HYBE: Prioritizing Transmedia Storytelling With Music IP
The K-pop Record Label behind BTS that's building content universes originating from music.
GM readers 👋,
Happy June!
I’m coming off the first New Orleans Jazz & Heritage Festival in two years. The cochon de lait po-boys, the crawfish bread, and the mango freezes. The gospel tent, the Jazz Fest dad outfits, and the amazing musicians (e.g., Avett Brothers, Sweet Crude, Jason Marsalis, etc.). Very grateful to experience life returning to normal in a great city.
Shifting from personal to business, financial markets are a sea of red these days. Public equity investors, who are effectively the end buyer of most VC backed start-ups, have reset public technology companies’ valuations lower. Altimeter Capital’s Brad Gerstner provides (fast forward to 5:25 mark) a great chart showing just how far public SaaS revenue multiples have compressed. Along these lines, the NASDAQ is down 25% year-to-date. And there are already examples of the decline in public market valuations spilling over to late-stage private company financing rounds. This game of hot potato is getting spicy!
Meanwhile, we’re wrapping up 1Q earnings season. With that in mind, I thought it might be fun to write about an interesting public company. This is the first time I’m writing a more company-focused post. So, your feedback is welcome!
I should note that I’m not trying to shill any investments. My aim is to explore what these companies are up to, what makes them interesting, speculate where they might be going, risks to getting there, etc. In short, I hope to “level up” my understanding. And with that, on to the disclaimers….
Note: None of this is financial advice. I don’t own any HYBE stock. Do your own research!
Thanks again for reading. Now, let’s get after it!
Jimmy
PS if you’re not already a subscriber to Leveling Up and don’t want to miss out on future newsletters, feel free to enter your email below and you’ll receive new posts directly in your inbox:
HYBE: Prioritizing Transmedia Storytelling With Music IP
“There used to be a fight to be one of the winning comic books, video games, or film franchises. This meant there was room for many winners and that the reach of any winner was limited. Soon, it will be a fight for dominance between all franchises and across all mediums. The major stories will expand into all categories, from film to TV to podcasts, and be envisioned as interactive experiences. And as long as they continue to offer more “more”, there’s little reason for a fan to look (and invest) elsewhere.” - Matthew Ball, Managing Partner of EpyllionCo and former Head of Strategy for Amazon Studios
If you’ve been following the music industry the past few years, you’ve probably heard of the boy band BTS. They’ve sold millions of albums, received numerous awards, and introduced many music fans to Korean “K-pop” for the first time. Just this past week, BTS met with U.S. president Joe Biden to discuss anti-Asian hate crimes.
Personally, I’ll admit I’m not the biggest K-pop fan 🤷♂️. But BTS’s record label, South Korean-based HYBE (f/k/a Big Hit Entertainment), has caught my attention for some time. Over the past few years, it’s accomplished some eye-popping financial milestones – 35x’ing revenue to $1 billion in five years – and made a number of splashy deals – from a multi-billion dollar IPO to a $1 billion dollar-plus acquisition of Scooter Braun’s Ithaca Holdings. What I hadn’t appreciated prior to researching this piece is HYBE’s clear vision and unique strategy in a highly competitive global recorded music industry.
HYBE’s founder and Chairman Bang Si-Hyuk is clear eyed in his desire to build and monetize “transmedia stories” based on the company’s music IP. Last year, I explored the concept of transmedia storytelling with a particular focus on gaming. As a reminder, transmedia is the telling of stories across platforms. A story might originate in a comic book series and then be expanded through television, novels, games, films, and so on. For example, the critically acclaimed Netflix show Arcane tells the story of the League of Legends gaming franchise’s characters in a television series format. Similarly, several renowned movie and comic IP franchises – from Stars Wars to Marvel – have incorporated characters into video games. We are clearly seeing a trend of many popular IPs originating from comics, film, novels, and gaming trying to tell stories in a variety of formats. But can transmedia storytelling be successfully executed at scale with music IP as the starting point?
It’s worth diving into HYBE more because of the potential it has to expand how the music industry thinks about telling stories, growing love for these stories, and monetizing this love. In this piece, I’ll explore how HYBE has risen to prominence; its unique strategy among music IP companies and if its strategy is working; and finally, what risks could derail its future ambitions.
Grab a cup of coffee! We’re about to go deep on a fascinating business.
