SM Entertainment: Korea's entertainment industry

1. Introduction

Korea, as a newcomer to the global market, has witness the dozens of success cases to internationalize domestic companies. Samsung, LG, and Hyundai even have become the biggest companies in the world. Today, however, Korea is showing more potential and competency in entertainment market. Represented as ‘Korean Wave’, Korea has gained the good reputation as producing good cultural contents that are loved world wide. SM Entertainment, the biggest entertainment company is Korea, has took globalization strategy, to expand its market world wide. We will analyze the achievement that it has had so far, and the competitive strength. Setting the future market as US, we will extend the analysis to enter the new market.

2. Brief Explanation of the Entertainment Industry

1) World Entertainment Industry

Entertainment, by definition, consists of any activity which provides diversion for people to amuse themselves in their leisure time. The industry comprises very wide scopes, including movies, music, TV show and so on. As the standard of living improving, the needs for entertainment have significantly risen. The world entertainment industry, according to Price Waterhouse Coopers(PWC) has been witnessed to grow at the annual rate of 7.3 percent. This rate outnumbers the world GDP growth rate by three times, considering it was around 2-3 percent annually.

At the same time, seeing the world entertainment market, we can see that it is mainly taken up by two major countries, US and Japan. No doubt, the rate is closely related to the living standard, and Korea takes only 3 percent of the total market.

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2) Korean Entertainment Industry

The entertainment in Korea is one of the fastest growing industries, and it is believed to have great potential, to receive massive government support for sake of fostering it. So it has been, that Korea has had much stronger competitive advantage in music and TV show sales and exports than other Asian countries. The amounts of export in entertainment industry were 631 million dollars in 2003, which has significantly grown to reach 1555 million dollars in 2007. It was mainly due to the reputation Korea has gained with well organized strategies and extraordinary performances

Korean entertainment industry, despite the fact that the industry has grown enormously, is sick for a couple of reasons. The market is so saturated that there is over-heated price wars, illegal downloads of the contents are immense and unstoppable. It is obvious that the market is not as attractive as it was a couple of years ago, which has motivated Korean entertainment companies to bend their look upon global market.

By far, the process has been positive. As we see the table below, it is very popular mainly in Asia. Korean female idol group, Girl’s Generation, has been watched on YouTube 24 million times, as much as 7 times as Japanese counterparts, 20 times as Taiwanese. Recent article on newspaper has introduced the popularity Korean Music is winning in France, a huge concert having been sold-out within 5 minutes.

3. Introduction of SM Entertainment

SM Entertainment which this paper is investigating in, is representative entertainment producing company, mainly focusing on music industry. It was established in 1995 with male idol group H.O.T., which was exactly what teenage girls were desperate for. H.O.T. had proven to achieve great success. Female idol group by SM, SES also was quite successful, meeting up what boys wanted for girl group. From then on were there BOA, Dong-Bang-Shin-Ki, Girl’s Generation and others, who were successful also outside of Korea, such as Japan and other Asias. Thanks to those success stories, SM entertainment holds the largest records market share in Korea.

As the case of H.O.T. and SES shows, SM entertainment is competent in discerning the customer’s needs and preferences, and putting into strategic action. It has systematic system to breed up singers and other talents, spending years of efforts to fit in the market. When a trainee passes the audition that SM has for new faces, it takes him or her 5 to 10 years to be fully trained. Jessica, a member of Girl’s Generation, had to spend 7 years to have all the training programs, and to eventually become a top star.

The process of SM in entertainment industry is well defined as the basic value chain model of manufacturing. There are usually five categories; R&D, Supply, Production, Distribution and marketing. SM engages in R&D as producing new conceptual development, and other cooperation with composers for music production. Next step is supply, discovering new potentials through audition throughout the world and signing contracts. Manufacturing equates cultivate songs, arranging dances and other training programs that increases the value of future product, singers. It comprises learning foreign language, manners, and so forth. At the last is put the combination of marketing and distribution, for they happen at the same time. It includes record distribution via retailing and on-line, and advanced other marketing that consumers can experience and get in touch with the products.

4. The Success Case in Japan

1) SM entering Japanese market

As noted above, not only the fact that Korean entertainment industry is already saturated and Japan ranks as the second largest, there are other motivations for Korean entertainments to enter the Japanese market. Japanese records are sold out even at the high price, with the high recognition of copyrights. Diverse genres in music are respected, and K-pop trend is booming. Moreover, Japan has so entertainment system at the pro level. For Japanese entertainments don’t provide training program to the singers, Korean counterparts were more strategic, to have competitive advantage on it.

