Digital Rules The Day

Telecom companies here are taking a major role in the development of the country's music industry.

Buoyed by soaring digital sales, telcos have moved beyond just providing platforms to taking part in various aspects of the music business.

Digital music sales—from polyphonic and master ringtones to song downloads, Internet streaming services, music for Web pages and more—already outpace total CD and cassette sales in South Korea.

According to local labels body the Music Industry Assn. of Korea, the value of physical music shipments collapsed in 2004 to just 152 billion won ($150 million). In comparison, digital sales reached about 187.5 billion won ($185 million) last year, according to the Korean Assn. of Phonogram Producers, which collects digital-music revenue.

A recent report from the KAPP and Seoul-based brokerage Daishin Securities predicts that digital sales could reach 1 trillion won ($1 billion) by 2007. Other estimates range from 709.5 billion won ($700 million) to 1.5 trillion won ($1.5 billion).

"Digital sales, whether via mobile or online, have not only rewritten the rules, they have changed the game," MTV Korea creative planner/senior executive Bernie Cho says. "With mobile operators opening massive online music portals, buying record labels and signing artists to exclusive content deals, telecom companies in Korea have moved beyond just being platforms to becoming major players in the music industry."

Mobile applications are leading the way in the industry's transformation. According to the Ministry of Information and Communications, 37.2 million of South Korea's 48 million people have at least one mobile phone.

There is fierce competition between telecoms and mobile phone makers to provide the largest number of new features at the lowest prices. Music is one of the most potent weapons in this battle.

All the phones coming to market this year in Korea by local manufacturers Samsung Electronics, LG Electronics and Pantech & Curitel will have MP3 functions, ranging from small, flash-memory players to 3GB hard drives. Other phones have WiFi connectivity to allow for wireless Internet access from much of Seoul and other major cities.

With phones able to hold increasing amounts of music, South Korean service providers have all introduced music download and streaming services in the last nine months. The main telecom operators—SK Telecom, KT and LG Telecom—say their online services combined have 3 million subscribers so far.

All of these services offer users the option of paying a per-song rate of around 500 won (50 cents) or a flat monthly fee of 5,000 won ($5) for unlimited access to hundreds of thousands of songs.

In May, SK Telecom, Korea's largest telecom operator, bought one of Korea's leading music companies, YBM Seoul Record, and a leading movie production company, iHQ Entertainment. It has also set up a $75 million entertainment investment fund.

Industry sources suggest that other local major movie studios and music companies are in the telecoms' sights. SK Telecom's strategy is to boost content through acquisitions and capital injections, explains Han Jung-su, assistant manager of the company's contents planning division.

"In the past, Korean movies were not doing well, but then big conglomerates such as CJ and Orion entered the market, introducing big capital, and now Korean movies are in their prime," Han says. "Similarly, the introduction of big capital into the depressed music market is necessary."

Labels, however, are less positive about the increasing influence of telecom providers in the music food chain. "In the short term, these deals seem positive, in the sense they are supplying funds," says Choi Young-eun, an administrator at the KAPP. "But in the long term, it could hurt the music industry. It is KAPP's policy to protect music producers' contents from the mobile carriers."

One of the KAPP's claims is that the labels receive only about 20% of the revenue from digital sales.

"We're still waiting for the first digital single to really take off," says Jimmy Jeong, director of new business at JYP Entertainment, a music label specializing in R&B and U.S. urban sounds. "At this point, we are looking for sponsors and other ways of making telecom deals work for us."

However, JYP has been swift to use mobile and online exposure for its acts. Jeong cites leading Korean artist Rain, who tied in a December album launch with a live concert in Seoul that was made available to mobile phone operators. Korean Internet portal Daum Communications owns 50% of JYP, and Jeong says more than 3 million people watched the broadcast on the daum.net Web site.

Rain, who has stated ambitions of being the first Korean act to crack America, has been named best Korean artist at a string of MTV awards shows across Asia this year. ••••