On the surface, streaming music is a hopeless money pit, with high licensing costs, bad margins, and far too many competitors plaguing profitability. Just shake a stick, and there’s a troubled tale: Spotify has incinerated hundreds of millions without a clear exit; Pandora has yet to turn a profit; Deezer canceled its IPO; Rdio went out of business.
But over in South Korea, there’s a success story. Just this week, messaging giant Kakao agreed to purchase a majority position in Melon for $1.6 billion (or, more accurately, $1.9 trillion won). The acquisition was for 76.4 percent ownership in Leon Entertainment, a K-pop firm that controls Melon. Both K-pop and streaming music dominate music culture in the region, and accordingly, the acquisition is designed to further Kakao’s dominant position in the region.
Streaming music profitability is still an unsolved mystery, and Kakao hasn’t cracked the code. But they are amassing a ton of South Koreans into one place. Central to this acquisition is KakaoTalk, which is used by roughly two-thirds of South Korea’s population, and is hyper-dominant among younger users. All in, KakaoTalk claims about 37 million users in a country of about 51 million people.
Layer in Melon, which has an estimated 28 million users (again, in a country of 50-some million), and the rationale behind this acquisition starts to make some sense. Of course, merging KakaoTalk with Melon won’t solve monetization problems inherent in either business, but at least it puts a huge number of South Koreans in the same place.