An embattled SM Entertainment delivers 'SM 3.0'

SM Entertainment says that removing founder Lee Soo-man from the production process will increase revenue by 134 percent by 2025.

SM Entertainment Chief Financial Officer (CFO) Jang Cheol-hyuk explains about SM's IP monetization strategy as part of the "SM 3.0" in a video uploaded on Tuesday. [SCREEN CAPTURE]

SM Entertainment says that removing founder Lee Soo-man from the production process will increase revenue by 134 percent by 2025.

The K-pop agency, which is currently in a dust-up involving HYBE, Lee Soo-man and company co-CEO Lee Sung-su, introduced its "SM 3.0" in a video Tuesday by Chief Financial Officer Jang Cheol-hyuk.

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The main strategy involves tilting away from what are called Primary IP (intellectual property) businesses — which include physical albums, music streams and concerts — to derivative IP businesses, which center on sales of merchandise (MD), IP licenses, fan "platforms" and video content.

Derivative IP “will become the core growth platform for SM 3.0” as it has much higher profitability compared to primary IP, according to Jang. A representative example is SM’s “Kwangya” concept.

SM’s MD and IP sales from derivative IP business, which currently stands at 120 billion won ($92.3 million), will increase to 170 billion won by 2023 and 300 billion won by 2025. For detailed plans, Jang cited incorporating the artist’s character IP into all activities of the artist, including physical albums and concerts; utilizing the concept of the SM Culture Universe IP to create contents such as webtoons, web novels and videos; and expand IP licensing by signing contracts with global licensing partners and setting up special organizations in key regions, such as the United States, Europe and Japan.

Jang said in the video that SM would improve its operating profit by terminating contract with Like Planning — founder Lee’s private company — and streamlining core businesses that were previously carried out under exclusive agreements.

According to SM Entertainment, Lee Soo-man has exerted significant influence in managing and training the agency’s K-pop artists through his private music production company Like Planning, and had been collecting up to 6 percent of SM’s annual revenue as “production fees” until 2092.

“We have terminated the producing contract with Like Planning as of Dec. 31, 2022 and any additional payment regarding this contract will also be stopped,” Jang explained. “Therefore, there will no longer be the ‘6 percent of all sales’ payment to Like Planning from now on, which will be translated into an increase of 6 percent in operating margin immediately.”

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In addition, instead of outsourcing its high-profit core businesses — such as commerce and the fan platform business, which was run by SM Brand Marketing, as well as the concert business — will be brought in-house, ultimately leading to an increase in sales.

"Charging fair amounts to outside companies and improving our core system will lead to an increase of 30 billion won in sales and 310 billion won in operating profit at minimum,” Jang asserted.

Through its primary IP businesses, SM plans to increase the number of active artists to 21 or more by 2025; release more than 40 physical albums a year and sell 27 million yearly in 2025; and hold more than 400 global concerts per year.

SM Entertainment also unveiled plans for its fan platform business.

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The agency currently runs a fan communication app named Dear U bubble. Beyond that, Jang said the company plans to establish a consolidated platform that allows communication among fan communities as well as content and commerce, which will be run and managed by SM itself.

“In addition to monetization from resolving issues from SM 2.0, the strongest growth strategy under SM 3.0 will be the IP monetization strategy,” Jang said.

SM Entertainment's target numbers exceed analyst expectations.

The consensus for SM Entertainment’s operating profit was set at 131.3 billion for 2023; 152.5 billion won for 2024; and 200 billion won for 2025, according to data compiled by FnGuide.

“Amid the strong presence of the previous generation of idols, SM Entertainment has the largest number of artists among Korean entertainment companies in 2023 following the group and solo activities from the discharge of EXO’s Baekhyun and SHINee’s Taemin, as well as three scheduled debuts of rookie groups,” said Analyst Park Seong-gook from Kyobo Securities.

“The company's operating profit growth rate of 63.6 percent is expected to be the highest among its competitors when the delays in albums and performances, which were chronic discount factors, are resolved,” Park added.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]