20120626_seoulbeats_smentertainmentK-pop is a business, through and through. No matter how original a concept is or how natural fan interactions may seem, the details even down to how much a performer weighs are all calculated. As a business model, Korean entertainment companies are admired by business analysts around the world. They are lean, mean, money-making machines. Balancing efficiency with innovation, Korean entertainment companies do whatever they have to do to sell their product.

SM Entertainment is a company that thrives in such a quick paced environment, and I set out to find out just why they do what they do so well. It can’t just be the vast array of pretty, well trained, talented trainees that they possess, right? In my quest for the answer to this riddle, I set to look at the idol of all budding businessmen — the idol of all idol companies if you will: Michael Porter.

For those who unfamiliar, Porter, is a professor at the Harvard Business School, and a leading author on competitive strategy. His answer to uncovering the secrets of a competitive business lies in the Five Forces Model — which are essentially The Five Competitive Forces That Shape Strategy… duh. Below is a diagram to help you understand what he means.


Looking at various external forces (i.e the bargaining power of their suppliers and customer, threats that new entrants or substitute products pose, and the general competitiveness within an industry) we can see how they affect business functions or strategy, giving us an idea as to what makes a business so special.

Together, with the help of Porter’s Five Forces and a burning passion for knowledge, I will attempt to understand why SM is so good at what it does and what they might do to continue this streak of success for many years to come.

Bargaining Power of Suppliers

20110920_seoulbeats_jyjSM is built upon many things — good leadership, wonderful producers, production teams — but the most vital of all these parts is their pool of trainees. The trainees supply the company’s growth and will continue to be the backbone to its endeavors in any market. Strictly speaking, SM chooses its trainees through auditions. They find their own trainees to mentor, which gives them a substantial amount of control over them and how they train. The contracts are catered to work towards the company’s advantage whereby profits are split in an uneven ratio. However this method of keeping the supplier power of trainees artificially low has been compromised following the Fair Trade Commission bust — whereby the unfair 13 year contracts were under scrutiny. SM, had no choice but to comply to the requests and have lost power through deciding to protect the interest and rights of their artists. This has not only hurt their business functions (in terms of how long they can milk a trainee for their worth) but it also detriments their public image. Unfortunately the past few years haven’t been easy on the publicity front with the Hangeng controversy, JYJ split, and further run-ins with the FTC for price rigging in 2011.

In terms of musicality, I would say this is the most subjective function of the company. It’s subjective to trends, producers and creative talent within trainees. SM houses some brilliant producers such as Yoo Young-Jin, who has continued to make hits after hits for many artists under the company. Occasionally, SM gets their supply of tracks from foreign producers, who may present negotiating powers (in terms of pay) but it would make sense for SM to choose producers that adhere to the SM sound (SMP). In reality, we can see that SM doesn’t often follow trends that smaller companies may follow — perhaps due to the merit of being a well established part of an oligopoly. This significantly reduces any power external music producers may have on SM. They make music, on their own terms.

20121107_seoulbeats_mnet_mamasMusic broadcasting stations are interesting to look at, as they supply something so critical to entertainment companies: airtime. Used as a promotional platform for many years now, music stations can exercise some power over the people who wish to be on them. In spite of that, SM still have the ability to pull out their artists from promoting (i.e the MAMA boycott in 2010) if they find that conditions are unfair.

It is safe to assume in light of the above, that supplier power is considerably low and any influence it does exercise, is short lived.

Bargaining Power of Buyers

20121014_seoulbeats_sujufanpowerThe buyer in this instance, would be the millions of loyal fans that exist not only in Korea, but around the world. From the days of H.O.T and Shinhwa right down to EXO — “SM-stans” are high in numbers. It is no surprise that the majority of artists under the SM brand have won at least one music show in their time.

Fans are the driving force behind sales and the continued popularity of a group. Thus they possess a significant amount of power, in influencing company decisions. We can see fans attempting to do this during the “Only 13” debacle, where fans bought stock within SM to counteract an executive decision to bring two additional members — Henry and Zhoumi — to Super Junior. Needless to say, their efforts failed, as SJ-M still promoted and Henry eventually had a solo. The previous argues that buyer power is pretty modest.

