“Kim Nam-joon! Kim Seok-jin! Min Yoon-gi! Jung Ho-seok! Park Ji-min! Kim Tae-hyung! Jeon Jung-kook! BTS!” Probably for the first time ever, the audience chanted Korean names as BTS made an appearance on the Ellen Degeneres show last year.

BTS, a seven-member South Korean boy band, has been gaining widespread attention outside their home country. In the four years since their debut in 2013, the band has broken records unprecedented for a non-American artist. In May 2017, BTS got 320 million votes for Billboard’s Top Social Artist award, surpassing artists such as Justin Bieber, Taylor Swift and Ariana Grande. Recently, BTS ranked as high as 28th on the “Billboard Hot 100” and 11th on “Billboard’s Artist Chart” — achievements that are unprecedented for an international artist outside of Latin America. With their latest album “DNA,” BTS ranked number one in the iTunes album charts of 73 countries in 3 continents, according to CNN.

While the Korean Pop (K-pop) industry has produced artists and tunes, such as Psy’s “Gangnam Style,” that have achieved viral success, BTS’s level of sustained growth and recognition is unprecedented for Asian artists. Seemingly out of nowhere, BTS caused a frenzy in a music industry long dominated by American pop artists. So, how was BTS able to gather so much popularity and loyal fandoms in countries with very little knowledge of the Korean language? And more broadly, is the K-pop idol industry a fad, just as short-lived as “Gangnam Style”, or is it sustainable in the long-term?

Jeff Benjamin, a Billboard journalist specializing in K-pop, explains how a multitude of factors explain why fans — with little to no knowledge of the Korean culture or language — are attracted to K-pop artists: they’re great performers, singing, rapping, and dancing at the same time; they’re meticulously trained; and their primary mode of distribution are music videos, creating a music experience that is heavily focused on visuals and effects. The well-synchronized dance moves, vibrant colors and catchy EDM beats create an immersive experience.

Additionally, nearly all successful K-pop artists are in groups. Entertainment companies craft a narrative for each member whom fans can empathize with. Each member is given a role – the leader, lead singer, lead dancer, rapper, entertainer, and even the designated “good-looking one.” K-pop companies do not just sell music, they sell an experience created by meticulous branding.

As a result, K-pop is a multi-billion dollar global industry. Korea Creative Content Agency reported that the total export revenue of K-pop industry in 2016 was 4.7 billion dollars. The industry employs approximately 80,000 people.

Yet, while K-pop may seem flashy and has captivated the fascination of millions, there is a darker side to the business. In December 18, 2017, Kim Jong-hyun, the lead singer of SHINee — one of the most popular groups managed by SM entertainment, the largest entertainment company in Korea — committed suicide, prompting both national and international debate over the demands of the industry.

The business model in K-pop is unlike that of American pop. For example, American record labels have a relatively limited scope compared to the equivalent K-pop “entertainment companies.” Most American record labels manage strictly business activities such as the production, marketing and distribution of music. Korea’s entertainment companies do all that, but also recruit and train potential artists starting from an age as early as 10, loan mandatory housing in company facilities that artists later pay off with their own money and manage the diets and lifestyles of their artists. Korean entertainment companies construct agreements that specify nearly all aspects of the artists’ career and personal lives while under contract.

As a result, K-pop “idols,” as they are referred to in Korea and within their fandoms, are an all-in-one package gift-wrapped by their entertainment companies. In order to ensure that the idols are following their protocols, the company watches them for 24 hours a day, according to Hankyoreh Media Group. The idols are under tight restrictions by the management company that directs their whole lives—how to sing, how to present themselves in public, what to wear, what to eat, what to say, who they can meet and cannot—as many experienced K-pop idols, such as Girl’s Generation, have reminisced in interviews. In other words, Korea’s entertainment companies are the brains and muscles behind their artists.

One part of the K-pop industry that recently came under intense scrutiny is the trainee system. Entertainment companies have many “trainees,” who are potential idols recruited from an early age that practice their skills under the company’s instruction. According to the Fair Trade Commision of South Korea (FTC), the average training cost the company invests in per trainee is only $90 dollars a month. Since it does not cost much money for the companies to retain trainees, companies can afford to retain trainees as long as they desire. As a result, trainees are kept in a constant state of uncertainty, often not even getting a chance to debut before they get too ‘old.’ Further, companies create contracts with high penalties for quitting or moving to a different company. The trainees, as young as they often are, often sign the contract without fully realizing the consequences. According to the FTC statement, six entertainment companies, including JYP and FNC, have imposed a penalty much larger than their investment on the trainees, keeping the trainees and even debuted singers in debt of the company. Thus, singers were effectively forced to listen to the protocols of these entertainment companies. The Fair Trade Commision has recently updated on their “Standard Contract” that is enforced on the companies in order to ensure fair conditions for the idols.

Underneath the glitz and flash, K-pop is a calculated business. The entertainment companies behind K-pop artists strategically convert artists into brands that transcend differences in language and culture. Although entertainment companies wielded incredible bargaining power due to the nearly endless supply of K-pop hopefuls, they appear to be treading more carefully owing to recent scrutiny from government organizations and bad publicity. Yet, given the recent backlash against these entertainment companies, a reckoning appears to be brewing.

