- Prohibiting the supply of music, forming an independent organization to check Melon's preference for its own music
The Korea Fair Trade Commission (Chairman Han Ki-jung, hereinafter referred to as the "Fair Trade Commission") decided to approve conditional measures to impose corrective measures as it determined that the combination of Kakao and Kakao Entertainment (hereinafter referred to as "Kakao") acquired 39.87% of the shares of SM Entertainment (hereinafter referred to as "SM") substantially limits competition in the domestic pop music digital music market.
* Corrective action will be imposed on Kakao Entertainment Inc., which operates Melon, a digital music distributor and digital music platform.
This business combination is a combination between Kakao, a platform and comprehensive content company, and SM, a powerful K-pop content company, and has a great impact on the domestic entertainment industry, so it has collected opinions from stakeholders several times.
This business combination is a vertical business combination in which Kakao, a leading operator in the domestic pop music digital music planning and production market and the No. 1 operator in the digital music distribution and platform market, combines with SM, the No. 1 operator in the digital music planning and production market.
* Kakao plans and produces digital sound sources of popular singers such as IU and IVE, distributes music sources with them and other companies, and also operates a music platform, Melon. SM plans and produces digital sound sources of popular singers such as NCT and Aespa.
Kakao has strengthened its position in the music distribution market by securing SM's strong popular music sources, becoming the No. 1 operator in the digital music planning and production market, and securing SM's music distribution rights.
Even before this business combination, Kakao had been vertically integrated in the entire value chain of the digital music planning, production, distribution, and platform market, but strengthened the existing vertical integration by strengthening the relatively weak music planning and production sector and expanding its share in the distribution sector.
* As of the time of reporting the business combination, Kakao's share in the digital music market is 13.25% in the music planning and production market (including SM), 43.02% in the music distribution market (including SM distribution conversion), and 43.6% in the music platform market.
The KFTC judged that Kakao, which has secured SM's strong digital music source, is likely to limit competition in the music platform market by not supplying its own music to Melon's competitive music platform in a timely manner, or by introducing or exposing music produced or distributed by itself or its affiliates in Melon's favor ("self-preferential treatment").
Stakeholders also strongly expressed the opinion that when Melon's competitive music platform launches a new plan that is not in Melon to target niche markets, Kakao does not supply music on time, which could hinder the launch of the new plan, and that fair competition in the music planning and production market could be limited if its preference is given through Melon when SM's popular singers debut or comeback.
To address concerns about restricting competition in the digital music market, the KFTC decided to first prohibit Melon's competitive music platform from rejecting, suspending, or delaying the supply of music without a justifiable reason, and second, to impose corrective measures to establish an independent inspection body to regularly check its preference on Melon.
The inspection body consists of only five or more external members independent from Kakao, and will check whether it has preferential treatment through Melon's latest music source introduction corners, "The Latest Music," "Spotlight," and "High Rising." Since 80% of digital music sales occur within three months of release, the company imposed a preferential inspection on the latest music sources, considering that initial promotion and exposure are very important for the success of the music source.
* "Latest Music" is a regular banner that exposes the 20 most recently released albums, "Spotlight" is an event banner to promote the comeback album of established artists, and "High Rising" is an event banner to promote the debut album of new artists.
In the case of this business combination, as competitive pressure from international (global) companies such as YouTube Music and Spotify in the digital music platform market increases, behavioral corrective measures will be imposed in consideration of the possibility of reorganizing the competitive structure of the domestic digital music market in the future.
Kakao shall comply with the above corrective measures for three years, but if there is a significant change in market conditions, such as a significant decrease in concerns about competition restrictions, it may request the KFTC to cancel or change all or part of the corrective measures.
This corrective action is the first time corrective action has been imposed to block the platform's own preference in the business combination review, and it is also the first time corrective action has been imposed on business combinations in the entertainment sector.
In the future, the KFTC will continue to faithfully review the business combination so that competition is not restricted and consumer damage does not occur in markets that have a close impact on people's lives.