The Threat Of New Entrants and Substitutes

20120725_seoulbeats_buskerbuskerThe threat of new entrants and substitutes is high in the industry. Smaller companies are dominating charts with successful artists (Busker Busker, Ailee, IU, BAP, Block B etc.) quickly changing the dynamic of the K-pop industry. These companies boast more artist involvement in producing music and concepts, a larger pool of “left-over” trainees from bigger companies, shorter trainee periods, and constant promotions (à la BAP.) But above all, these companies are venturing to provide something tangible for a huge international fan base. Companies like TS Entertainment and Woolim Entertainment (pre-merger) were catering to demand across the world in the forms of concerts and are continuing to do so. SM on that front, rides this wave strongly — whereby a huge chunk of their artists are promoting in other areas of the world aside from Asia (Super Junior touring Latin America, SHINee in Spain, f(x) at the SXSW show, The Hollywood Bowl etc).

Despite this, SM is not oblivious of the need to further utilise this aspect of their strategy. Perhaps this is where the Woolim merger comes in to play as they will inevitably reach newer markets this way. The recent share acquisition of Baljunso also seems to slot in to this newer framework as indie labels offer an organic maturation of artistry and musicality — something that the ever so machine-like and robotic SM lacks. The decision for SM to target a domestic market (which stands to be more lucrative given SM’s expertise with international expansion) shows that this new development aims to eliminate the threat of new entrants and substitutes, by simply taking over them. How long they can keep on splurging on buying shares is ambiguous at the moment and thus makes the threat, pretty high.

Competitive Rivalry Within the Industry

20120531_seoulbeats_iamsmtown2Despite all of the above, we cannot say that SM hasn’t got power. They have a solid artist base (with 12 active artists under their wing and more to come with the Woolim and Baljunso deal.) They were the pioneers of European concerts (SM Town in Paris), which before then was an uncharted territory by K-pop companies. They are constantly searching for newer markets to pool trainees from (The SM auditions in Kazakhstan), and they have entered and made a small home in the Chinese music market with EXO-M and SJ-M. Expansion in to film and drama has also seen major developments with the release of the “I AM” documentary and the “To The Beautiful You” production.

20121208_seoulbeats_psyFor all that, we failed to see any growths in profits for the latter half of 2013. This has somewhat changed with EXO increasing SM’s stock value (doubling as Lee Soo-Man’s retirement plan,) but evidence dictates that YG is leading profits rights now (and JYP is leading losses.) The success of “Gangnam Style” has also shook the Korean entertainment industry out of its slumber — serving as an inspiration to budding artists to expand internationally, where SM failed with Girls’ Generation. Further comparison with YG unearths more doubts about SM: YG houses more homegrown producers (Teddy, G-Dragon, CL, and Epik High) reducing supplier power to a minimum.

Smaller companies are finding a strong footing in the industry, serving up newer genres that are attracting more listeners. This begs industry officials to rethink whether the idol formula holds any longer. The famous face-off between BAP and EXO (two traditional idol groups) during the 2012 MAMA Awards for the Best New Male Artist and how they lost against Busker Busker (giving rise to new slang amongst fandoms) stands testimony to this.

20130114_seoulbeats_kpopstarNon traditional routes of finding trainees have also become more popular with the rise of K-pop Star type programmes. Pulling trainees off of a show where future buyers have seen them perform and grow on stage for weeks ensures that popularity is achieved prior to an official debut (WINNER, Bang Ye-dam etc.) However, this does not always guarantee success as revealed by Park Ji-min, winner of K-pop Star 2012, who debuted as part of 15& and has seen a lukewarm response at best.

We can deduce that based on competitive rivalry, SM holds a majority in the market share due to their existing business strategy and a few developments made recently. But will they stand the test of time? With all this is mind, competitive rivalry within the K-pop industry stands to be a dark cloud looming over SM — and it’s high.

In the business of drawing to a close, we can see that SM has some solid foundations in their business model from the recruitment of trainees, right down to global promotions. However the threat of new entrants is high, and poses a threat to the continued success of SM. Though EXO has recently been a gem amongst the rocks, smaller companies and their talented acts are stealing the limelight. In order for SM to maintaining majority market share and continue this streak of prosperity for years to come, they must adapt to the changing face of K-pop. Time will tell us, whether they will achieve this or not. I guess Porter really doesn’t have all the answers.

(Naver, KBS World, Billboard, KTMF, Sports Today, Nate, BALJUNSO, KOSDAQ, Harvard University Press, YouTube Images via TED, appladesign, High Cut, SBS, SM Town, CJ E&M, MNet, C-Jes Entertainment)