Stream Media Corporation / 4772

COVERAGE INITIATED ON: 2021.07.20 LAST UPDATE: 2021.07.20

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Stream Media Corporation/ 4772 RCoverage LAST UPDATE: 2021.07.20 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------7 Quarterly trends and results ------7 Business ------14 Business description ------14 Business Model ------16 Rights & Media segment (75.8% of total revenue in FY12/20) ------16 Entertainment segment (24.2% of total revenue in FY12/20) ------20 Other (0.0% of revenue in FY12/20) ------24 Parent company strategy ------25 SM Entertainment ------25 Market and value chain------29 Korean government policy to promote content and market expansion ------29 Main competitors ------35 Reference companies: Korean entertainment companies ------36 Strengths and weaknesses ------38 Historical performance and financial statements ------40 Income statement ------40 Balance sheet ------41 Cash flow statement ------42 Historical performance ------44 Other information ------49 History ------49 News and topics ------49 Corporate governance and top management ------49 Dividend policy ------50 Major shareholders ------50 Employees ------50 Profile ------50

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Executive summary

Business overview

◤ Stream Media Corporation (SMC) is a Japanese subsidiary of SM Entertainment (SM), South Korea’s largest entertainment company. Since 1998, SMC has provided digital content centered on Korean TV shows (K-dramas) in Japan. In 2009, SMC merged with BOF International Inc., a subsidiary of South Korea-based KEYEAST Co., Ltd. (founded by Bae Yong-joon, the lead actor of the K-drama hit “Winter Sonata”). At the time, SMC operated Japanese fan clubs for Korean actors/actresses, and broadcast Korean pop culture content through its paid TV channel DATV to communication satellite (CS) broadcasting subscribers.

◤ In 2016, SM invested in SMC through its Japanese subsidiary SM Entertainment Japan Co., Ltd. In 2018, SM acquired KEYEAST, bringing SMC into its group as a result. SMC then acquired SMEJ Inc. (a newly formed subsidiary of SM Entertainment Japan Co., Ltd.) via an absorption-type merger. Following the merger, SMC continued to broadcast paid content and manage and operate Japanese fan clubs for Korean artists, including artists not affiliated with SM, while also operating the music business (master production and CD sales) and concert business inherited from SMEJ. SM holds 85.3% of the voting rights in SMC. The company operates in three segments: Rights & Media (in FY12/20, 75.8% of total revenue; operating loss of JPY195mn), Entertainment (24.2% of total revenue; operating loss of JPY308mn), and Other (0.0%; operating loss of JPY14mn).

◤ In the Rights & Media segment, SMC broadcasts paid TV channels such as KNTV through CS broadcasting (via direct broadcast satellite services such as SKY PerfecTV! and SKY PerfecTV! Premium Service), cable TV (CATV), and Internet Protocol TV (IPTV). In FY12/19, broadcasting revenue was JPY2.3bn (36.1% of total revenue). Broadcasting revenue was not specifically disclosed in FY12/20 but assuming this revenue held steady YoY, broadcasting likely made up half of the total revenue of JPY4.3bn in FY12/20. Broadcasting revenue is determined by the number of subscribers and subscription fees. SMC pays a fixed percentage (undisclosed) of its subscription revenue to CS broadcasters. It had roughly 100,000 subscribers (as of 2014), mainly consisting of Korean pop culture fans in their 40s and above, including Korean residents in Japan. A KNTV subscription costs JPY3,960/month (on SKY PerfecTV!; incl. tax). In the rights business, SMC sells broadcasting rights of TV shows it has purchased in South Korea to terrestrial, CS, and other broadcasters. It also supplies DVDs of such TV shows to DVD rental chains. The company sells broadcast rights with a limited term and it also collects a portion of the revenue generated from the secondary usage for some rights it sells. However, the copyright of the TV shows is not transferred and remains with the Korean production company or TV station. SMC has not disclosed the fees from selling broadcasting rights.

◤ In the Entertainment segment, SMC exclusively manages SM-affiliated artists in Japan, organizes concerts for them at sports stadiums and other venues, sells merchandise, and plans and operates media appearances. For Korean artists who are not affiliated with SM, the company also offers contracted support for fan club operation, mobile content delivery, and other activities in Japan. SMC has merged with SMEJ and inherited the latter’s music business, and its new subsidiary Beyond Live Corporation (BLC) has launched the world’s first online concert streaming service “Beyond LIVE.” Entertainment revenue breaks down into concert, merchandise, and music revenue. Concert revenue accounts for the largest percentage of total segment revenue, followed by merchandise revenue, fan club revenue, and then album and music streaming revenue. Concert revenue is determined by attendance and ticket price (e.g., JPY12,000/ticket for TVXQ! concerts). Gross profit margin for merchandise sales is 30%. Fan club revenue equals annual membership fees (about JPY5,000/member). Fan club revenue is derived from the operation of fan clubs for A-list Korean actors/actresses and artists not under the SM umbrella (SM-affiliated artists are managed by SMEJ PLUS Co., Ltd.). SMC has not disclosed membership data for the fan clubs it operates. SMC typically receives about 20% of CD sales (JPY3,000/album) as music revenue. Concert revenue makes up 60– 70% of Entertainment revenue, and a portion of this is paid to parent company SM to cover artist training fees and future investments.

◤ In FY12/20, SMC reported revenue of JPY4.3bn and an operating loss of JPY1.2bn. The company was unable to hold any live concerts in Japan due to the COVID-19 pandemic, resulting in no booking of concert and merchandise revenue. Its domestic concerts annually drew over 1.5mn fans in 2017–2019. In FY12/19, the year before the merger, SMEJ reported revenue of JPY6.2bn and operating profit of JPY677mn, while SMC posted revenue of JPY6.1bn and operating profit of JPY71mn. Together, the companies generated revenue of JPY12.4bn and operating profit of JPY748mn (simple sum). In FY12/21, the

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company’s earnings will be affected by the extent of the recovery in offline concerts from 2H. On December 27, 2020, BLC held the “Beyond LIVE - NCT: RESONANCE 'GLOBAL WAVE’ (NCT2020)” online concert in an effort to complement offline concerts. This concert was watched by 200,000 viewers in 124 countries. However, SMC says the impact of this event on earnings will be negligible because a significant portion of the generated revenue goes to the streaming platform V LIVE. Building an in-house streaming platform is therefore one of the strategic challenges the company will need to address over the medium term.

