Wrestling with or Embracing Digitization?

Vincent Van Gogh is regarded as one of the greatest artists and his paintings are some of the world’s most expensive. However, while he was alive he only sold one piece, The Red Vineyard near Arles, for 400 Belgian francs in 1890 (roughly equivalent to six to eight months wages of a domestic servant) or about 1,200 U.S. dollars at the current exchange rate. Today it is valued at more than 722 million U.S. dollars. He began to gain popularity only after his death in 1890 through a series of retrospective exhibitions in Paris (1901, 1905), Amsterdam (1905), Cologne (1912), New York (1913), and Berlin (1914). Why did he receive the fame only after his death? Have his works “improved” or “changed” since then? Obviously the answer is no. Two important factors converted the fate of his works; the galleries and the public (or “consumers” in economics jargon). Galleries made his works visible, and so the public appreciated his works. The more exposed, the more popular.

The European Parliament is currently engaged in a hot debate over the proposed reform of intellectual property rights (IPRs) and the rights of authors in a digital world. These issues have emerged all over the world. However, the way to approach them differs very much from country to country. Many voices in the EU are using the digitization of the market as an opportunity to strengthen further the level of IPRs and the rights of authors. They argue that YouTube and Netflix—today’s galleries—will inevitably decrease the creativity and income of artists. Therefore, Europe is wrestling with digitization which is considered to be an unalterable trend all over the world.

In order to find a better solution, it is always good to examine the experiences of other countries. South Korea (hereafter Korea) has one of the most developed Internet infrastructures in the world and has experienced severe debates, even several lawsuits, over digitization and IPR issues a decade ago. Today, Korea’s cultural power has expanded, and it enjoys a rich and vibrant cultural industry. These facts do not mean that everything is perfect in Korea. They simply suggest that one can extract very useful implications from Korea’s experience for Europe’s further cultural development and diversity.

Firstly, an examination of the brief history of the Korean music industry does not reveal any close link between IPRs and a lively music industry. Before 2009, despite widespread piracy, the Korean music industry displayed rapid growth rates of on/offline music sales, even reaching to 20 percent in 2008.[1] When the Korean government amended its IPR laws more strictly in 2009, the growth rate dropped to around 7 percent, and it was still only 8.4 percent in 2010. The same year, Korea was still considered to be the no. 2 country in illegal music file downloads in the world according to the Korea Times. However, in 2011, The Economist reported that Korea had the world’s toughest anti-piracy laws. The music sale growth rate reached 37.5 percent, but it declined to 7.7 percent in 2012. That same year, the viral hit “Gangnam Style” by Psy, took the world by storm, allowing him to buy a luxury mansion in Los Angeles. Making sense of this brief history requires two key elements: other important sources of revenues in the music industry than domestic on/offline sales and the role of business that has been overlooked.

In order to introduce these two elements, let’s analyze the comprehensive details of business activities in Korea vis-à-vis the evolution of the industry which are summarized in Table 1. When PC-based communication networks became widespread in the 1990s and digital devices, such as Mini-Disk and MP3 players, were introduced, the Korean business sector recognized that the market was changing. It was a transformation from analog to digital (A1 in Table 1). In 1998, instead of conventional recording formats, such as tapes or CDs, businesses began to produce “digital music (or albums)” (A1-1).[2] In 2000, tapes and CDs began to be sold and distributed online (A1-2). Witnessing this shift from offline to online markets (A2), Korean businesses anticipated the expansion of the music genres (from ballad to rap music) and the market (from domestic to international) as well.

As a result, Korean entertainment companies began at first to hire Korean-Americans who could speak and sing rap songs in English (in the late 1990s), later they contracted other foreign singers from Thailand and China (in the late 2000s) (A2-1). At the same time, Korean companies began to produce CDs which could take on the competition with online sales—that is, CDs packaged with products that cannot be obtained online, such as exclusive photos or posters of the singers, and even concert tickets (A2-2). Due to these efforts, CD sales increased again since the 2010s. Meanwhile, the rapid digitization of the music industry changed consumer behavior. Instead of buying CDs with only a few songs that were considered to be well made, consumers began to purchase (or download) only their favorite songs, not complete albums (A3). This picky behavior by consumers forced Korean companies to enhance musicality through collaboration with foreign composers (A3-1) and to focus on making a few well-made songs which led to the development of more profitable “digital single albums” (A3-2)—the first of this kind being released by Seven, a Korean singer, in 2004.