In year 2000 November, SM Entertainment had concluded a licensing contract over Asia with AVEX, which is the greatest music entertainment company in Japan. With the strong cooperation with AVEX, SM gained chances to release new albums in Japan, selling them under the license of AVEX. Also, as a means to penetrate into foreign markets, Sm has enlisted on KOSDAQ. In year 2001 January, SM Entertainment Japan was incorporated to a foreign joint corporation, which is a stock company. Thanks to all these process, celebrities from SM could appear on Yoshimoto group’s TV programs and gain other supports to arise the effects in public relations. By SM’s favor, with compiled knowledge and experiences, other entertainments could take a gradual step to enter into Japanese market.

2) Case of BOA

A female singer BOA was planned for the Japanese market, thus had to learn Japanese from her early ages. Her Japanese capability so excellent when she had made her debut in Japan that people didn’t believe she was Korean. She even commissioned Japanese songwriters for her songs. These were effective in letting people have affinity to her that she could won the first place in the Oricon Chart. This strategy can be also seen in Dong-Bang-Shin-Ki that the group was named in Chinese style.

3) Case of Girl’s Generation(GG)

Girl’s Generation could achieve the success with special marketing strategy. It had benchmarked the case of Beatles entering into US market, taking three steps; public relations, local landing and standardization. GG first tried to make touchpoint to Japanese consumers via exposing itself into various media. SM released teaser pictures, used YouTube as a tool for promotion, and even sold DVDs before its official debut. This was the first step to raise awareness and interests among Japanese people. This strategy has contributed significantly to its success. Different from BOA, however, GG chose to standardize itself over countries. It had released the same songs that had been in Korea, which eventually resulted in differing itself from other Japanese groups. Their superior appearances, songs and performance won vast number of female fans at their ten to twenties, to become role models of them.

5. Evaluation of Japanese Case

1) Localization

There are mainly three strategies that have resulted in the success in Japan. In the beginning, SM entertainment could succeed in Japan by localization strategy, and made efforts to hold its culture. SM has been striving for this strategy with music, stages and other factors to meet up with local market. It has close relationship with Japanese composers, to create songs closer to Japan. There also was an importance in cutting down the language barriers, having singers educated the local languages. This strategy is seemingly different from the competitors’, in that the previous K-pop singers tried to utilize the popularity in Korea as a stepping stone to enter into Japan.

2) Cooperative partnership

SM thought it necessary to settle down the Japanese market. It set up the various strategic partnerships with related businesses, such as entertainment, music and TV production companies. This partnership was applied to not only distribution channel, but other sections as marketing and supply. That is how SM could readily enter into the Japanese market.

3) Differentiation strategy

SM’s positioning strategy is not confined to localization. As we have witnessed the “Korean Wave”, which explains the huge trend of favoring Korean culture, Korean Entertainment companies have gained power to push their domestic culture into other countries. BOA, for example, has gradually introduced Korean songs into Japan. These contents are unique, and different from others, which raise awareness of Korean culture and in the end make them more competitive.

6. The Recording Industry of America

It is understood as a strategic process for entertainment companies to enter into the US entertainment market after the Japanese. SM is also seeking taking this into consideration, and data show that the American music industry is optimal site for SM to expand its business.

1) Market Structure

As we see the table below, there are several big companies such as ‘Universal Music Group (UMG),’ ‘Sony/BMG,’ ‘EMI,’ and ‘Warner Music Group’ in U.S recording market, and they have so competitive powers that they have a 30-percent of the domestic market share. This structure is different from Korea in that Korea market has various production and distributor companies. Major companies can sign up with so many singers, and invest on concerts, marketing promotions paying higher cost than small entertainments. Therefore, smaller ones have relatively low competitive power than big companies in marketing and distribution. Thus, minor companies, so called ‘indies’, cannot but focus on small, genre-specified niche market.

2) Market Size and Trend

The American music entertainment industry takes up about 10 billion dollars. The market can be divided into off-line and on-line market. Since the internet developed rapidly, off-line market is declining while on-line market is undergoing fast-growth. Seen in the table below, On-line recording sales run to 5,720 million dollars with rapid growth rate of 19.3%. The growth of on-line market size is very significant trend, in that it costs less for each company to do music promotions.

table 8 Recording sales on and off line, and growth rate change. (Million $, %) PricewaterhouseCoopers

3) Genre Preference.

As the table shows, Rock is the most attractive genre in American recording industry. Seeing that it is quite a meager market in Korea, we can conclude that the consumer taste is seemingly different between Korea and US. When we see the top ten selling artists, who are believed to have piled up the legendary achievement, they are mainly white except one, who had desired to be so.