Earnings trends

◤ In FY12/20, SMC reported consolidated revenue of JPY4.3bn, an operating loss of JPY1.2bn, a recurring loss of JPY1.2bn, and a net loss attributable to owners of the parent of JPY1.2bn. The company had expected the merger with SMEJ to drive YoY growth in revenue and profit, but it was unable to hold any offline concerts after the merger due to the pandemic. Moreover, it recorded merger costs, upfront expenses for the launch of the KNTV801 channel, and an increase in costs to close the DATV and Kchan! Hanryu TV channels, resulting in an operating loss. The company had planned to transfer “software in progress” in the Entertainment segment to its online streaming business, but booked JPY39mn in impairment losses.

◤ For FY12/21, the company forecasts revenue of JPY6.9bn (+60.7% YoY), an operating loss of JPY322mn (versus loss of JPY1.2bn in FY12/20), a recurring loss of JPY307mn (versus loss of JPY1.2bn in FY12/20), and a net loss attributable to owners of the parent of JPY309mn (versus net loss of JPY1.2bn in FY12/20). Despite YoY improvement, its outlook remains clouded by the pandemic, which will make it difficult to hold major offline events and attain the typical level of merchandise sales. The company expects its operations to gradually return to normal from Q4 FY12/21.

◤ On March 1, 2021, SMC unveiled a medium-term business plan covering FY12/21 to FY12/23. The company has not disclosed numerical targets for FY12/22 and FY12/23, but outlines the following strategic directions: 1) organizational improvement of broadcasting business and cultivation of video streaming market, 2) creation of synergies between offline and online concerts, and 3) expansion of revenue and earnings through in-house development of an online platform.

Strengths and weaknesses

◤ Shared Research sees SMC’s strengths as: 1) its 25-year broadcasting history and 100,000-strong subscriber base for the paid TV channel KNTV, which has a track record of popularizing Korean content in Japan; 2) the fan mobilization power of SMEJ, which has created bands such as TVXQ! and SHINee that can consistently sell out concerts at large stadiums; and 3) post- merger abilities to generate synergies and reap the benefits from access to content of artists managed by parent company SM and fan club member data of SMEJ PLUS (a subsidiary of SM Entertainment Japan).

◤ We see the company’s weaknesses as: 1) the absence of a clear growth path for its paid TV channel KNTV amid a general downtrend in subscribers of premium TV channels and the rise of free video streaming services; 2) a high earnings dependence on offline concerts, and a delay in developing an in-house video streaming platform; and 3) difficulties in securing human resources with high planning capabilities due to the company’s low name recognition in the Japanese music and video streaming areas.

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Key financial data

Income statement FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 FY12/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Cons. Cons. Est. Revenue 3,907 4,409 3,796 2,497 3,328 4,534 7,770 7,059 6,114 4,270 6,861 YoY -33.1% 12.9% -13.9% -34.2% 33.3% 36.2% 71.4% -9.2% -13.4% - 60.7% Gross profit 955 735 85 548 628 801 1,378 1,140 1,155 356 YoY -17.3% -23.0% -88.5% 548.4% 14.6% 27.5% 72.0% -17.3% 1.3% - Gross profit margin 24.4% 16.7% 2.2% 21.9% 18.9% 17.7% 17.7% 16.1% 18.9% 8.3% Operating profit 95 -188 -500 23 69 6 301 74 71 -1,200 -322 YoY - - - - 200.8% -91.4% - -75.6% -3.1% - 0.0% Operating profit margin 2.4% - - 0.9% 2.1% 0.1% 3.9% 1.0% 1.2% - Recurring profit 68 -139 -539 37 -22 16 308 73 74 -1,207 -307 YoY ------76.3% 1.0% - 0.0% Recurring profit margin 1.7% - - 1.5% - 0.4% 4.0% 1.0% 1.2%- Net income -53 -216 -434 67 -64 14 289 61 -483 -1,241 -309 YoY ------78.8% - - 0.0% Net margin - - - 2.7% - 0.3% 3.7% 0.9% - - Per-share data (split-adjusted; JPY) Shares issued (year-end; '000) 108,785 54,393 54,393 54,393 54,393 165,204 16,520 16,520 16,520 115,214 EPS -0.1 -2.7 -7.4 1.7 1.2 1.3 17.5 3.7 -29.3 -22.6 -2.68 EPS (fully diluted) 0.0 0.0 0.0 0.0 1.2 0.0 17.5 0.0 0.0 0.0 Dividend per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Book value per share 21.0 40.2 31.9 33.6 34.8 261.8 279.3 282.4 253.8 49.7 Balance sheet (JPYmn) Cash and cash equivalents 2,018 795 1,317 771 671 1,906 3,288 1,644 953 3,485 Total current assets 2,811 2,514 2,186 1,582 1,692 5,230 6,156 5,518 4,775 8,802 Tangible fixed assets 52 21 13 13 14 33 57 39 80 34 Investments and other assets 310 790 75 752 533 165 92 773 227 106 Intangible fixed assets 130 89 41 28 26 29 76 89 109 55 Total assets 3,303 3,414 2,315 2,376 2,265 5,457 6,380 6,419 5,191 8,997 Short-term debt 0 0 0 0 0 0 6 6 5 0 Total current liabilities 805 1,034 516 533 484 1,086 1,720 1,710 921 2,932 Long-term debt 0 100 0 0 0 0 21 15 10 0 Total fixed liabilities 3 33 1 4 3 14 33 27 22 16 Total liabilities 808 1,067 517 537 487 1,100 1,753 1,737 943 2,948 Shareholders' equity 2,390 2,225 1,741 1,818 1,754 4,333 4,611 4,662 4,190 5,720 Total net assets 2,495 2,347 1,798 1,839 1,778 4,357 4,627 4,681 4,248 6,049 Total interest-bearing debt 0 100 0 0 0 0 27 21 15 0 Cash flow statement (JPYmn) Cash flows from operating activities 433 -842 323 -191 -272 -726 1,388 -947 -599 -1,228 Cash flows from investing activities 67 -96 239 -366 174 -14 5 -687 -85 -5 Cash flows from financing activities 29 177 -87 -1 -1 1,176 -4 -6 -6 2,734 Financial ratios ROA (RP-based) 1.9% -4.1% -18.8% 1.6% -0.9% 0.4% 5.2% 1.1% 1.3% -17.0% ROE -2.2% -9.4% -21.9% 3.8% -3.6% 0.5% 6.5% 1.3% -10.9% -25.0% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% DOE 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity ratio 72.4% 65.2% 75.2% 76.5% 77.5% 79.4% 72.3% 72.6% 80.7% 63.6% Net margin -1.4% -4.9% -11.4% 2.7% -1.9% 0.3% 3.7% 0.9% -7.9% -29.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Recent updates

Highlights

On July 20, 2021, Shared Research initiated coverage of Stream Media Corporation (SMC).

For previous releases and developments, please refer to the “News and topics” section.