What is HYBE’s Origin Story?
Hybe, Co. Ltd. (“HYBE”) was established in 2005 by Bang Si-Hyuk as Big Hit Entertainment (“Big Hit”). Bang (pictured below) was passionate about music from an early age and joined the K-pop record label JYP Entertainment as a composer and producer in the 1990s. He worked with boy band g.o.d., Rain, Wonder Girls, 2am, and other top K-pop artists signed to JYP. During this period, Bang earned the nickname “Hitman Bang” for his involvement with a series of hit records.
In 2005, Bang left JYP Entertainment to start his own company, Big Hit Entertainment. Bang’s relationship with JYP’s founder Jin-Young Park enabled Big Hit to enter a joint venture-like relationship whereby Big Hit would develop several of JYP’s artists. But in the early years, Big Hit struggled to break a major artist and find consistent revenues.
In 2010, Bang signed RM, a rapper at the time, and considered forming a hip-hop group around him. Instead, Bang pivoted and formed an idol group. Only Suga and J-Hope remained after the pivot. Later, through auditions, four more members – Jin, Jimin, Jungkook, and V – would join the band. These seven members formed the group BTS, short for “Bangtan Sonyeondan” (which roughly translates to “Bulletproof Boy Scouts”). Bang explained how this decision to pivot to a boy band was primarily driven by business considerations:
“K-pop idol groups had an advantage, in that they had many opportunities to diversify revenue streams and their fans were extremely passionate, allowing concerts to compensate for the dropped album sales. This was also a time when many around the world were saying the only replacement for the demolished musical industry is live performances. If a performance-based model were to be created in South Korea, I thought, it would [still have to] be a K-pop idol group.”
Over the next decade, BTS would become arguably the most popular artists in the world, including the U.S. – an incredible achievement considering most of their songs are in Korean. Along these lines, the group became the first Korean act to perform at the Grammys and top the U.S. Billboard 200. They are the first group since the Beatles to have four U.S. number one albums in less than two years and were named the 2021 IFPI artist of the year for the second year in a row. Heady stuff!
As BTS’s popularity exploded and cash flows grew, Big Hit began to reinvest funds in building an ecosystem to further support the growth of its artists. Through a combination of internal technology development, partnerships, and acquisitions, Bang has tried to create a platform in which the company’s music IP can be transported to many different formats beyond audio. In doing so, HYBE aims to introduce IP where fans choose to spend time; in a way that furthers fans’ love of this IP; and monetizes their fandom more frequently.
With this expanded vision, Big Hit announced it was rebranding from a record label into a “music-based entertainment lifestyle company.” In March 2021, the company formally changed its name to HYBE, which “symbolizes connection, expansion, and relationships.” Meanwhile, the name Bit Hit Entertainment was changed to Big Hit Music and became a subsidiary of HYBE. (For more details on the re-brand, it’s worth watching the company’s brand presentation.)
The company’s new mission statement (depicted below) reflects Bang’s vision. He explains, “HYBE is a company that shares consolation and empathy through music. And to take it one step further to prove how entertainment based on music can touch the everyday life of an individual. This is what HYBE strives to do in the future.” We’ll explore this strategy in more detail in a bit. It’s at the heart of what makes HYBE’s strategy unique among music IP rights holders.
From Modest Origins to the Largest Player in K-pop
Before diving into HYBE’s strategy, it’s worth looking at the company’s leadership team and reflecting on the speed and scale of its growth.
In addition to HYBE’s founder and Chairman Bang Si-Hyuk, the senior team is mostly made up of successful music industry executives. For example, Lenzoo Yoon, HYBE America co-CEO, joined HYBE in 2010 and Scooter Braun, HYBE America co-CEO, founded his music management company SB Projects (later acquired by HYBE) in 2009. One notable exception to the music industry pedigree is HYBE’s CEO Jiwon Park, who spent a number of years at video gaming publisher Nexon. Given media trends and HYBE’s strategy, both of which we’ll discuss shortly, we doubt it’s an accident that its current CEO has gaming experience.
With a strong leadership team at the helm and the popularity of BTS, HYBE has experienced exponential growth over the past several years. In 2016, the company’s revenue and operating profit were $28 million and $8 million, respectively. By 2021, revenue had increased 35x to ~$1 billion with operating profit reaching $151 million.
