, TOMORROW X TOGETHER, and NewJeans.

HYBE’s largest drawback: An over-reliance on BTS

Even when HYBE absolutely acquired SM Leisure within the months forward, it will be a really great distance off rivaling the smallest of the three main music corporations – Warner Music Group (WMG) – when it comes to annual income.

In 2022, in line with USD-aggregated outcomes printed in investor filings, HYBE’s whole world enterprise generated $1.38 billion within the calendar yr, over 3 times smaller than WMG’s turnover in the identical interval.

If HYBE is harboring hopes of rivaling Warner’s dimension 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 document labels”, he was really talking from a place of fear.

HYBE must up its market share of Ok-pop general, as a result of, briefly, the wheels are actually coming off its most bankable asset within the house: BTS.

Final yr, BTS introduced it will be taking a protracted break from making music collectively till 2025, following its members’ obligatory conscription into South Korea’s military.

That’s an enormous situation for HYBE’s traders, as a result of the agency’s business reliance on BTS – regardless of its constant makes an attempt to dilute the boy-band’s inner share of generated income – is obvious to see.

In keeping with Kim Hyun-yong, an analyst at Hyundai Motor Securities, throughout income sources like information, merch, stay tickets, business partnerships and extra, BTS contributed 95% of HYBE’s typical revenues up till 2019.

In 2021, says Kim, that share fell to 70%. In 2022, it stood at round 50%.

One essential purpose for HYBE’s potential 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-Ok-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 Initiatives (dwelling to Justin Bieber and Ariana Grande).

As you possibly can see within the beneath slide from HYBE’s newest monetary outcomes (FY 2022), its Ithaca acquisition – mixed with the acceleration of Ok-pop’s reputation in the USA – has helped catalyze HYBE’s worldwide enterprise to the purpose that business 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 massive.

If Hyundai Motor Securities’ estimates are proper, then BTS’s proportional contribution to HYBE’s revenues (50%) in 2022 implies 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 discuss 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 expertise”.

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 want to [merge with/acquire] varied labels, administration [firms] and every other corporations that pursue companies associated to musical mental property.”

HYBE assertion, November 2022

This concept was additional fleshed out by HYBE for its traders a month later (November 2022), with the corporate telling shareholders that it was actively and strategically “trying to M&As and establishing joint ventures in order that we could increase on our multi-label construction each in and out of doors of Korea”.

Added HYBE: “We want to [merge with/acquire] varied labels, administration [firms] and every other corporations that pursue companies associated to musical mental property.”

Enter High quality Management.

Scooter Braun’s large guess

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 using the recordings in syncs, and re-recording a lot of her earlier materials beneath ‘Taylor’s Model’-branded information (that she absolutely owned).

Braun, realizing when a sizzling 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 belongings for practically the identical value he paid for the entire of Large Machine, Braun primarily acquired Scott Borchetta’s whole 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 inner danger away from BTS and in direction of different superstars – placed on possession of Taylor Swift’s first six albums in the present day?

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 often called High quality Management (QC), the Atlanta-born hip-hop specialist created by native legends Pierre “P” Thomas and Kevin “Coach Ok” Lee.

The deal was value $300 million in complete, in line with Korean regulator filings – with $250 million of that determine paid in money, and the remaining in HYBE inventory. (Raine Group is known to have priced QC.)

This nine-figure acquisition clearly follows HYBE’s said technique in 2023, each when it comes to diversifying its portfolio past Ok-pop, but additionally when it comes to its keenness to take action by way of “M&As and… joint ventures [that] increase on our multi-label construction each in and out of doors of Korea”.

The QC purchase can be Scooter Braun’s first large guess as an govt 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 a variety of established stars of recent 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 difficult 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 a variety of QC label’s largest hits thus far, and their copyright info on streaming companies:

• Migos’ Dangerous 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 thus far. Possession of the observe (and others on its related album, 2017’s Management) seems to have absolutely reverted to High quality Management Music, in line with credit on Spotify;
• Nonetheless, later Migos hits from 2018’s Management II album – together with Stroll It Discuss 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, moderately than a more-typical license settlement;
• Elsewhere, Lil Child’s largest hit thus far (and likewise, it seems, High quality Management’s largest hit thus far) is Drip Too Laborious (with Gunna), with 1.15 billion Spotify performs. This time, the observe and related album (2018’s Drip More durable), like hit 2020 album My Flip, are credited as “High quality Management Music LLC, beneath unique license to UMG Recordings”.
• Lil Child’s second biggest-hit, 2018’s Sure Certainly (with Drake, 860m Spotify streams, from the 2018 album More durable Than Ever) is, like Migos’ Tradition II, credited as: “High quality Management Music LLC and UMG Recordings Inc”.
• As well as, the “beneath unique license to UMG Recordings” credit score seems for the largest (non-feature) hits thus far for Lil Yachty (2018’s Yacht Membership) and Metropolis Ladies (2018’s Act Up).

Common Music-related problems RE: the possession (and royalty assortment) of High quality Management’s largest catalog hits was nodded to within the press launch asserting HYBE’s acquisition of the corporate final month.

In that PR, Coach Ok 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 guess that, when these catalog rights do ultimately revert, they are going to stay widespread sufficient on streaming companies to be profitable lengthy into the long run.

One other ingredient of HYBE’s gamble on High quality Management: braving the declining – however nonetheless dominant – share of hip-hop music in the USA.

In keeping with Luminate’s end-of-year stories, ‘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 preferred 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 extra 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 line with Luminate’s stories, ‘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 guess on High quality Management: it’s all concerning the future.

One much-missed ingredient of HYBE’s acquisition of QC is that the deal spans past simply the latter firm’s document label.

Actually, in line with a press announcement, HYBE has – in line with the related Korean regulatory submitting – acquired QC Holdings Inc by way of QCMHoldCo LLC.

QC Holdings Inc is the father or mother firm to the High quality Management label, nevertheless it’s additionally the father or mother to a variety of different related companies arrange by Coach Ok 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 guess on Coach Ok and P (and their group) with 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 Reside Nation Leisure’s long-running, and wildly profitable, funding in Roc Nation.

The historic pedigree of Coach Ok and P find and growing expertise inside sub-cultures, after which serving to that expertise go blockbuster, is unquestionable.

Coach Ok, 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 Ok 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 bother 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 necessary a part of the trio’s aspirational enchantment – Coach Ok 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 now have $150,000 in our [business] account, however we’ve to go together with this document to radio now. It might 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 with regards to the non-BTS income combine on the Korean firm – it’s going to wish Coach Ok and P to search out a number of extra acts, like Migos, who it may 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 an important a part of our development plan to innovate the leisure business by a diversified portfolio and superior expertise. We are going to work collectively to proceed including depth of hip-hop to the worldwide music business.”

HYBE is coming 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