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Trends and outlook Quarterly trends and results

Cumulative FY12/19 FY12/20 FY12/21 FY12/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of Est.FY Est. Revenue 1,904 3,982 5,047 6,114 1,237 2,188 3,211 4,270 1,530 22.3% 6,861 YoY 50.9% 24.6% -5.4% -13.4% -35.1% -45.0% -36.4% -30.2% - 60.7% Gross profit 293 659 891 1,155 231 402 546 356 201 YoY -2.6% 16.3% -5.6% 1.3% -21.3% -38.9% -38.7% -69.2% -13.1% Gross profit margin 15.4% 16.5% 17.7% 18.9% 18.7% 18.4% 17.0% 8.3% 13.1% SG&A expenses 299 562 815 1,083 234 505 1,102 1,556 434 YoY 21.9% 9.6% 3.7% 1.6% -21.8% -10.2% 35.2% 43.6% - SG&A ratio 15.7% 14.1% 16.1% 17.7% 18.9% 23.1% 34.3% 36.4% 28.4% Operating profit -6 96 76 71 -3 -102 -555 -1,200 -233 - -322 YoY -80.4%-51.8%-3.1%------Operating profit margin -2.4%1.5%1.2%------Recurring profit -5 99 77 74 -4 -96 -545 -1,207 -233 - -307 YoY -94.9%-51.4%1.0%------Recurring profit margin -2.5%1.5%1.2%------Net income -7 73 53 -483 0 -92 -555 -1,241 -217 - -309 YoY -49.6%-62.5%------Net margin -1.8%1.1%-0.0%---- - Quarterly FY12/19 FY12/20 FY12/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Revenue 1,904 2,078 1,065 1,066 1,237 952 1,023 1,059 1,530 YoY 50.9% 7.5% -50.2% -38.1% -35.1% -54.2% -4.0% -0.7% 23.7% Gross profit 293 365 232 264 231 171 144 -190 201 YoY -2.6% 37.7% -38.4% 34.5% -21.3% -53.0% -38.2% - -13.1% Gross profit margin 15.4% 17.6% 21.8% 24.8% 18.7% 18.0% 14.1% - 13.1% SG&A expenses 299 263 253 269 234 271 597 455 434 YoY 21.9% -1.7% -7.4% -4.2% -21.8% 3.0% 136.3% 69.2% 85.6% SG&A ratio 15.7% 12.7% 23.7% 25.2% 18.9% 28.4% 58.3% 43.0% 28.4% Operating profit -6 102 -20 -5 -3 -99 -453 -645 -233 YoY ------Operating profit margin -4.9%------Recurring profit -5 104 -23 -3 -4 -93 -449 -662 -233 YoY ------Recurring profit margin -5.0%------Net income -7 80 -19 -536 0 -92 -464 -686 -217 YoY ------Net margin -3.8%--0.0%---- Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. SMC changed its segment structure from Q3 FY12/20. Through 1H FY12/20, it operated in the Broadcasting segment (channel business), the Rights & Media Communication segment (rights business, management business, events business, merchandising business, and fan club business), and the Other segment (content streaming business). In Q3 FY12/20, it reorganized its segment structure into the Rights & Media segment (channel business, rights business, and online streaming business), the Entertainment segment (management business, events business, merchandise business, fan club business, and music business), and the Other segment (karaoke app business).

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Quarterly results by segment

By segment (cumulative) FY12/19 FY12/20 FY12/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Total revenue 1,904 3,982 5,047 6,114 1,237 2,188 3,211 4,270 1,530 Before adjustments 1,954 4,094 5,245 6,343 1,256 2,191 3,211 4,285 1,530 YoY 50.9% 24.6% -5.4% -13.4% -35.1% -45.0% -36.4% -30.2% 23.7% Rights & Media ------2,475 3,246 1,048 % of total revenue ------77.1%75.8%68.5% Int eYoY ------Internal transactions ------15 3 Entertainment ------736 1,037 481 % of total revenue ------22.9%24.2%31.4% YoY ------9.0% Internal transactions ------Other ------1 1 1 % of total revenue ------0.0%0.0%0.0% YoY ------Internal transactions ------Inter-segment transactions, eliminations ------0 -15 Rights & Communication 1,275 2,881 3,515 4,054 727 1,196 - - - % of total revenue 65.3% 70.4% 67.0% 63.9% 57.9% 54.6% - - - YoY 84.9% 41.1% -3.8% -16.5% -42.9% -58.5% - - - Internal transactions 49 112 198 225 18 0 - - - Broadcasting 677 1,212 1,729 2,287 528 995 - - - % of total revenue 34.6% 29.6% 33.0% 36.1% 42.1% 45.4% - - - YoY 16.5% 1.9% -1.1% -1.1% -21.9% -17.9% - - - Internal transactions - - - 4 2 2 Other 2 2 2 2 - - - - - % of total revenue 0.1%0.0%0.0%0.0%----- YoY -59.3%-79.5%-85.5%-89.0%----- Internal transactions ------Inter-segment transactions, eliminations -49 -112 -198 -229 -19 -3 Operating profit -6 96 76 71 -3 -102 -555 -1,200 -233 Before adjustments 123 324 421 529 89 112 8 -516 -117 YoY -80.4%-51.8%-3.1%----- Operating profit margin -0.3%2.4%1.5%1.2%----- Rights & Media ------142 -195 32 % of total OP ------Operating profit margin ------5.7%-3.0% YoY ------Entertainment ------128 -308 -142 % of total OP ------Operating profit margin ------YoY ------Other - 6 -14 -8 % of total OP ------Operating profit margin ------YoY ------Inter-segment transactions, eliminations ------15 - Company-wide, eliminations ------564 -669 -116 Rights & Communication 103 400 463 493 68 122 % of total OP 83.4% - - 93.2% 77.1% - Operating profit margin 8.1% 13.9% 13.2% 12.2% 9.4% 10.2% YoY 64.4% 192.3% 72.4% 34.1% -33.3% -69.4% Broadcasting 21 -75 -41 36 20 -10 % of total OP 16.7% - - 6.9% 22.9% - Operating profit margin 3.0% -6.2% -2.4% 1.6% 3.8% - % of total OP -75.5% - - -38.0% -1.3% - Other -0 -1 -1 -1 - - % of total OP ------Operating profit margin ------% of total OP ------Inter-segment transactions, eliminations ------Company-wide expenses -129 -227 -345 -457 -92 -215 Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. SMC changed its segment structure from Q3 FY12/20. Through 1H FY12/20, it operated in the Broadcasting segment (channel business), the Rights & Media Communication segment (rights business, management business, events business, merchandising business, and fan club business), and the Other segment (content streaming business). In Q3 FY12/20, it reorganized its segment structure into the Rights & Media segment (channel business, rights business, and online streaming business), the Entertainment segment (management business, events business, merchandise business, fan club business, and music business), and the Other segment (karaoke app business).