For context, HYBE rose from being much smaller than the “Big Three” South Korean K-pop companies (i.e., SM Entertainment, YG Entertainment, and JYP Entertainment), to becoming larger (as measured by revenue) than all three combined in 2021. An impressive feat 15 years in the making. In October 2020, HYBE went public on the Korean Exchange and as of June 1, 2022 had a market capitalization of over $7.5 billion.
How did HYBE accomplish such exponential growth, so quickly – basically over a five year period?
I love the part in the How I Built This podcast when host Guy Raz asks very successful entrepreneurs: “Do you believe your success was due to skill or luck?” Answers vary, but data suggests that 64% of the time entrepreneurs give credit to both playing a role. 19% believe it was all luck. And 17% say it was all skill. Bang is a “both” guy, with a slight lean towards luck. In an interview with Time magazine, he explained his attribution:
“I fundamentally believe BTS’ success in the U.S. had a lot to do with luck. It wasn’t my brilliant strategy or BTS being such a perfect fit for the U.S. market. It was rather that their message resonated with a certain demand, and through digital media it spread quickly. And BTS touched something that wasn’t being addressed in the U.S. at the time, so American youths reacted, and that was proven through numbers…. With BTS and K-pop idols, fans want to be a part of the lifestyle of their beloved idols outside of concerts, but there’s no product on the market that fulfills that desire. I hate expansion for the sake of expansion; it has to be rooted in music.”
Yes, HYBE and BTS were lucky. But even still, HYBE’s clear vision, unique strategy, and successful execution have played a large part in its growth. Let’s look at HYBE’s strategy in more detail.
What is HYBE’s strategy for the future?
With all the above context set, let’s take a look at how HYBE intends to deliver on its vision. How is HYBE executing against its vision to be the world’s top “music-based entertainment lifestyle platform company”?
Bang Si-Hyuk explains how he draws inspiration from media companies, like Disney, that tell stories through multiple platforms: “Just like with Disney — animations, family movies, Marvel and Star Wars — I am trying to approach market segmentation while retaining the virtues of K-pop.” HYBE wants to tell stories about its IP – such as music and artists’ name & likeness – in an engaging way and convenient format for fans. Simply put, transmedia storytelling underpins the HYBE team’s strategy.
Before going further, it’s important to clarify what is and isn’t transmedia storytelling. Transmedia is not simply “more” – it’s not telling the same stories, or non-canonical stories, in other media forms. Transmedia storytelling endeavors to go further – telling discrete parts of stories on different platforms, causing voracious audiences to track down every part of the story; driving further audience love for the IP involved; and ideally leading to monetization of that love.
Music has attempted to build on its original IP (i.e., the copyrighted song and name & likeness of an artist) over the past several decades. One of the earliest examples of successful transmedia storytelling with music IP involved the rock pop band The Monkees and their eponymous TV show. Today, the music video is arguably the most popular way musicians tell stories in a different format (i.e., video). Examples of longer form video storytelling include Eminem & his 8 Mile film and the Spice Girls & their Spice World movie. The Beatles’ recently released Get Back documentary series as well as The Beatles: Rock Band video game, which was the first band-centric game in the Rock Band series. Meanwhile, The Gorillaz, an animated band, released several DVDs in the 2000s that contained a variety of content to enhance their story world, including video games, “live” performances, and a documentary about the band. More recently, there are examples of several other musicians’ documentaries on Netflix and virtual concerts in Fortnite and Roblox.
While some transmedia projects on music IP have been quite successful, I’d argue that music IP rights holders – whether they be record labels or artists – have not prioritized transmedia storytelling at scale to the same degree as IP rights holders originating from other entertainment segments. In this regard, HYBE’s transmedia approach is quite unique.
The “three C’s” framework of successful transmedia storytelling has been described as characters (the importance of story), convenience (getting the right content to the right people at the right time), and community (the importance of connecting and rewarding fans). By blending all three effectively, IP owners get something beyond the ability to exploit their characters on different platforms: they can use that synergy to personalize the story for audience members, driving interest in and engagement with the IP.
Consider this framework in the context of HYBE’s corporate structure. HYBE’s businesses are grouped (depicted below) into one of three different divisions: HYBE Labels, HYBE Solutions, and HYBE Platforms.