As the Internet became part of everyday life, notably with the rise of smartphones, Korean businesses realized that the music market was undergoing another dramatic transformation from “possessing music” as hardware to “accessing to music” via software, e.g., “platform” or “music streaming” (B1). Initially, Korean companies turned to cyber storage services such as Webhard (B1-1). But later they have focused more on music streaming services, following the launch of Melon in the early 2000s (B1-2). This new shift shortened the process of distribution to consumers and affected the whole music industry: from complexity to simplicity (B2). This new transformation has also shortened and simplified the process of music recording and publishing by establishing a simpler value chain in business terms (B2-1).

As a result, the costs of music recording and publishing have been significantly reduced, allowing numerous small and medium sized recording and producing companies to start their own businesses (B2-2). Portable devices such as smartphones and tablets highlight the importance of visual images as well as audio effects (B3). The Korean entertainment companies have thus focused on idol groups’ choreography, such as group dance to meet the visual appetite of consumers (B3-1). At the same time, idol groups and companies have focused more on on-site performances such as concerts which cannot be so easily copied or found online, emphasizing the existence of profitable and alternatives sources to declining on/off music sales (B3-2).

The severe competition in the music industry has forced companies to be more efficient when recording and publishing music (C1). They have merged and acquired other individual companies that specialized in a few specific sectors. Therefore, the “verticalization” of companies has started to prevail (C1-1). As these entertainment companies have beefed up, they have poured more effort and investment into fostering new idol groups and would-be singers by utilizing revenues gained from well-established idol groups or stars within the same company—a form of “chaebolization” (C1-2). All these processes and evolutions in the market made K-pop more competitive and the Korean companies have sought to expand abroad more aggressively. Soon, iTunes and Netflix will enter the Korean market. Instead of fearing this entry, the Korean music industry is welcoming the intervention of foreign companies because these foreign platforms will provide better revenues to artists than the current Korean platforms. But most of all, many Korean companies consider the participation of foreign companies as an opportunity to disseminate K-pop abroad more easily and effectively.

The fact that Korea has weaker IPRs than Europe or the United States could be seen as limiting creativity and/or reducing artists’ income. However, as mentioned above, as industrial evolutions shorten value chains and reduce recording and publishing costs, there have been an increasing number of companies and idol groups competing against one another. In this competitive environment, differentiation has become a critical factor among companies—and even among idol groups from the same entertainment company. This evolution has forced the Korean music industry to become more creative.

The ultimate consequence of this increased level of competition and creativity can be seen in the evolution of the artists’ income. In sharp contrast with the expectations based on weaker IPRs and reduced artists’ income, the Korean National Tax Service reported recently that the average income of singers has increased by 72.2 percent between 2010 and 2013 overpassing that of actors. This is in strong contrast with the situation in 2010, when the average income of K-pop singers was lower than that of salaried workers and a lot lower than that of actors (see Figure 1).

Three important implications can be extracted from the Korean case. First, if you cannot avoid it, enjoy it. The Korean music industry did not wrestle with digitization, but embraced it. Through this “technovation,” K-pop fans all over the world can easily access the music produced, and idol groups try to meet the needs of their fans from around the world. Second, business activities are the core factor, rather than state intervention. State intervention can distort the market structure and paralyze its function. Competition-oriented business activities (or strategies) induce more efficient resource allocation for improved results. In order to meet market needs, they can find better alternatives to strict regulations for addressing issues, such as IPRs. Last but not least, IPRs that balance more efficiently the interests of both consumers and producers do not harm creativity and income. Open competition and easy dissemination via globalisation can enhance creativity and artists’ incomes, as shown in the Korean case.

If Vincent Van Gogh had used the Internet or another platform to connect with the public in his era, he may well have sold more than one painting, and for much higher prices.

* This article is based on Dr. Jimmyn Parc’s presentation at the ECIPE-AKS seminar, “Cultural Industries: Pivoting to Asia?” held at the Korean Cultural Center on 7^th December 2015.

** This work was supported by Laboratory Program for Korean Studies through the Ministry of Education of Republic of Korea and Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2015-LAB-2250003).”

[1] The numbers can be different from other literature; however, the growth rates are based on author’s calculations with data obtained from the Ministry of Culture, Sports and Tourism and the Korea Creative Content Agency.

[2] The turning point was made by Cho PD, a Korean rapper, who established a “one-person” label, Stardom. Therefore, he is considered as a business entity.