The World's Largest K-Pop Empire Behind BTS, Big Hit Entertainment Files for IPO, My Key Risks
This week, Big Hit Entertainment, the company behind global K-Pop group, BTS submitted a preliminary review for its public listing on the Korea’s Stock Exchange KOSDAQ.
The meteoric rise of BTS in the past few years transformed Big Hit Entertainment from a tiny company to the largest K-Pop group Korea has ever seen. Big Hit’s operating profits in 2019 was larger than that of the next 3 competitors combined. However, it’s a very delicate empire because Big Hit is more or less a "one group wonder". All other entertainment companies in Korea manage several artists and groups at a time.
In the past year, CEO Bang Si-hyuk has rapidly tried to diversify revenue streams with 1 new group (TXT), a joint venture, and 2 acquisitions of small competitors. Nevertheless, revenue concentration with BTS is still extremely high. Sources estimate revenue from BTS still accounts for 75% of Big Hit’s total revenue. New investors into Big Hit will need to be hyper-aware: a dollar invested in Big Hit is $0.75 invested in BTS, and any impact to BTS will severely impact the stock. (Queue mic drop).
A Brief History of the K-Pop Industry
The Rise: K-Pop began to gain popularity in Korea in the 1990s. Modern K-Pop mixes elements of American pop and hip-hop, and attracts viewers by its innovative music videos and intricately choreographed dance routines. All three of the “Big Three” K-Pop entertainment companies discussed below were founded within 1995-1997 during this initial rise.
The Process: Entertainment companies today are fairly standard in their training and debut process. Companies recruit prospective idols when they are 12-18 year olds and are henceforth known as “trainees”. Trainees train for several years with the company and wait for their chance to debut as a solo artist or in a group. This training period is extremely rigorous and includes vocal, dance, and maintenance of physical appearance. The process creates incredibly high standards for idols’ physical appearance, vocal ability and dancing skills. With these new standards of perfection that the companies created, Korea was able to rise above the rest of the world's entertainment industries.
Competitive Landscape: The Big Three
There are 3 well established K-Pop companies, together known as the “Big Three”. This consisted of JYP, SM and YG Entertainment. In 2019, Big Hit Entertainment actually replaced YG Entertainment in the Big Three ranking after YG came under fire for several sexual assault controversies. The scandals culminated in YG’s CEO and many top group members resigning.
For investors, there's massive risk associated with investing in any business that has 3/4 of its revenue stream coming from one source. Below, I will dive into 2 of the key risks facing BTS.
BTS Risk 1: Crowded Out by Fierce Competition
The Situation: BTS helped the world gain awareness of K-Pop, but there’s no shortage of Korean groups chasing right on their tails. It makes sense that one group served as the defacto global "face" of K-Pop (male groups) in this first wave, but as the world gets more comfortable with the genre, casual listeners will become avid K-Pop lovers. These casual listeners turned avid fans will discover other groups they like more than BTS and jump ship. (Note: In K-Pop, you’re only supposed to be the “ultimate fan” for one group).
More Groups Than Ever Touring the World: 2017 was a historic year for the global consumption of K-Pop. In 2017, 20 groups held multi-city world tours outside of Asia compared to just 1 group in 2016 (EXO).
BTS Risk 2: The Army Problem and Member Departures
The Situation: A looming and immediate issue with BTS is the need for its members to enlist in Korea's 18-month mandatory military service by the age of 28. South Korea's military service is compulsory for all Korean males, and no exceptions have been made for K-Pop idols. BTS’ oldest member, Jin, turns 28 at the end of this year and will have to enlist. It's true that other entertainment companies will have to face the same "temporary disbandment" challenge, but their risk is spread across several groups with staggered timelines.
Will BTS Be Excused?: There’s a very strong argument for granting BTS an exception to the military service, as removing members for 1.5 years will impact the group's revenue and Korea's GDP by millions of dollars. Exceptions are made by the government and have been given sparingly to Korean Olympic medalists and other professionals who made invaluable contributions to the nation.
Two Strategies: BTS' oldest member, Jin will be the first to reach 28 years old, but all 7 members will eventually need to enlist when they reach the age. Big Hit can take 1 of 2 approaches here: it can stagger the 7 members’ service periods so that there is always an active subgroup or just send all members to serve at the same time. Neither option is ideal and both will have negative impact to fan engagement and sales. The second option of sending them all at once definitely won't make sense if Big Hit is already public, as this would halt the main revenue stream for 18 months.
Member Departures: Other reasons for member departures or otherwise unexpected events will have tremendous immediate impact to the stock. As an example of this, SM Entertainment’s stock dropped 15% in one day to a year-low price after EXO-M member Luhan announced his departure from the group. Member departures can happen for a number of reasons including contract disputes or pursuing a solo career.
Conclusion: Until we get clarity on how BTS will approach its military service dilemma, investors should be very cautious of this situation. There’s certainly going to be a negative financial impact from these events, but the magnitude is unclear at this time.
K-Pop 101: Are you interested in K-Pop, but don’t know where to begin? You can listen to this Spotify playlist of my top “K-Pop Bangers for Beginners”.
About the Author
Bonnie Young runs the Amplified blog. She shares her insights on market trends from US to Asia and interviews founders that are shaking up the tech scene. Please reach out to her on LinkedIn with your questions and feedback. She is currently looking for a growth equity or VC role in the Bay Area.