[Insight & Opinion] The Limits of Entertainment Companies... It's Not Just HYBE's Problem

Stock Price Declines of Korea's Top Four Entertainment Companies
Drop Larger Than HYBE's
Need for Systematic Management Structure

The conflict between HYBE and CEO Min Hee-jin will ultimately end up in court. Even if CEO Min Hee-jin is removed at the shareholders' meeting, the controversy will not end. HYBE's stock price has fallen significantly. The closing price on the 17th (Friday) was down 38% compared to the peak at the end of June last year.

However, if we take a broader look at other companies, the stock price decline is not unique to HYBE. Following SM and YG, even JYP Entertainment's stock price among the four major domestic entertainment companies has all dropped significantly compared to their highest points recorded last year. Based on last Friday's closing prices, JYP fell by 59%, YG by 55%, and SM by about 41%, making HYBE's decline relatively smaller.

While the specific situations vary slightly by company, poor earnings performance is a major factor. JYP's operating profit in the first quarter fell 20% year-on-year to 33.6 billion KRW. SM posted an operating profit of 15.5 billion KRW, falling 35% below the expected average, and YG recorded an operating loss of 7 billion KRW.

HYBE's stock price decline is fundamentally due to poor earnings as well. Operating profit decreased by 73% compared to a year ago. HYBE's standalone financial statements, excluding subsidiaries, show an even more severe performance, with a sharp increase in financial asset valuation losses leading to a deficit exceeding 190 billion KRW last year. The impact of management conflicts on the stock price has been limited. This is partly because CEO Min Hee-jin's company still contributes little to HYBE's overall earnings. Ultimately, stock prices reflect earnings.

Korea's entertainment industry has a unique history and system. Starting with SM in 1989, agencies introduced corporate management systems. They selected talented trainees, debuted them through Korea's unique idol training system, and ventured into overseas markets.

As a result, the territory of K-pop expanded, and with BTS making a strong impact in the United States, K-pop has grown into mainstream music enjoyed worldwide, capturing a 10% share of the global streaming market. It is an astonishing growth story, but the entertainment industry has clear limitations. Past success does not guarantee the future, creating great uncertainty, and volatility is so high that predicting responses in advance is virtually impossible. Securities firm reports generally forecast new album or rookie performance based on past results, but public tastes are always changing and difficult to predict.

The success or failure of the business is decisively influenced by capable producers and star entertainers, but since people are everything, risk management is extremely challenging. In HYBE's case, the conflict was among producers, but conflicts between companies and their affiliated entertainers are common. No company can maintain stable management with an unstructured decision-making system and a revenue model relying on a small number of human resources. This is why leading global entertainment companies like Universal Music adopt a multi-label system based on horizontal diversification. If HYBE's multi-label strategy is properly established, it will not be a weakness.

HYBE, with total assets exceeding 5 trillion KRW, was designated as a large business group for the first time among entertainment companies on the 15th. The largest shareholder, Chairman Bang Si-hyuk, was named the head of a large business group (same person). This is the first time for a music producer. Most internal corporate disputes are actually due to governance issues. For stable earnings, it is now necessary to have a more mature governance structure and systematic systems. If the separation between management and creators is ambiguous, controversies will continue. The roles of an outstanding producer and corporate management are different.

Kim Sang-chul, Economic Commentator