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Q1 FY12/21 results Summary

▷ Revenue: JPY1.5bn (versus pre-merger, non-consolidated revenue of JPY1.2bn in Q1 FY12/20)

▷ Operating loss: JPY233mn (versus loss of JPY3mn)

▷ Recurring loss: JPY233mn (versus loss of JPY4mn)

▷ Net loss attributable to owners of the parent: JPY217mn (versus net income of JPY117,000)

SMC faced a challenging business environment as the impact of the COVID-19 pandemic lingered beyond its initial expectations, substantially delaying an anticipated normalization in core businesses such as event and concert operations. However, amid the paradigm shift caused by the pandemic, the company discovered new business opportunities in the form of higher consumer demand for streamed video content and sharp growth in the online concert market. Against this backdrop, the SMC group launched initiatives to create new businesses.

In Q1 FY12/21, the company maintained stable operations in part thanks to an expansion in sales of content rights in the Rights & Media segment. In the Entertainment segment, the suspension of operations in the core offline concerts delayed a return to normal business conditions, but the company still expects offline concerts to resume from Q4. From January 2021, it has continued to roll out measures to overcome the challenging business environment, such as resuming the music business by releasing new albums and planning to hold online events.

By segment Rights & Media

▷ Revenue: JPY1.0bn

▷ Operating profit: JPY32mn

In the broadcasting business, SMC focused on establishing the foundations for an improvement in earnings structure by reassigning the management resources of Kchan! Hanryu TV (closed in March 2021) and DATV (closed in May 2021) to KNTV. KNTV broadcast multiple popular K-dramas such as “The Penthouse: War in Life,” a major hit in South Korea that earned the highest number of awards (nine) at the 2020 SBS Drama Awards. It also broadcast a wealth of K-pop content, including a special feature on popular SM-affiliated band SUPER JUNIOR aired over 12 consecutive hours in March. The closure of Kchan! Hanryu TV and DATV is expected to depress revenue by several tens of millions of yen, with the impact likely to emerge from Q2.

The rights business delivered strong performance despite the tough operating environment. The company entered sublicensing contracts for major TV shows and sold broadcasting rights to terrestrial broadcasters, local TV stations, and broadcasting satellite (BS) channels. It also secured the rights for “Mr. Queen” (© STUDIO DRAGON CORPORATION), a K-drama that was highly rated in South Korea.

In the online streaming business, the company organized a concert by EXO member BAEKHYUN, which was viewed by about 110,000 fans across 120 countries. The concert included many new songs that are scheduled to be released in Japan, and was favorably received especially by Japanese fans.

The company made progress with the development of a KNTV streaming service slated for launch in Q4 FY12/21. KNTV is currently available on platforms such as CS broadcasting, but the company is pushing ahead with preparations to ensure viewers can enjoy KNTV content on their smartphones, computers, and tablets from Q4. It will allow subscribers to stream programs they missed during regular KNTV broadcasts via smartphones. The core subscribers for KNTV have thus far been Korean pop culture fans in their 40s and above. By allowing subscribers to stream K-dramas and variety programs featuring K-pop artists they missed during KNTV broadcasts, however, the company hopes to draw in a younger audience (teens to people in their 30s). The

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company also thinks its customer data collection efforts will enhance its marketing campaigns, which in turn should contribute to an expansion in the customer base for KNTV. In the future, it plans to stream music and other content such as live concerts.

Entertainment

▷ Revenue: JPY481mn

▷ Operating loss: JPY142mn

In the Entertainment segment, offline concerts were suspended during Q1, but the company strived to establish the foundations for a future recovery in earnings through a rebound in the music business by launching new albums, promoting artists’ media appearances, and planning online events. The company has maintained its initial forecast, assuming offline concerts will resume from 2H FY12/21.

The music business was supported by successive launches of new albums. In January 2021, EXO member BAEKHYUN released his first solo mini album “BAEKHYUN” in Japan. The album soared to the top of the iTunes chart in 21 countries. In the same month, SUPER JUNIOR released their new album, which secured 5th place in the Oricon Weekly Album ranking. In February 2021, NCT127 released the new mini album “LOVEHOLIC,” which rose the top of the Oricon Monthly Album ranking. Those CD sales and other revenue will be booked from Q2 onward.

In April 2021, SMC streamed SUPER JUNIOR’s fan meeting in Japan through the Beyond LIVE service, the first such event on the service held by SMC. The company books planning and production fees of fan meetings (before deduction of costs) as its revenue. SMC aims to generate earnings by increasing the frequency of self-hosted events on Beyond LIVE.

Other The Other segment recorded revenue of JPY1mn and an operating loss of JPY8mn.

Topics Closure of Kchan! Hanryu TV and DATV The company closed Kchan! Hanryu TV on March 31, 2021, and DATV on May 31, 2021.

Securing rights The company continued to secure broadcasting, streaming, and DVD rights of popular TV shows, and expanded related sales. For example, it secured the rights of the historical K-drama Mr. Queen (© STUDIO DRAGON CORPORATION).

KNTV

▷ The company held a live broadcast of the SMTOWN LIVE music program in Japan (January 1, 2021).

▷ The company held a Japan-exclusive live broadcast of a fan meeting with Park Seo-jun, the lead actor of the K-drama Itaewon Class (May 15, 2021).

▷ The company is pushing ahead with preparations for the launch of a video streaming service (scheduled for Q4).

Beyond LIVE

▷ BAEKHYUN live performance (January 4, 2021) was viewed by 110,000 fans across 120 countries.

▷ SHINee WORLD concert (April 4, 2021) was viewed by 130,000 fans across 120 countries.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

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Full-year company forecast Numerical targets FY12/19 FY12/20 FY12/21 (JPYmn) FY Act. FY Act. FY Est. Revenue 6,114 4,270 6,861 YoY -30.2% 60.7% Cost of sales 4,959 3,914 Gross profit 1,155 356 YoY -69.2% - Gross profit margin 18.9% 8.3% - SG&A expenses 1,083 1,556 SG&A ratio 17.7% 36.4% - Operating profit 71 -1,200 -322 YoY - - Operating profit margin 1.2% - - Recurring profit 74 -1,207 -307 YoY - - Recurring profit margin 1.2% - - Net income -483 -1,241 -309 YoY - - Net margin - - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

For FY12/21, SMC forecasts revenue of JPY6.9bn (+60.7% YoY), an operating loss of JPY322mn (loss of JPY1.2bn in FY12/20), a recurring loss of JPY307mn (loss of JPY1.2bn in FY12/20), and a net loss attributable to owners of the parent of JPY309mn (net loss of JPY1.2bn in FY12/20).