I’d argue that this structure looks pretty familiar. HYBE appears – on purpose or by chance – to have organized its business with the “three C’s” framework in mind. At HYBE Labels, artists work with their record label to introduce original “Characters” – audio content in which stories are told. At HYBE Solutions, specialized business units aim to deliver more, non-music content (based on the Labels IP) in a “Convenient” way – secondary and tertiary formats where fans spend the most time. Finally, HYBE Platforms connect fans directly to artists and each other, creating a sense of “Community.” In short, HYBE is working to create a flywheel in which they can build love for stories, originating from music IP, in a variety of formats.
Let’s look at each of these three divisions in more detail and explore how the company is executing its transmedia storytelling playbook:
Characters – HYBE Labels creates music IP that fans love
HYBE Labels includes the various record labels that develop artists and produce the music IP that acts as a foundation for HYBE Solutions and HYBE Platforms. Here’s a list of the labels and artists creating the characters that power HYBE’s content universe:
BIGHIT Music is the original Big Hit Entertainment. Artists on its roster include BTS, Lee Hyun, and Tomorrow X Together.
BELIFT Lab is a label partnership formed by HYBE and CJ ENM, a Korean entertainment and retail company, with the goal of developing K-pop idol groups. Artists on its roster include ENHYPEN.
PLEDIS Entertainment is a South Korean entertainment company that HYBE has acquired a majority stake in over time. Artists on its roster include SEVENTEEN, NU’EST, and BUMZU.
Other labels include SOURCE Music, KOZ Entertainment, HYBE Labels Japan, and ADOR.
HYBE Labels has grown its music IP content via both organic artist development and acquisitions. As an example of organic growth, BTS was signed and developed within the company’s ecosystem. Over the past couple years, other artists have emerged (albeit to a lesser degree than BTS), helping to diversify the company’s revenue. These artists include SEVENTEEN, Tomorrow X Together (“TXT”), and ENHYPEN.
In 2021, HYBE artists represented five spots in the South Korean music industry’s top 10 selling albums.
Even though more HYBE artists have found recent success, one of the biggest challenges facing the company is diversifying its revenue by artists. Developing evergreen IP at a scale close to BTS is very challenging once, let alone consistently. To this point, 97% of HYBE’s revenue was derived from BTS in 2019. And while I couldn’t find any data that shows HYBE’s current revenue mix by artist, the company has almost certainly reduced the degree of reliance on BTS revenue since 2019. That said, I’d estimate that the band still contributes greater than 50% of total company revenue.
HYBE management team appears keenly focused on diversifying its content portfolio. In addition to the organic growth mentioned above, the company is also pursuing inorganic growth strategies to accelerate its diversification and add new content to the storytelling flywheel. For example, HYBE has invested in South Korean K-pop companies (e.g., PLEDIS Entertainment) and made a greater than $1 billion acquisition of Scooter Braun’s Ithaca Holdings in 2021.
The Ithaca deal includes SB projects and management clients Justin Bieber, Ariana Grande, Demi Lovato, and J Balvin. It also includes Scott Borchetta-led Big Machine Label Group and its roster, with artists like Thomas Rhett, Florida Georgia Line, and Tim McGraw.
It’s difficult to opine on HYBE’s valuation of Ithaca, because financials weren’t disclosed. But HYBE’s strategic rationale seems solid. Ithaca helps to further diversify its content offering and provides a platform in the U.S. through which to further expand in the West. HYBE surely sees additional revenue synergies between the groups once Ithaca is integrated and HYBE’s systems are put to work. For example, adding Justin Bieber and Ariana Grande to Weverse could bring tens of millions of fans to the HYBE ecosystem. Finally, Ithaca appears to embrace the transmedia storytelling playbook. SB Projects’ film and TV divisions have produced a number of successful projects including Lil Dicky’s acclaimed show “Dave” and Demi Lovato’s documentary series “Dancing with the Devil”.
At the time of the acquisition, Ithaca’s CEO Scooter Braun shared the potential for the combined company:
“This will be the first time HYBE’s groundbreaking systems and curation will be integrated in the U.S. market at the onset of an artist’s career. Plus, it will help us to continue to further the careers of the artists we already work with. Global opportunities for artists become exponential with this partnership. This is an opportunity for us to make history and further innovate the music industry and revolutionize the game itself. Its implications for the business will be monumental for a long time to come.”
