K-Pop: idol speculation

Seoul equities traders do not read gossip about Korean pop stars purely for light relief. It can move stock prices. In the last decade, “K-Pop” has become a global export, thanks to bands such as BTS and Shinee. Returns on some entertainment stocks have been phenomenal. Shares in JYP Entertainment, one of the top three music businesses, rose by about 3,000 per cent in the eight years to its peak last October.

This year, scandals involving sex, drugs and bribery erupted across the industry. These are a problem for a business that promotes bands with squeaky clean images to teenage consumers. Shares of the three biggest entertainment companies are down more than a quarter this year.

A flawed business model has exacerbated the decline. A couple of K-pop groups may bring in most of a company’s revenues. For JYP, revenues from a single boy band, 2PM, were once over half its total. A new hit band can triple the previous year’s revenues. A flop means years of investment is lost. Idols, as the stars are called, spend up to a decade training at the company’s expense. There is no inbetween.

Luck plays an outsized role, making it difficult to predict or replicate successes. For boy bands that do find fame, a further problem awaits them in their 20s, at the peak of their popularity: up to 24 months of mandatory military service. For larger groups, staggered enlisting times can mean up to a decade out of the public eye. By the time stars switch back from camouflage to make-up, younger rivals abound.

Stocks generally start declining a year ahead of the date the oldest band member is slated to enlist. Shares in YG Entertainment, which represents singing sensations Big Bang, fell 38 per cent during this period. Operating profits slid by a quarter after the band members’ service started.

Almost two-thirds of all revenues come from concerts and TV ad appearances. These require artists to be present. Entertainment companies have, nevertheless, diversified into restaurant chains, cosmetics and even private equity. The failure of such ventures has dogged earnings in the past year.

Diehard fans around the world have pleaded with the Korean government to waive military service for boy bands, as it does for Olympic medallists. A recent ruling to keep the status quo means agency earnings continue to rely heavily on the shortlived fame of a few teenagers. Fans remain passionate about K-Pop. But the ardour of investors is waning.

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