The company’s outlook remains clouded by the pandemic, but it expects operations to gradually recover supported by the start of vaccinations and the Tokyo Olympics in the summer. It expects that difficulties in holding major offline events will continue to undermine sales of merchandise, but looks for a gradual return to normal operations from 2H.

By segment Rights & Media In the broadcasting business, SMC will conduct a fundamental review of its existing structure through adopting an approach of selection and concentration. It will concentrate its resources on its flagship channel KNTV to improve its earnings structure.

In the new online video streaming business, the company will continue to actively develop the online concert service Beyond LIVE (operated by its subsidiary Beyond Live Corporation) into a global platform. While working to expand its artist lineup and customer base, the company will take steps to strengthen its monetization strategies by building in-house systems, securing sponsorship deals, and collaborating with the merchandise business.

In addition, the company will actively explore online video streaming services, leveraging its expertise in broadcasting TV shows and variety programs. In the rights business, the company will also seek to ensure stable and sustainable earnings by securing and selling broadcasting, distribution, and DVD rights of popular TV shows and variety programs.

Entertainment In the Entertainment segment, the company will continue to closely monitor conditions surrounding the pandemic, and push ahead with preparations for the resumption of offline concerts in compliance with government guidelines. It aims to restore annual concert attendance to the level SMEJ had before the merger (about 1.5mn). After the pandemic is brought under control, the company looks for a rebound in its offline and online concerts—the two pillars of the business—to contribute to synergies.

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Medium-term business plan

On March 1, 2021, SMC unveiled a medium-term business plan spanning from FY12/21 to FY12/23, however the company has not released numerical targets for FY12/22 and FY12/23.

Strategy Improve broadcasting business structure, and develop video streaming market

▷ SMC sees the broadcasting business as a core business which generates continuous and stable earnings, but earnings power of this business needs to be improved if it is to expand in scale. Previously, SMC operated three paid channels: KNTV, DATV, and Kchan! Hanryu TV. However, the latter two suffered consecutive losses in recent years, so the company decided to discontinue them.

▷ The company plans to concentrate its management resources on KNTV from June 2021. In addition to broadcasting popular K- dramas and Korean variety programs for the first time in Japan, the company is focusing on generating synergies between existing and new businesses. For example, it will start broadcasting Beyond LIVE events held in the video streaming business. It also aims to enhance its brand recognition and strengthen customer retention by increasing the channel’s appeal.

▷ In June 2020, the company launched the KNTV channel on communication satellite (CS) 110-degree broadcasting, which can be received without a dedicated tuner. It plans to utilize its expertise in operating channels such as KNTV to enter the linear- streaming space, and step up efforts to attract new subscribers.

▷ In the rights business, the company plans to take advantage of the recent increase in demand for content to expand beyond Korean content, and purchase and sell rights for Chinese and other global content. By investing in such content from the production stage, it will work to rapidly procure premium content.

Generate synergies between offline and online concerts SMC has thus far tended to manage artists affiliated with companies other than SM in Japan and held their concerts at arenas and other large venues. It has struggled to stably secure major artists due mainly to the risk of them cancelling their contracts, so the challenge for the company going forward is to avert earnings fluctuations stemming from insecure access to artists.

▷ SMEJ—absorbed by SMC in August 2020—has a track record of exclusively managing popular artists affiliated with SM in Japan. SMEJ has a rich lineup of artists such as TVXQ!, Girls’ Generation, and NCT, leveraging it to operate its concert, music, merchandise, and other businesses.

▷ In 2019, SMEJ reported roughly 10x the operating profit of SMC. Through the merger, SMC gained access to many artists affiliated with SM, and it therefore expects it will be able to operate the Entertainment segment on a larger scale than before while maintaining stability.

▷ SMC still faces a challenging business environment because it cannot hold offline concerts. It assumes this predicament will continue through 1H FY12/21, but thinks it will be able to hold offline concerts from 2H. It targets a rapid recovery in concert attendance to the typical annual level of around 1.5mn fans (1.65mn in 2017, 2.2mn in 2018, 1.5mn in 2019), and has been preparing for a return to normal operations.

▷ After the pandemic subsides, the company plans to push its offline and online concerts—two major business pillars—to not only capture larger audiences, but also expand cooperation with peripheral businesses such as the merchandising, music, and fan club businesses.

Expand revenue and earnings by developing online platform in-house

▷ For a long time, SMC has operated TV channels such as KNTV as its core business, and developing TV-centric platforms has

therefore been its main focus. However, the advancement of multimedia devices and communication networks in recent years

has altered the way video content is consumed, creating a new business environment for the company. Providing services

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adapted to such changes has proved a challenge. However, the company was able to move into the video streaming field in

earnest when Beyond Live Corporation (BLC) became a consolidated subsidiary as part of the merger with SMEJ.

▷ BLC is a pioneer in online concerts and operates the Beyond LIVE service. In addition to its affiliation with SM, it collaborates

with JYP Entertainment, and therefore a continually expanding pool of A-list artists affiliated with two major Korean

entertainment companies (e.g., TVXQ!, TWICE) is making an appearance on Beyond LIVE. As such, the service has major appeal

with fans, attracts many viewers, and continues to steadily generate attention.

▷ As online concerts can be viewed by fans all over the world, BLC plans to hold concerts of global artists on the service. Beyond

LIVE is currently streamed through the third-party platform V LIVE, and its earnings contributions are therefore small. However,

SMC plans to build its own online platform for Beyond LIVE, and expects this will sharply boost revenue and earnings from the

service in the future.

▷ SMC has already raised funds needed to build the in-house platform. In addition to rapidly improving the earnings from Beyond

LIVE, it plans to explore alternative monetization schemes through new services that leverage the in-house platform once it is

completed.

Fund raising In November 2020, SMC issued new shares worth roughly JPY2.7bn to NAVER Corporation through a third party allotment. It plans to use proceeds to push ahead with its growth and business strategies. Through this third party allotment, NAVER Corporation acquired 7.55% of the voting rights in SMC (as of December 2020), becoming a major shareholder.

Use of funds Use of funds Amout (JPYmn) Expenditure timing (1) Investments in new businesses including Beyond LIVE 1,722 Technololgy development, operation and maintenance 700 Operating and administrative expenses 700 Marketing expenses 322 From December 2020 (2) Strengthening existing businesses through December 2023 322 (Purchase of rights and content, advertising, other) (3) Hiring and training of human resources for business expansion698 Total 2,742 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Business Business description

SMC is a Japanese subsidiary of SM Entertainment (SM), one of the “Big 3” entertainment agencies in South Korea. In the Rights & Media segment, SMC broadcasts Korean TV shows (K-dramas) and variety programs—that have become popular as part of the “Korean wave” phenomenon—to paid subscribers. In the Entertainment segment, SMC manages K-pop artists affiliated with the parent company SM, operates fan clubs, and organizes events in Japan.

