Kakao’s Acquisition of Loen Entertainment and Online Music Service Market – a déjà vu?

author admin   |   2016-06-05 23:35:37

Dae-Sik Hong (Professor, Sogang University)


Kakao’s Acquisition of Loen Entertainment

 

In January 2016, while merger between SK Telecom (“SKT”) and CJ Hello Vision (“CJHV”) was still an on-going debate issue in broadcasting and communications market, another huge M&A news came out and covered front pages of media – “Kakao acquiring Loen Entertainment.”  The value of takeover was 1.87 trillion won, exceeding 1 trillion won of SKT’s acquisition of CJHV. Loen Entertainment provides online music service with a brand named MelOn. CJHV, however, is the number one cable TV company in Korea, providing high-speed internet service, internet telephony service and MVNO (mobile virtual network operator) service. The change in industrial structure does not give a full explanation to difference in values of two companies, when considering customers’ needs to such services. Compared to the endless debates on validity of SKT-CJHV M&A, Kakao’s acquisition of Loen Entertainment ended without much argument, and Korean Fair Trade Commission (KFTC) stands on the same side.


Then, why did Kakao pay, compared to SKT-CJHV merger, almost double price to acquire Loen? It is beyond my ability to analyze the complicated strategies and plans of a company running its business. As a professional of competition law and regulation law, my concerns are how such acquisition might affect the related markets and the legal implication of the acquisition. Business owners might dislike the idea of connecting every single matter with legal point of view, but it is not our goal to pick out the problems (so don’t worry!). Korean government already has various legal methods to intervene and regulate any business, so our ideas might minimize the side effects of such regulations.

 

Loen, SKT and MelOn Services

 

M&A between Kakao and Loen reminds me of an old case. Loen is originally a record company named “Seoul Record” and started MelOn Service after SKT acquired it. After changing its main business to online music service, it became an affiliate of SK group and was named Loen in 2008. In 2013, Star Invest Holdings, Inc. became the largest stockholder of Loen, then Kakao became the largest stockholder in 2016 (Click here for the history of Loen).

 

MelOn Service which SKT started after the acquisition of Loen greatly affected the market and KFTC investigated and imposed sanctions to SKT. Before the launching of MelOn service, domestic online music service market was in fierce competition, having no company with market dominant power. The market was formed by several companies such as Soribada and Bugs Music in early 2000s which enabled customers to listen to the music for free through their personal computers that are connected to internet or provide P2P services to download MP3 files.. These enterprises induced people to visit their websites to use free music streaming services or to download MP3 files for low prices, while earning profits from advertisers. It was a typical two-sided platform business model using advertisements as the source of profits. The problem was, the methods to induce customers (which mean to provide customers music contents) were protected by copyrights of song writers and the infringement of copyright became a big issue. That explains why the history of Soribada (which would have become the Korean Napster) is the history of copyright infringement (Click here to see further information of Soribada).

 

Online Music Service Market and the invention of MP3 Phone

 

Dramatic change in online music service market is related to the development of devices. While customers had to download MP3 files via PC and used MP3 players to play the music in the past, using cellphones to listen to the music became possible. In 2004, LG Electronics Inc. (be sure it was not Samsung nor Apple) became the first company to equip MP3 players in the cellphones. However, LG Electronics were severely attacked by groups and people working in music copyright industry. MP3 files were almost impossible to control by copyrights since there was no protection at all and LG’s attempt to install MP3 players in cellphones made the situation even worse. It was the time I wrote this paper in the magazine named “Copyright Culture” while practicing Korean competition law at a law firm (the paper is not provided in online anymore, but my personal experience did help writing this paper).