In summary, HYBE Labels and Ithaca provide the company with the foundation to create stories – originating from music – that fans love. The combined company is focused on internally developing new artists as well as pursuing acquisitions and investments. While HYBE may take its time integrating Ithaca, I expect to see additional content deals in the future as the company seeks to further grow and diversify its music IP portfolio.
Convenience – HYBE Solutions aims to deliver the right stories in the right place
Different demographics spend varying amounts of time with each media format. A recent Deloitte survey on media trends captures this dynamic well. For example, video games are becoming increasingly mainstream as Gen Z finds it their favorite entertainment activity. Meanwhile, Boomers prefer watching TV over other formats. Music is pretty consistently ranked as a top 3 activity across demographic groups but not the favorite form of entertainment among any age group. This becomes even more important as people spend less time consuming media post-pandemic – a dynamic dubbed the “attention recession”.
Alongside middling engagement, music hasn’t historically been the best media category at monetizing a user’s time spent engaging. And that’s being kind. According to a study by video streaming platform Twitch, fans monetize at a rate of $0.15 per hour spent on Twitch versus $0.01 per hour listening on Spotify. Likewise, I recently wrote about the different paths for the recorded music and video gaming industries over the past 20 years. From the 1970s to early 2000s, recorded music was a larger market than gaming. Since then, the global gaming market has exploded from $40 billion to $175 billion in 2021. Meanwhile, music contracted (on an inflation adjusted basis) from $40 billion to a nadir of just below $15 billion in the early 2010s. Only with the proliferation of streaming has music once again returned to growth, causing the market to rise back above $20 billion in 2019.
This divergence can be summarized in a chart provided by strategist and former Head of Strategy for Amazon Studios Matthew Ball:
Consumers are spending more time and money immersed in a variety of media formats, with Gen Z ranking gaming as their favorite. Simply put, media companies, like HYBE, are highly incentivized to push their IP towards the most lucrative media formats. HYBE Solutions is made up of specialized business units that create new content based on the company’s music IP portfolio. The division has dedicated business units for video production of online concerts, artist movies/documentaries, and fan meet-ups (HYBE 360); technological research and partnerships related to video games, AI, and the metaverse (HYBE IM); creation of collectibles and merchandise (HYBE IPX); and more.
Some examples of recent projects include:
Web3 / NFTs: A partnership with Dunamu, which runs the Korean crypto exchange Upbit, to launch an NFT business, which will create an NFT platform and collectibles based on HYBE artists.
Gaming: Several music-inspired video games developed internally and in partnership with other gaming studios. In 2019, HYBE acquired South Korean video game publisher Superb Corporation. Since then, the company has released a number of games, including BTS World, which was published by NetMarble.
Books / Comics: A number of webtoons and webnovels that incorporate HYBE artists into the plots. In August 2021, HYBE announced a partnership with DC Comics and online animation firm Webtoon to work on content creation. Check out its pipeline of future releases presented during its 2021 Corporate Briefing (fast forward to the ~9 minute mark).
Educational Content: BTS-inspired Korean language learning materials.
Online Concerts / Films: BTS recently performed a three-day concert series called “BTS Permission to Dance On Stage” in its home city of Seoul, South Korea. Only 45,000 concert goers were allowed per show, due to COVID-19 restrictions. However, 2.5 million fans watched the concert via livestream, generating an impressive $30+ million just from livestreams of the event shown in theaters.
In summary, people are spending time and money on other entertainment formats beyond music. This makes HYBE’s Solutions prong essential for its transmedia strategy – to diversify storytelling to where people’s eyeballs, ears, and dollars increasingly are.
Community – HYBE Platforms connects fans to drive further engagement
As we noted at the beginning of this piece, music IP rights holders have attempted to tell their stories through other entertainment formats with varying degrees of success. While companies can drive love for their IP by spreading narratives across media, community building from instant messaging, VoIP, message boards, traditional social media platforms, and creator tools all help audiences engage with transmedia narratives and feel connected to both the IP and each other.
The large music streaming platforms, which drive the majority of recorded music industry revenues, have historically not focused on building features that foster community between artists and their fans and between fans themselves. Instead, these streaming services have solved for content delivery rather than connection with artists. They provide users with personalized playlists and discovery tools to sort through tens of millions of catalog and tens of thousands of new tracks uploaded everyday. As MIDiA Research aptly puts it, Spotify, Apple Music, and other streaming services have caused “music to become the sonic wallpaper that is the constant backdrop to our daily mundanity.”