This article was written by Jake Goodman, Brown ’20. It is one of two Intercollegiate Finance Journal (IFJ) articles co-published this fall under a new partnership between the DBJ and the IFJ. To find out more about the IFJ and the partnership, please click on the author profile below.

Spotting Investors

From its early roots in Stockholm, Sweden, Spotify AB (Spotify Inc. in the United States) has grown to become a tectonic force in the music industry — a true market disruptor in the way it transformed the consumption of music. Since its inception, the firm has managed to dramatically increase its paid-membership service, as opposed to its free service rife with advertisements. Daniel Ek, the company’s CEO, recently tweeted that “40 is the new 30. Million.”, referring to the streaming service’s recent milestone of 40 million paid users, compared to 30 million in March 2016. The firm has 100 million total users, both free and paid. Spotify’s largest competitor, Apple Music, lags behind with a mere 17 million users.

As Spotify grows, it is increasingly under pressure to file for an initial public offering, which is the first time a private company’s stock is opened to the public to purchase. According to Bloomberg Businessweek, the company plans to go public in the second half of 2017 with a valuation of $8 billion. The pressure to go public largely stems from a recent round of financing — $1 billion in convertible debt, which is a debt security that can be converted into the underlying company’s equity at the financiers’ discretion.

This new round of debt was issued by a group consisting of the private equity-firm TPG, the hedge fund Dragoneer Investment Group, and Goldman Sachs. The Wall Street Journal reports that the debt’s interest rate will increase the longer Spotify waits for an IPO, and investors are entitled to a 20 percent discount on shares if they decide to convert their debt into equity. Yet, to improve its margins before an IPO, Spotify will have to grapple with its net loss of $200 million last years despite revenue doubling to more than $2 billion, and the firm thinks it has found a solution.

A Music Industry Super Brawl

As Spotify anticipates its IPO, its chief focus is on restructuring its music rights. According to public filings, Spotify’s commissions to the music industry totaled $1.8 billion last year, with 55 percent of its currently paid to record labels and artists and an additional 15 percent to music publishers and songwriters. The major record labels — namely Universal Music Group, Sony Music Entertainment, and Warner Music Group — each hold undisclosed minority stakes, forming a conflict of interest as CEO Daniel Eks attempts to lower the labels’ checks to around 50 percent. Lower sales to labels would encourage Spotify’s chances of profitability with an IPO on its horizon.

Spotify currently operates on a short-term month-to-month basis with the labels. With long-term negotiations underway, there is insight into the positions of both sides of the table. On Spotify’s side, the streaming service has a couple advantages. Additionally, Spotify has offered additional data and promotion to artists and has hinted at the possibility of a limitation on the length of time one can remain a free user for. As the labels all hold minority stakes in Spotify, they have a vested interest in seeing the streaming service succeed. Spotify also has some special treats it can offer the labels. The labels, and notably artists such as Adele and Taylor Swift, have taken issue with Spotify’s availability of its complete catalog to free users. There has been discussion about giving the labels the ability to restrict certain new releases to the paid tier. However, Spotify is concerned that doing this will drive consumers to free platforms, such as YouTube.

Finally, Spotify holds a key position as a mainstream consumption platform and a major source of revenue for record companies — the largest source of sales for recorded music in 2015. After struggling from declining sales of CDs and digital downloads, US record companies, posting revenues of $3.4 billion in the first half of 2016, are increasingly pivoting toward streaming services, giving Spotify greater leverage in negotiations.

The record labels also maintain a certain edge over Spotify. Online streaming services have tended to create losses for corporate parents, as evidenced by the struggling Pandora, which went public in 2011. Spotify also faces competitive pressure from its rivals in the industry: Apple Music, Amazon Prime Music, YouTube. Whereas these other services can lean on their respective corporate parent, Spotify does not enjoy such a luxury. Ultimately, with discussions centering on amending Spotify’s free service aspects, compromises will have to be made, and Daniel Ek and his team will have to balance the firm’s need for increased profit margins with its relationships with record labels and artists.

The Times They Are A-Changin’

Whatever happens with Spotify, it is clear that consumers can expect changes in the months before an IPO. Spotify seems to be increasingly ambitious in its projects. Spotify’s recent partnership with Tinder, integrating a user’s music taste into their dating profile, is a recent example. A single song, dubbed an ‘anthem’, is chosen to represent one’s personality on the dating app. Spotify has also worked with another dating app, Bumble, to work on a similar idea, displaying what users have been streaming. These recent developments are part of Spotify’s goal to provide a broader experience to users. The company spent $250 million on research and development last year, including the purchase of a dozen original music-based TV series. It’s evident that Spotify does not envision itself as part of the general trend in the music industry — to soar and plummet fast — rather seeks the means to ensure its survival.

However, with the pressure on, this series of negotiations seems to be a key test for Spotify’s leadership and for its future on Wall Street. Despite this pressure, Spotify has other options besides Wall Street. A possible acquisition by Facebook is not even off the table, according to the investment firm GP Bullhound, a partial owner. Overall, an $8 billion dollar valuation is hard to live up to, especially in an industry notorious for its lack of profitability, but Spotify seems to have the drive to forge a permanent position in the music industry. Hopefully for Daniel Ek and the rest of his team, Wall Street feels the same way.