South Korea continues to develop as a model for future recorded-music markets

In some ways South Korea’s music industry could be considered unique. It is one of a small number of markets that have reported growth in recorded-music sales, and for several years digital sales have exceeded physical. All of this has been achieved through the government’s emphasis on turning South Korea into the most “wired” country in the world. Virtually all households are connected to a high-speed broadband service, and mobile penetration exceeds 100%, with almost all members of the population able to own a mobile now having one.

For a number of years South Korea has been seen by Western countries as the future music-industry model. It is also an example of how territories moving away from physical music distribution and toward digital may proceed. The rapid advancement of South Korea’s digital-distribution infrastructure, coupled with few legitimate digital services, inevitably affected recorded-music sales. The collapse in the early part of the last decade was widely blamed on the same technology advances that are now driving new business models.

Music sales
Looking back over the past decade or so at the pattern of recorded-music sales in South Korea shows a market that went from relative stability to collapse then back to stability. During much of the 1990s, recorded-music sales were buoyed by the transition from audiocassettes to CDs, with sales benefiting from consumers’ replacing their analog music collections with CDs in addition to buying new music. The Asian financial crisis hurt sales in 1998, but they bounced back the following year. A rapid fall in audiocassette sales at the beginning of the 2000s hurt music sales, and CD sales also started falling soon after, resulting in a drop of more than two-thirds in the trade value between 2001 and 2005.

Since 2005, recorded-music sales have staged an impressive comeback. With the exception of 2007, the trade value of sales has increased, albeit at a slowing rate since 2008. According to the latest figures published by the IFPI, the trade value of sales increased 10.4% in 2009, to KRW185.2 billion (US$144.8 million), from KRW167.9 billion in 2008.

Earlier this year the IFPI said in its Digital Music Report 2011 that, overall, recorded-music sales increased 10% in the first half of last year. The report said that growth was due to the rollout of the graduated-response program to deal with file sharing, alongside strong take-up of legal music services from a number of Internet portals.

In some countries that have also tightened controls on file sharing, such as France and Sweden, the initial result of a return to an increase in recorded-music sales quickly subsided, and both these markets experienced contractions last year. In contrast, South Korean music sales have continued to grow. Music & Copyright has estimated that total trade revenues increased 8.6% last year, to KRW201.1 billion. The dip in physical sales was more than compensated for by the continued growth of digital. Music & Copyright estimates that digital accounted for 61.7% of total trade revenues last year, up from 55.5% in 2009.

It remains too early to say precisely what is behind the sales growth. The publicity surrounding the introduction of the government’s graduated-response legislation, which became effective last July, had a positive effect on music sales. However, those lobbyists that are against controls on file sharing and say the growth in digital should be driven by new, innovative services might also be able to use the experience of South Korea as justification for their stance.

Repertoire
Another reason for the return to growth in South Korea is the rise in popularity of the K-pop (Korean pop) genre. In 2009, the latest year for which repertoire-share figures are available, domestic repertoire accounted for 61% of physical recorded-music sales, up from 49% in 2008.

The K-pop genre, which has its roots in electronic pop, originated in the mid-1990s and was boosted by the creation in 1995 of music company SM Entertainment, which focused on the genre. Several other music companies followed SM Entertainment’s lead, and the genre quickly became mainstream. In the past decade a number of K-pop artists, such as the Wonder Girls and Taeyang, have sold well internationally.

The rise of the genre has, however, resulted in local criticism that artists and groups are being manufactured and subsequently exploited. Several K-pop artists are reported locally to go through an apprenticeship period at the beginning of their careers as part of long-term contracts signed with talent agencies. Despite subsequent successful K-pop careers, a number of artists and groups have complained that their arrangements with the talent agencies amount to little more than “slave-like contracts.” Earlier this year three members of the girl band Kara announced that they had taken legal action to terminate their contract with South Korean company DSP Entertainment. The three members have claimed that they received little in return for a high level of success in several Asian countries, as well as South Korea.

Another recent contract dispute involved the five-member group TVXQ and SM Entertainment, which was credited with forming the group in 2003. Three of the five members filed lawsuits claiming that their contract terms, which tied them to SM Entertainment for 13 years, were unfair. Although the dispute has not been resolved, the three formed a separate band called JYJ and released English-language album The Beginning in October 2010. The album, which included the track Ayyy Girl with US artist Kanye West, has sold about 300,000 copies in South Korea.

At the end of 2009, SM Entertainment was also on the receiving end of a lawsuit from one of the 13 members of the boy band Super Junior, who claimed that the length of his contract (13 years) was excessive. He won the case. Another case brought by a member of the NH Media-controlled boy band U-Kiss resulted in a ruling by the Korean Supreme Court that no contract between an artist and a talent agency could last for longer than 10 years.

Because of so many complaints, the Korean Fair Trade Commission (FTC) established new guidelines for contracts between entertainers and agencies, reducing the contract period to seven years. So far no talent agency has challenged the FTC guidelines.

Piracy and copyright protection
Music piracy remains a problem in South Korea, despite continued growth in legal digital sales. Successful negotiations regarding the FTA with the US coincided with South Korea’s removal from the US Trade Representative’s piracy watch list in 2009, the first time in 20 years it had not been included on the list. It was removed even though the Intellectual Property Alliance estimated that, in 2008, 70% of the music downloaded in South Korea via the Internet was of pirate origin. Included in the FTA are minimum standards of copyright protection and enforcement.

South Korea was one of the first countries in the world to introduce a three-strikes system to deal with online piracy. In July 2009 three-strikes legislation became effective, having been passed by the South Korean parliament the previous April. The law provided authorities with the power to force ISPs to send warnings to persistent file sharers and then suspend their account if they do not heed the warnings. Internet access is stopped for one month for a first offense, up to three months for a second offense and six months for a third offense. The first notices were sent out in March 2010, and the first accounts were suspended in November.

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.