KFTC’s decision on MelOn service cannot be explained when not considering this situation. SKT, compared to LG telecom, chose the business model considering the interests of copyrighters. While allowing MP3 phones to use music services, it technically locked the MP3 files with Digital Rights Management (“DRM”). DRM controls the copyright of digital contents and enables copyrighters to find out how the sources are downloaded or spread throughout internet. Music contents with DRM helped copyrighters to earn profits as more people downloaded their songs. SKT, when starting MelOn service, adapted DRM with their own technology and it was used to music files and MP3 phones. Customers using SKT mobile communication services could join MelOn service and use DRM contents downloaded from PC with their cellphones. It was even possible to download with mobile internet service (which was not that fast at that time) just like Apple’s iTunes service.

 

Market Dominant Enterprise SKT’s Attempt to Enter Market and Resistance

 

SKT was the market dominant enterprise in Korean mobile communication service market. Then, when SKT tried to enter online music market, competitors in the market started to react. In September 2005, AD2000 Entertatinment, which provided music streaming service with the brand named MAX MP3 (it was the second largest enterprise in such market and was later acquired by CJ Media in July 2016), complained against SKT for the allegation of violating Korean  competition law to KFTC. Other enterprises followed AD2000 due to the fact that customers could not use MP3 files downloaded from the service provided by them with SKT’s MP3 cellphones. When customers want to use Non-DRM MP3 files which were not provided by SKT with their SKT MP3 phones, they had to join MelOn service and convert such files to DRM files. Complainants were afraid that customers might prefer using MelOn service and their attempt to minimize customers inconvenience by providing various services were not enough to attract customers. At the same time, a dispute between a French company Virgin Mega and a US global company Apple was going on, intensifying controversy in Korea as well. A bill was even submitted to French Congress ordering compatibility of DRM, and it was against Apple’s stand (click here for a translated version of such situation by an expert, click here for the original version).


I was personally engaged in the case on behalf of SKT so it might be hard to remain neutral to such issue. However, the followings are the opinion of a person who reviewed the case from the beginning (of course, that’s me). Several issues related to competition of online platform business model and its effects to customers are hidden in this case. Debates arose as the merger process continued as to concerned types of behavior such as tying and bundling and refusals to access to patented technology and legal reasoning for judgment such as essential facilities doctrine, network effects, tipping effects, leveraging of market power doctrine, and technological innovation as justification. SKT was imposed fines after reviews of KFTC (first review was based on the tying as unfair trade practice, second one for the acts of coercion of disadvantages and appreciable harm to interests of consumers as abuses of market dominance) but later on won the case in Seoul High Court. Supreme Court, despite people’s expectations of bringing the clear answer regarding important competition law issues, ended the case saying the decision of Seoul High Court was right. In October 2011, Supreme Court reconfirmed the legal principles from POSCO case (search for case number 8626 at Supreme Court English page). To look up for the SKT case, you can rather click Case information or Legal information service. Although we admit the fact that Supreme Court wasn’t able to review every single case with care due to the rush of cases, it is still sad to miss the opinion of Supreme Court. We hope there might be some chances to review issues of the case later on.

 

A déjà vu?

 

This case sure does remind us of old cases and I call it a déjà vu. When an enterprise trying to start a new business in ICT environment, which is consisted of C(Contents)-P(Platform)-N(Network)-D(Device), competitors always resist and customers have all different kinds of thoughts regarding their own interests. Enterprises with vertical integrations and without those, large business and small ones, and allied enterprises still in competition and tension in another area are all trying to grab customers’ attention, which leads to competition or co-operation among them.  As a result, there comes a winner (and of course the losers), co-operation ends with betrayal but there are some scenes that it is hard to allow enterprises to do so. Government, such as KFTC, decides whether to interrupt in such issues after analyzing each case. It is always interesting to view whether the government made the right choice or not with my own assessment.


What happens in real business area and disputes arising from events always catch people’s attention. However, are ordinary people, without much knowledge about competition law, given enough information about why the government is trying to interrupt in real cases? Unlike professionals, it is hard to find the answer for the question. Here is the Gatorade for your thirst, and you are now seeing the blog of Sogang University ICT Law and Economy Institute (“ICLE”) – Yes, you’ve found the right place to answer your question.

 

tags  
Kakao
Loen
SKT
MelOn
Online Music Service
DRM

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