[K Changers]⑦ SM, the Pioneer of K-pop, Transforms with 28 Years of Know-how

Pioneer of K-pop Genre SM, the First and Number One
Transformation with 'Multi-label' Introduction and 'Focus on Core Business'
Synergy with Kakao Entertainment Driving 'Economies of Scale'

SM Entertainment is the foundation of 'K-pop.' In the early to mid-2000s, when the term overseas expansion was still unfamiliar, its artist BoA dominated the Japanese Oricon charts. With over 60 album releases in Japan and more than 160 dome tours, the experience and know-how accumulated by SM are unparalleled. SM is the only entertainment company that holds all intellectual property rights (IP) across generations?from the so-called first-generation idols to the second, third, and fourth generations?and is the pioneer of the K-pop genre.

aespa Karina (Photo by SM)

For more than 20 years, SM has expanded its influence worldwide, starting with Japan and then moving into China, the United States, South America, Australia, and Europe. Currently, NCT and aespa are at the forefront, attracting overseas K-pop fans. Last year, SM recorded sales of 848.4 billion KRW and an operating profit of 93.5 billion KRW, both the highest since its founding in 1995. This year, the goal is to exceed 1 trillion KRW in sales.

The company's growth has also benefited its shareholders. In March, through the general shareholders' meeting, SM decided on a cash dividend of 1,200 KRW per share, six times the previous year's 200 KRW. No other company in the industry has a dividend payout ratio as high as SM's.

SM, the Industry Standard

Boa, the living history of K-pop. She is still actively performing. (Photo by Yonhap News)

SM defines the period up to 2010, when it produced H.O.T., BoA, TVXQ, Girls' Generation, and SHINee, as 'SM 1.0.' The period up to last year, when it launched EXO, Red Velvet, NCT, and aespa and secured numerous producers, is called 'SM 2.0.' A common trait among most SM artists is their success overseas.

SM's approach has set the industry standard. A representative example is its thorough localization strategy. For BoA, SM received songs from Japanese composers and released albums in Japanese through a Japanese agency. At first, it was hard to tell she was Korean. TVXQ also partnered with a Japanese agency and achieved great success in Japan. SM was the first to try this strategy. BoA and TVXQ continue their activities in Japan and remain popular.

SM also led the strategy of targeting overseas markets by including foreign members. When EXO debuted in 2012, four of the 12 members were Chinese. All music videos were released in both Korean and Chinese versions. At one point, EXO was the group with the most fans on the Chinese fan community service 'Tieba,' surpassing all Korean actors and singers. After EXO's success, other entertainment companies began adding foreign members one after another.

SM 3.0: A Bold Transformation

However, after the emergence of BTS and BLACKPINK, titles like 'industry leader,' 'first,' and 'pioneer' disappeared from SM's front. SM artists challenged overseas charts, but BTS and BLACKPINK conquered them. SM's market capitalization (2.4641 trillion KRW) ranks third in the industry, behind HYBE (11.5564 trillion KRW) and JYP (3.2622 trillion KRW, as of the closing price on the 9th). Sales and album sales rank second in the industry. Although its main groups aespa and NCT are performing well, they fall short of being 'mega IPs.'

SM has decided on a radical transformation. This year marks the start of 'SM 3.0.' A representative change is the adoption of a multi-label system, which is the industry's current trend. The key is moving away from the former single-producer system centered on former executive producer Lee Soo-man. This is the '5+1 plan,' establishing five production centers and one 'virtual artist/IP production center.' Each center will have dedicated and core functions for each artist.

If necessary, SM will also establish separate labels as subsidiaries outside the company. This is a hybrid model combining JYP's 'in-house label' system and HYBE's subsidiary labels acquired through M&A. Through this, SM aims to create a rich 'IP kingdom' with more than 21 teams active by 2025, each releasing content at least twice a year, and to create mega IPs like BTS. Currently, 10 teams are active.

'SM 3.0' also includes plans to divest non-core assets unrelated to its main business. SM's operating profit margin was 11% last year, the lowest compared to JYP (27%), HYBE (13.3%), and YG (11.9%). SM has 29 subsidiaries, including businesses in alcohol, bakery, and cosmetics. Under the leadership of new CEO Jang Cheol-hyuk, a certified public accountant who took office in March, the company is accelerating the sale of non-core assets. Having worked at Samjong KPMG, Daebu Construction, and Bodyfriend, he is an expert in financial structure improvement.

Synergy with Kakao Also Expected

NCT 127 Japan Dome Tour (Photo by SM)

In March, SM experienced its biggest change since its founding: Kakao Entertainment became its new largest shareholder. Going forward, SM artists may be featured or appear in Kakao Entertainment's vast IP portfolio, including webtoons, web novels, dramas, and movies, thereby expanding the influence of its IP. Additionally, in its core business, the two companies plan to combine their assets and strengths to create economies of scale and establish a global management system.

Although there were some issues during Kakao's acquisition process, the outlook is positive. Researcher Jeong Ji-soo of Meritz Securities said, "With the management dispute settled, efforts to normalize business and maximize profitability through supporting artist activities will continue," and predicted, "Operating profit this year is expected to increase by 34.1% to 125.3 billion KRW." On the 8th, aespa's mini-album 'Mini World' sold 1.37 million copies on the first day, setting a new record for first-day sales by a girl group.

SM stated, "As a key strategy for global expansion this year, we plan to establish a U.S. corporation with Kakao Entertainment to expand global business based in the U.S. and conduct more aggressive global marketing for artists through the U.S. corporation." They added, "Our goal is to increase overall market share in the global market and expand album and digital music sales."

This content was produced with the assistance of AI translation services.