In response, large music companies, such as Universal, Sony, and Warner, have sought to build community via investments in and partnerships with platforms where fans socialize to share and spread love of IP. Some notable recent examples include Sony’s (perhaps more gaming focused) investments in Discord and Epic Games, and Warner Music Group’s investment in Roblox.
In stark contrast to other music IP rights holders, HYBE has sought to build its own community platform. HYBE’s Platforms unit internally developed and launched the Weverse Company (“Weverse”). Weverse consists of a mobile app and web platform that hosts a variety of free and subscription content, including educational and entertainment videos, artist to fan interactions, platforms for users to connect with each other, and more. It is paired with an e-commerce app and website, “Weverse Shop”, where merchandise and other artist related products are sold.
HYBE reports some KPIs for Weverse, so we can get a sense of its performance over time. Weverse grew significantly in 2021, but showed some decline in active users during 1Q 2022. There were 6.8 million monthly active users (“MAUs”) in 4Q 2021 (up 45% year-over-year), but MAUs declined 5% to 6.4 million in 1Q 2022. Meanwhile, Weverse had 37 million subscribers (up 105% year-over-year) and 36 artists (up 157% year-over year) using the platform at the end of 2021. Notably, HYBE has allowed non-HYBE artists to utilize the Weverse platform with 29 non-HYBE signed artists onboarded, including popular acts like boy band PRETTYMUCH and singer songwriter Jeremy Zucker.
It’s no surprise to see HYBE finding ways to incorporate their IP storytelling into a community driven platform. I’d expect to see the company aggressively try to get more artists using Weverse while continuing to invest in tools and services that improve the app over time. Along these lines, the Ithaca acquisition provides the opportunity to onboard several pop superstars (e.g., Justin Bieber, Ariana Grande, Demi Lovato). The deal could prove to be a major catalyst for the app’s user count and revenue. Either way, investing in platforms like Weverse where fans live and form communities is likely to remain a priority as HYBE continues to tell stories across formats.
Will HYBE’s strategy work and what risks does it face?
HYBE’s transmedia storytelling strategy is exciting and the company is juggling a lot of balls to execute against its vision. But will it work? To answer this question, let’s take a look at how some of the key aspects of its business are faring.
First, let’s look at HYBE’s revenue mix. As discussed earlier, the company’s revenue has exploded over the past five years driven by the success of BTS. HYBE has employed its transmedia playbook to grow revenue streams that don’t require its artists to be directly involved, so-called “Artist Indirect Revenue.” Examples include merchandise, fan club subscriptions, and video game sales, whereas “Artist Direct Revenue” examples include album sales, concerts, advertisements, etc. where the artists need to physically be involved with the content creation process. Since 2018, indirect revenues have grown 6.8x to $583 million and its percentage of total revenue has increased from 31% to 58%. While some of the mix shift can be explained by the pandemic and collapse in concert revenues, the numbers suggest HYBE has been able to successfully expand the monetization of its IP to new formats. And for context (and although not necessarily a perfect apples-to-apples comparison), Warner Music Group and Universal Group generated a smaller 15% - 20% of their total revenue from licensing, merchandising, and other indirect revenue channels in 2021.
Second, HYBE’s operating profit has grown 2.4x since 2018. At the same time, operating profit margins have declined from 27% in 2018 to 15% in 2021. The company’s margins have been impacted as it invests in content, services, tools, and technology that allow it to sustain its growth. Even still, HYBE’s margins are higher than two of the three K-pop big three and in-line with major U.S. record label Warner Music Group.
Given what we know, HYBE’s transmedia strategy appears to be working quite well. However, can it sustain this success? The risks facing HYBE include:
IP portfolio age. As discussed above, BTS’s global popularity really took off in the past five years, meaning the dollar-weighted age of HYBE’s IP portfolio is quite young. It remains to be seen if BTS and the rest of HYBE’s content will stand the test of time and truly become evergreen. And even if it does, music releases typically decline in the first few years after release (depicted below), meaning HYBE will have to continue successfully releasing new content to keep revenue flat until its catalog ages and revenue stabilizes. To offset these effects, I’d expect HYBE to acquire more music IP beyond the Ithaca acquisition, especially targeting older IP (10+ years of age) that can provide steady cash flow and further be monetized in the company’s ecosystem.
