Kakao’s SM takeover gets conditional green light

Jeong Hee-eun, director general of business trade and M&A bureau at Fair Trade Commission, speaks during a press briefing held at the Sejong Government complex in Sejong, Thursday. (Newsis)

Korea’s antitrust regulator has approved IT giant Kakao’s acquisition of a 39.87 percent stake in SM Entertainment, the K-pop agency behind EXO, aespa and NCT, contingent upon the implementation of corrective measures.

The Fair Trade Commission said Thursday that it imposed two forms of corrective measures to address concerns that the merger of Kakao, a major IT company that owns both the music streaming service Melon and SM Entertainment, may pose a threat to competition in the local digital streaming market.

To ease these concerns, Kakao is prohibited from unreasonably refusing, suspending or delaying music supply by Melon’s competitors without justifiable reasons. The regulator has also mandated Kakao to establish an independent body comprising at least five external members to regularly monitor whether the company is receiving potential favoritism from Melon.

Kakao is required to comply with these corrective measures for three years. However, if there is a significant change in the market situation, such as a significant decrease in concerns about competition restrictions, the FTC may seek the cancellation or modification of some or all of the measures, the regulator said.

The decision came about 14 months after Kakao and Kakao Entertainment acquired a combined 39.87 percent stake in SM Entertainment. Since the merger was expected to have a significant impact on the entertainment industry down the road, including the K-pop sector, the regulator launched a review of Kakao's acquisition a month later.

At that time, the watchdog described the deal as "a merger between a general content firm and a K-pop company," noting that their businesses overlap each other.

It looked into the possibilities of Melon modifying its algorithms to benefit singers from SM Entertainment, as well as the potential for Kakao and SM to enhance their market power by jointly launching new products or services.

Through this acquisition approval, Kakao became the No. 1 operator in the digital music planning and production market and secured SM’s popular music sources.

Its share of the local digital music market rose to 13.25 percent of the music planning and production market here. It took up about 43 percent of the music distribution market and 43.6 percent of the music platform market.

“Kakao, which had been vertically integrated across the entire value chain from digital music planning and production to distribution and platform, strengthened its relatively weak music planning and production sectors further solidified its existing vertical integration,” Jeong Hee-eun, director general of business trade and M&A bureau at FTC, said.

Following the FTC’s decision, Kakao vowed to faithfully fulfill its duty for approval conditions. Meanwhile, the IT giant said it would enhance the global competitiveness of the K-culture industry and create a fair ecosystem by combining the IT and IP capabilities of each company to create synergy.

By Jie Ye-eun(yeeun@heraldcorp.com)