“Big 3” entertainment agencies in South Korea: The three leading entertainment agencies in South Korea are SM (founded in 1989), YG Entertainment (founded in 1996), and JYP Entertainment (founded in 1997). In some cases, HYBE (formerly Big Hit Entertainment; founded in 2005; the company behind the K-pop sensation BTS) is included as the “Big 4.” South Korea is home to some 500 entertainment companies, including independently operated businesses.

Korean wave: The Korean wave phenomenon refers to the growing popularity of South Korean culture in countries such as Japan, China, and Taiwan, since the 2000s. The first such wave in Japan was sparked by the success of K-drama “Winter Sonata” (starring Bae Yong-joon and Choi Ji-woo) around 2004. The second wave started around 2010, when K-pop bands such as TVXQ!, Girls’ Generation, and KARA rose to fame. The third wave occurred around 2017, when the girl “idol” group TWICE arrived on the scene. The fourth wave began in 2020, and was fueled by the popularity of the K- dramas “Crash Landing on You” and “Itaewon Class” and the success of K-pop band BTS.

K-pop: A genre of popular music originating in South Korea.

In August 2020, SMC merged with SMEJ Inc., a wholly owned subsidiary of SM Entertainment Japan Co., Ltd. As a result of the merger, SMC can now take full advantage of the resources of SMEJ and companies under its umbrella. This means it should be easier for SMC to increase appearances of popular artists affiliated with SM in programs under its own production, and secure other programs featuring such artists. By expanding its premium content, SMC expects to increase subscribers to its TV channel and retain them.

SMC has distributed digital content to mobile phones, and acquired, commercialized, and sold K-dramas and other programs as its core business since 1998 (under the name Digital Adventure Co., Ltd.). In 2009, it merged with BOF International Inc., a subsidiary of KEYEAST Co., Ltd. KEYEAST was founded by Bae Yong-joon (largest shareholder of the venture), who starred in the leading role of the K-drama “Winter Sonata” that kickstarted the first Korean wave in Japan. In October 2009, SMC launched the DATV channel dedicated to Asian content. In 2016, it merged with KNTV Co., Ltd., a company that broadcast content of major Korean TV stations such as MBC and SBS. In September 2016, the company received investment from SM Entertainment Japan, a subsidiary of SM. In 2018, SM acquired shares in KEYEAST, with SMC becoming a subsidiary of SM. In 2020, SMC merged with SMEJ, a company spun off from SM Entertainment Japan Co., Ltd. as a wholly owned subsidiary, and as a result, SMC inherited Everysing Japan Co., Ltd. and Beyond Live Corporation as subsidiaries as part of the merger.

The Rights & Media segment comprises broadcasting and rights businesses. In the core broadcasting business, SMC broadcasts paid TV channels such as KNTV through commercial satellite (CS) broadcasting (via direct broadcast satellite services such as SKY PerfecTV! and SKY PerfecTV! Premium Service), cable TV (CATV), and Internet Protocol TV (IPTV). It generates revenue from such operations through monthly subscription fees. In the rights business, the company chiefly sells broadcasting rights of TV shows. It acquires broadcasting, streaming, and other rights of K-dramas and Korean variety programs in collaboration with—or through joint planning with—Korean entertainment production companies, producers, and TV stations. It operates this business with a broad range of rights such as broadcasting rights, online streaming rights, and video and DVD rights. Once it has fully broadcast a show on its KNTV channel, SMC sells the broadcasting rights to domestic CATV channels, DVD rental chains, local terrestrial broadcasting stations, and streaming platforms such as Netflix as secondary and tertiary distribution channels (in this order).

In the Entertainment segment, SMC exclusively manages SM-affiliated artists in Japan, organizes concerts for these artists at sports stadiums and arenas, sells related merchandise, and plans and organizes media appearances. For famous Korean artists affiliated with other companies, SMC helps organize events, operate fan clubs, and disseminate information to mobile phones, supporting their activities in Japan. Through the merger with SMEJ in 2020, SMC inherited the SMEJ’s music business, and streams online live performances held by its subsidiary Beyond Live Corporation.

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In FY12/20, SMC reported revenue of JPY4.3bn on a consolidated basis (JPY6.1bn in FY12/19) and an operating loss of JPY1.2bn (operating profit of JPY71mn in FY12/19). Its performance was weighed down by successive cancellations of live concerts due to the pandemic and swelling restructuring costs. Before being absorbed by the company, SMEJ posted revenue of JPY6.2bn and operating profit of JPY677mn in 2019. SMC expects its earnings to bounce back once live concerts resume in Japan.

Results by segment By segment FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Revenue 3,907 4,409 3,796 2,497 3,328 4,534 7,770 7,059 6,114 4,270 YoY -33.1% 12.9% -13.9% -34.2% 33.3% 36.2% 71.4% -9.2% -13.4% -30.2% Rights & Media 3,246 YoY ------% of total revenue ------75.8% Entertainment 1,037 YoY ------% of total revenue ------24.2% Internal transactions Digital Content Delivery 745 724 YoY -43.0%-2.8%------Internal transactions Merchandising 988 1,483 600 637 353 144 YoY 45.0% 50.0% -59.6% 6.3% -44.6% -59.3% - - - - Internal transactions 20 Rights & Communication 1,737 1,867 2,958 1,839 1,908 2,145 5,351 4,729 3,829 YoY -26.6% 7.5% 58.4% -37.8% 3.8% 12.4% 149.5% -11.6% -19.0% - Internal transactions 66 82 82 126 225 Broadcasting 1,050 2,226 2,401 2,312 2,283 YoY -----112.1% 7.8% -3.7% -1.2% - Internal transactions 422 4 Telecommunication and Video Streaming 198 YoY -74.6%------Internal transactions 48 Other 239 335 239 21 19 19 18 18 2 1 YoY -66.1% 40.1% -28.8% -91.3% -9.8% 2.0% -5.5% 0.2% -89.0% - % of total revenue 6.1% 7.6% 6.3% 0.8% 0.6% 0.4% 0.2% 0.3% 0.0% 0.0% Internal transactions 00 Inter-segment transactions, eliminations -48 0 -69 -105 -85 -126 -229 -15 Operating profit 95 -188 -500 23 69 6 301 74 71 -1,200 YoY ----200.8% -91.4% - -75.6% -3.1% - Operating profit margin 2.4% - - 0.9% 2.4% - 8.5% 6.0% 8.3% - Rights & Media -195 YoY ------Operating profit margin ------Entertainment -308 YoY ------Operating profit margin ------Digital Content Delivery -64 93 YoY ------Operating profit margin -12.9%------Merchandising 193 252 45 30 -52 -71 YoY 70-10 ------Operating profit margin 19.5% 17.0% 7.5% 4.8% ------Rights & Communication -17 -488 -550 -8 113 0 384 368 493 YoY ------1 -00 - Operating profit margin ----5.9%0.0%7.2%7.8%12.9%- Broadcasting 17 68 284 59 36 YoY -----33-10 - Operating profit margin ----1.6%3.0%11.8%2.5%1.6%- Telecommunication and Video Streaming 5 YoY -1 ------Operating profit margin 2.6%------Other -22-46402122-1-14 YoY - - --14000 - - Operating profit margin - - 1.9% 2.1% 11.4% 7.9% 8.5% 12.1% - - % of total oprating profit - - - 1.9% 2.6% - 0.2% 0.5% - - Int er-segment t ransact ions, eliminat ions 01 -118 -15 Company-wide expenses -368 -355 -457 -669 Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. SMC changed its segment structure from Q3 FY12/20. Through 1H FY12/20, it operated in the Broadcasting segment (channel business), the Rights & Media Communication segment (rights business, management business, events business, merchandising business, and fan club business), and the Other segment (content streaming business). In Q3 FY12/20, it reorganized its segment structure into the Rights & Media segment (channel business, rights business, and online streaming business), the Entertainment segment (management business, events business, merchandise business, fan club business, and music business), and the Other segment (karaoke app business).