7. Communication as success factor

US is the country of diversity. There are hundreds of different cultures, language and societies, and they are equally respected. Everyone is said to be given the same chance to become successful. In this regards, the most important success factor in music industry would be ‘communication’. Quency Jones, by far the most distinguished producer and artist, claimed that musical artists have to communicate with audiences in US. They can do it either via music, the most typical way to arise sympathy to audiences, or via other measures that they can provide more touchpoint to the audiences.

1) Music as is

As US is the biggest in the world, it has the most diverse music genres, and the most famous and popular musical artists in the world. Thus, the standard of audiences and the entry barriers are quite high. Therefore, first of all, singers should have the perfect competence as the basic condition to get into US market.

Some famous genres in Korea, like lyrical ballad, hip-hops are mainly originated from US. Thus, however Korea tries to promote on those sectors, it might be boring and quite common in the US market. Rather, Quency Jones has evaluated Korean music as creative, and good in performances.He is more than positive to see musical artists as passionate, and close to the nature of music itself. The music has some similarities to that of Chicago in that it is about resentment. It is largely originated from people trying to convert it into pleasure. These features are believed to have enough competitiveness in the American music market, as there is significant differentiation factor as well as musical perfection itself.

2) More than Music

US is the most market-driven country in the world. There can be no other measures than money to better explain it. Thus, communication quite often occurs through marketing and public relations, and they serve as effective means to draw vast number of consumers. In other words, it is important to secure the touchpoint to the consumers via indirect way as well as music itself.

The growing on-line market, such as I-tunes and internet, is a good and easier way for Korea to gain interests and awareness from people. Mika, the world famous pop singer, could gain the popularity thanks to the compliments he has gained from the world famous blogger. Also, there are quite many TV show programs that deal with music, say American Idol. Appearance on TV programs or other media are also a very large part that musical artists in US try to maintain for more touchpoint.

8. SM Entertainment’s Strategic Analysis

SM entertaintment’s core capacity could be defined three aspects; training multi-talented entertainers, Trend Setting, capacity for marketing. And it has been proven that these features are effective when entering a new market. Adjusting and entering to the US music market, SM should take three strengths into account, and utilize them as realizable strategies.

1) Multi-talented entertainers

The most remarkable feature of SM is that it puts focus on training the future top stars from their early ages. It holds public audition to look for good talents. The audition is held over a couple of countries, comprising China and US. Under the signed contract, trainees who have passed the audition take various trainings ranging from vocal, dance to composition and acting. They are put under competition, which they should strive to survive through the intense circumstance.

The know-how of 15 years of training system seems to be the crucial strengths for US, in that singers are multi-talented, not just limited to singing. US market is hard to penetrate only with singing capabilities, rather singers should work on marketing and public relations on-line and off-line with various measures. This is directly related to the value that they can deliver to the customers; the higher and wider it is, the more useful it is better for entertainment companies to utilize it. Therefore, the fact that singers have more talents means they can grab more chances to become successful.

2) Trend Setting

Entertainment industry is extremely sensitive to trends. For US, even more, as it is the most developed and advanced in the world, meeting up the trends is critical. It is closely related to the competitiveness that a company can ensure the profitability. SM, in this regards, has been quite successful. It has been producing idols right for the trend, with the sensitive investigation on markets. The market in US seems distinctive; different from Asian markets. Even the preferences that consumers have are seemingly different from Asia. Systemic structure that SM may be vulnerable to fit in the US market, for it takes at least 5 years to produce the new singer. The volatile and distinctive market of US can be hard to cope with. Therefore, it is essential for SM to grasp the trend flow in US and for it should the timely and costly effort should be put.

There also is good news. Far East Movement, male musical group of four Asian people has shown the great success in US with trendy and unique songs and performances. It was the first Asian group to earn the top ten hit on pop charts. Despite the fact that their songs themselves were not Asia-oriented, it is a positive case that American market is not exclusive to Asia. As it has been discussed that typical k-pops are not promising in US, SM can originate unique and distinctive music with the Asian color.

3) Strategic Marketing

As US music entertainment market is taken up by a few major companies, it can be difficult for SM to gain a single chance to enter into the market. It is critical for SM to establish the strategies to overcome the entry barriers. Even Beatles had to use special marketing strategy for US. The success case of Girl’s Generation in Japan was a good example that we can borrow to US. Indirect communication, appearance on TV show or other means to expose the singers and release their songs, via I-tunes so to say, is the best option that SM can choose for US market.

9. Conclusion

We have analyzed the SM entertainment company, its success case in Japan, and future strategies for US. Entering into a new market is an extremely complex task, to be hardly discussed with pages of paper. Still, the unique strengths that SM has, which other companies in the world haven’t well established, are believed to be the most essential elements to drive a success in US.