Why South Korea’s Biggest Streaming Service Sold for $1.6 Billion

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.

5 Responses

  1. Paul Ayres

    Hi Paul
    Interesting article, thanks you; my question is what are you inferring? That the aggregated value of the two services builds them a robust and defensible market position in S Korea? That the aggregated revenues will justify the price? that their market position will now be unassailable?
    Chat and music are great ubiquity plays, but niether have produced material income though bot produce huge enterprise valuations.
    I don’t buy this approach at all – look at Line’s acquisition of MixRadio as an example of what should be a no-brainer turning out to be rather more complex.That said, I
    Anyway, would be interested in your thoughts – I still think that $1.6 billion is a huge amoutn of money for 28 million active subscribers…
    Best, Paul

    • Paul Resnikoff

      I’m not disagreeing. It’s a play for mass users: great for the principals of Melon, obviously. Not sure how it pans out in the bigger picture for Kakao.

  2. Remi Swierczek

    If the head count is all that matters than Shazam should be worth $10 billion.
    Won’t happen as long music PIMP #2 will continue to PIMP music for FREE to the society of freeloaders.

  3. Anonymous

    There is nothing mysterious about the lack of profit. A 70-75% royalty rate is extremely high and there isn’t enough revenue left over to pay all operating expenses and turn a profit.

  4. Asad

    what do you think about spotify launch in South Korea ?
    is there any scope for spotify ? can spotify compete with MelOn ?