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Business Model Rights & Media segment (75.8% of total revenue in FY12/20)

Overview of business model Products and services KNTV: a channel dedicated to Korean content SMC provides the premium TV channel KNTV to communication satellite (CS), cable TV (CATV), and Internet Protocol TV (IPTV) broadcasters (mainly SKY PerfecTV!, JCOM, and Hikari TV). The channel primarily broadcasts popular K-dramas aired by Korean TV stations MBC and SBS, Korean news, K-pop (music) shows, and Korean variety programs. It is also available on CATV and IPTV (video content streamed over broadband internet such as ADSL).

SMC launched the DATV channel in 2009, and the linear-streaming channel Kchan! Hanryu TV—which was part of the dTV offerings by NTT Docomo— in 2018, but it discontinued both by May 2021, leaving KNTV as the only channel in operation from June 2021. DATV was dedicated to Asian content across the board, and included Chinese and Taiwanese programs in addition to Korean ones. Kchan! Hanryu TV was a linear-streaming channel for mobile devices that was geared toward a younger audience.

Viewing options There are six ways fans can view K-dramas and other content on KNTV. CS broadcast services that feature the channel include SKY PerfecTV! (SKY PerfecTV! Premium Service [channel 657] and SKY PerfecTV! Premium Service Hikari [channel 657]), Hikari TV (channel 570), J:COM (channel 761), and cable TV (CATV). From June 2020, the channel became available on the SKY PerfecTV! plan of the SKY PerfecTV! service (CS801; broadcast from 7am to 2am the following day). This new channel is called KNTV801.

The primary difference between KNTV (first five options above) and KNTV801 (sixth option) is broadcasting hours. KNTV broadcasts in 24-hour cycles starting at 4am, whereas KNTV801 broadcasts from 7am to 2am the following day (no broadcasting for five hours each day). During those hours, viewers cannot watch KNTV programs. Another key difference is that a special tuner is required to view KNTV, which is not the case for KNTV801. All viewing options give fans access to new K-dramas, variety programs, and music shows of Korean terrestrial broadcasters, as well as to programs featuring SM-affiliated artists such as TVXQ!, and original programs.

Pricing structure KNTV and KNTV801 are premium TV channels that require subscribers of broadcast services such as SKY PerfecTV! or J:COM to pay an additional monthly fee over and above their standard subscription fee (total subscription fee = standard subscription fee for broadcasting service + KNTV subscription fee). The table below shows the approximate total prices for standard and channel subscription fees by service provider as of February 2021 (all subscription fees are subject to revision due to service revisions). The standard subscription fees for broadcasting services such as J:COM (CATV) and Hikari TV are higher as they provide access to multiple channels. However, when combining these fees with internet provider service, they could end up being more affordable. The subscription fee for KNTV801 is lower than for KNTV in reflection of its shorter broadcasting hours.

Fee structure

(including t ax; SKY PerfecTV! SKY PerfecTV! SKY PerfecTV! J:COM Hikari TV JPY) Premium Service Premium Service Hikari CS801 Basic fee 429 429 From about 4,500 From about 1,650 429 KNTV fee 3,960 3,960 2,750 3,300 3,300 Source: Shared Research based on company data

Programming KNTV specializes in Korean content, and its programs largely break down into: 1) K-dramas (55%), and 2) variety, K-pop, and Korean news (45%). KNTV801, launched in June 2020, mainly broadcasts new K-dramas, variety programs, and music programs of Korean terrestrial broadcasters. It also broadcasts programs featuring SM-affiliated artists such as TVXQ!, and original content. DATV (closed in May 2021) was a channel dedicated to Asian content, and broadcast Chinese, Taiwanese, and other Asian content, in addition to K-dramas.

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Subtitle production The company produces Japanese subtitles for programs purchased in South Korea and its own shows and sells them (to CS and BS broadcasters and Netflix).

Sales of programs Through collaboration and joint planning with Korean entertainment agencies, production companies, and TV stations, SMC acquires broadcasting, online streaming, and video and DVD creation rights for K-dramas and Korean variety programs and use them to generate revenue. After airing programs on its own channel, if they are not a good fit for the channel, the company sometimes sells their rights to operators of other channels.

Use of broadcasting content outside of South Korea ・ Program broadcasting rights (including The rights to sells programs as "complete packages" to broadcasting stations in relevant countries/regions (providing localization repeat broadcasts) through subt it ling or dubbing). ・ Various rights related to programs Merchandising rights The rights to sell merchandise for characters or other content featured in broadcast programs. Video and DVD rights The rights to sell broadcast programs as video or DVD packaged software in relevant countries/regions. Online streaming rights The rights for video streaming services in relevant countries/regions to localize broadcast programs and stream them over the internet. Formatting rights are rights to format and sell program concepts, production methods, etc. Remake rights are rights to use structural Formatting and remake rights elements such as a story (drama) settings or characters in new productions, and sell these. Other rights The rights to use parts of broadcast programs as video materials (footage). Source: Shared Research based on “2014 Analysis of State of Overseas Use of Broadcast Content” by the Ministry of Internal Affairs and Communications’ Institute for Information and Communications Policy, “Content Business Management Strategy” (Chuokeizaisha) Note: SMC does not sell the merchandising rights and formatting/remake rights shown in the table above.