Launching new superstar artists to diversify revenue beyond BTS. Hits drive revenue and profits at record labels. But discovering and launching new superstars is a competitive and very difficult game. It’s why labels spend billions of dollars every year trying to identify the next superstar. HYBE hit the jackpot with BTS, but can they do it at a similar scale again? This will be important for the company to diversify its revenue mix by artist. And given South Korea’s mandatory military service for men between ages 18-28, some BTS members may be required to leave the band for a period of time in the near future. That said, there are rumors that BTS members may be given an exemption from service.
Attracting artists outside of K-pop. One thing potentially working against HYBE’s global ambitions is K-pop’s unique development model. K-pop companies typically find artists in their teens, train the prospects for several years, and launch the most promising trainees as solo artists or groups. It’s a more manufactured and sometimes exploitative model of music creation than the rest of the world. Bang Si-Hyuk has been outspoken about prioritizing HYBE’s artists’ health and authenticity. Similarly, HYBE appears to be letting Big Machine and SB Projects work independently with regards to attracting and developing talent. The company will have to continue being flexible if it wants to launch superstars outside of K-pop.
M&A Overpayment. At the end of 2021, HYBE had over $500 million of cash on hand. I expect to see further acquisitions to diversify its content portfolio beyond BTS and to continue building out its transmedia storytelling platform’s talent, technology, and tools. Of course, a big risk will be pursuing a large acquisition that doesn’t work out.
Attracting great talent willing to focus on its IP portfolio. In order to build great content in new formats, HYBE will have to recruit great technical and business talent. This may be harder than it seems. For example, if you are a great game developer, why do you want to work at HYBE instead of a dedicated game company? Why limit yourself to HYBE’s IP and potentially be of secondary importance to the HYBE Labels business?
Transmedia storytelling is really hard. The graveyard of large media companies who have attempted transmedia strategies is large. Disney is arguably the current leader in transmedia – successfully telling unified stories about large complex worlds across film, TV, and comic books. But even Disney has struggled at transmedia, releasing a series of video games with mixed results and suddenly closing their internal game studios in 2016. Closer to home, K-pop company YG Entertainment experienced operating margin erosion (depicted below) after it entered a variety of non-music businesses. As a result, I’d expect HYBE Solutions to continue forming partnerships in areas outside its core competencies rather than trying to build them solely in-house.
High valuation relative to peers. I don’t intend to go deep into HYBE’s valuation. The purpose of this piece is meant to be more strategy-focused. But I feel like we should at least touch upon it. I analyzed HYBE against competitors across two valuation metrics (Enterprise Value to LTM Revenue and Price to LTM Earnings) and one operating metric (revenue growth). As a quick disclaimer, I’m using trailing numbers via Morningstar, The Wall Street Journal, and Yahoo Finance data, so this analysis should be taken with a grain of salt. Nevertheless, the analysis suggests that HYBE trades at premium multiples when compared to other K-pop, media, and internet platform companies. The two charts below illustrate this dynamic. HYBE’s premium valuation is largely driven by the company’s faster growth trajectory than the comp set. However, its relative valuation sets a high bar for the company to meet expectations and maintain its elevated growth rate into the future. Can HYBE continue to deliver?
Closing Thoughts
What HYBE strives to build is very ambitious. After all, it’s what the largest media companies in the world are working hard towards: telling stories based on first party IP across many different entertainment formats in a cohesive and compelling way.
HYBE has structured its organization to deliver on this clear objective and early financial results suggest that it’s executing well against this vision. At the same time, moving from merely exploiting IP to transmedia is expensive. And there are many big open questions surrounding HYBE’s ability to sustain this success over a longer time period.
However, if HYBE is successful, it may create a content ecosystem so robust and popular that it could even challenge the “Majors.” In this way, other music companies can learn a lot: HYBE’s combination of catering to artists’ biggest fans, embracing technological change to distribute IP across multiple platforms, and developing fully-owned tech products (i.e. Weverse) that support deeply community-driven experiences is differentiated in the recorded music market. For that reason, I expect to see other labels – such as Universal Music, Sony Music, and Warner Music – looking to tell more stories based upon their IP across other formats in the coming years.
Thanks to Hannah and Adam for the feedback, input, and editing!
Great insight, thank you.
Terrific Analysis! Will watch them closely - wondering whether Scooter's disastrous PR battle with Taylor Swift will impact growth.