In 2001, the purchase price of Korean content (per program) averaged USD16,000–25,000 for K-dramas, USD9,000–25,000 for documentaries, and USD8,300 for animation works (source: Growth and International Distribution of Korean Video Content, Kim Mirim, Keio University Press). According to the company, K-dramas cost between JPY2mn and 20mn per episode, with the actual price determined based on the popularity of the show and buyer competition.

Content streaming SMC is expanding its platforms online, and already streams a wide range of content online, including live concerts. Following the merger with SMEJ in August 2020, it started streaming offline concerts through its Beyond LIVE service as a new business. Prices vary by concert, but official fan club members receive a discount (e.g., JPY3,900 for fan club members vs. JPY4,900 for non- members, both including tax).

Beyond LIVE: An online concert service operated by Beyond LIVE Corporation (BLC; currently a subsidiary of SMC), the world’s first online-only concert streaming service provider originally founded by SM and JYP Entertainment. BLC aims to grow its Beyond LIVE service into a global brand for online concerts through fusing the content production capabilities of SM with the IT technology of NAVER and also adding the global network of JYP Entertainment. The first Beyond LIVE event held in April 2020 was the world’s first paid online-only concert. BLC built a new cultural technology (CT: a system to promote Korean culture around the world) in the concert space by combining augmented reality (AR) and a multi-video connection system to achieve two-way communication between artists and viewers. Beyond LIVE events are streamed live across the world through NAVER’s video streaming app V LIVE.

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Beyond LIVE

Source: Shared Research based on company data Customer base The customers in its broadcasting business are the subscribers of KNTV, the company’s premium TV channel accessible through paid multi-channel broadcasting services. The channel was initially geared toward Korean residents in Japan (which numbered 435,459 as of June 2020). After K-dramas rose in popularity following the release of “Winter Sonata” in 2002, K-dramas became central to the channel’s programming. In 2014, the channel topped 100,000 subscribers including Japanese fans of Korean pop culture (source: minutes of the 2014 KNTV Program Council Meeting), with many subscribers in their 50s–60s (source: minutes of the 2015 KNTV Program Council Meeting). These are core Korean content fans who are willing to pay a monthly fee to view K- dramas and music programs featuring K-pop artists. The company says it aims to expand the number of viewers in their 30s and below going forward. According to the 2016 K-drama Survey conducted by SKY PerfecTV! (1,000 respondents), fans spent an average of JPY11,834 per year to enjoy Korean content.

The main age bracket of subscribers to paid multi-channel broadcasting services is “40s and above” (source: 2020 Report on Survey of Multi-Channel Broadcasting by the Multi-Channel Broadcasting Research Institute). As of end-March 2021, subscribers totaled 3,102,004 for CS digital broadcasting services (total subscribers of SKY PerfecTV!) and 25,546,780 for BS digital broadcasting services (NHK-BS: 22,755,309 subscribers, WOWOW: 2,791,471 subscribers).

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Customer value KNTV is a channel that specializes in Korean content, with K-dramas making up half of its programs. Its subscribers are fans of the genre who are willing to pay for such content. The channel provides value to core fans by 1) supplying interesting K-dramas, 2) offering a high quantity of such content (K-drama shows with 20–50 episodes of 75–90 min each), 3) premiering shows in Japan, and 4) allowing viewers to enjoy shows without commercials (however, the channel is not entirely commercial-free).

In the aforementioned 2016 K-drama Survey, respondents attributed the appeal of K-dramas to “the depiction of pure love” (27.2% of respondents), “the complexity of human relationships” (23.0%), “improbable plot twists that are detached from reality” (21.3%), “stories underpinned by a clear sense of right and wrong” (19.5%), “the depiction of love that transcends obstacles such as differences in social status” (18.3%), and “large-scale plots” (17.8%). In other words, the main attractions appear to be the themes of romance and personal relationships, as well as sprawling story arcs.

Another benefit of a paid channel such as KNTV lies in the quantity of its content. Whereas Japanese drama shows are generally replaced every three months, K-dramas do not adhere to such rigid broadcasting schedules. If viewership rates are favorable, the number of episodes is increased. Many K-dramas have 20–50 episodes, but large historical K-dramas can span over 200 episodes. In addition, individual episodes last 75–90 minutes. On the whole, therefore, K-dramas offer more volume than Japanese dramas. Another contributing factor to viewer satisfaction is that K-dramas have an addictive structure that encourages viewers to keep watching the next episode.

The shows that appear on KNTV are typically broadcast in Japan for the first time, which is another major draw of the channel. After all, KNTV subscribers are core fans of Korean pop culture, who are very familiar with the Korean content to begin with. The fact that many such shows are premiered on KNTV in Japan is therefore enticing to subscribers. Since 2020, a fourth Korean wave has been driven by younger K-pop fans (teens to people in their 30s). By being the first to broadcast K-pop and variety shows that feature K-pop artists, KNTV can offer the same satisfaction to this audience as to its K-drama fans. SMC says that KNTV and DATV broadcast over 50% of the K-dramas that premiered in Japan (in 2020), which is higher than rival K-drama channels KBS WORLD (operated by KBS Japan, a subsidiary of Korean Broadcasting System [KBS]), and Mnet (operated by CJ ENM JAPAN).

Content suppliers SMC purchases its content directly from 1) Korean terrestrial broadcasters MBC, KBS, and SBS, 2) Korean cable TV operators CJ ENM and JTBC, and 3) production companies that own show rights.

Content customers The company sells the rights of the K-dramas and Korean variety programs it purchased to 1) terrestrial broadcasters such as TV Tokyo, 2) local TV stations, and 3) BS and CS broadcast services. It also sells video-on-demand (VoD) rights to video streaming services such as U-NEXT and FOD, and also sells DVD rights.

Revenue structure Channel (broadcasting) business Revenue in the broadcasting business is calculated using the formula: Number of subscribers x monthly subscription fee x 12 months. KNTV has roughly 100,000 subscribers, who pay a monthly subscription fee of JPY3,960 for the SKY PerfecTV! Premium Service. The service operator collects this fee, and pays a fixed percentage to SMC. In the case of KNTV801, SMC collects the subscription fee directly from subscribers, and pays a fixed percentage to SKY PerfecTV!.

Revenue in the company’s broadcasting business has held steady at around JPY2.3bn from FY12/16 to FY12/19. Shared Research understands that broadcasting revenue accounted for 36.0% of the total revenue of JPY6.1bn in FY12/19, and two-thirds of the JPY3.2bn revenue in the Rights & Media segment in FY12/20 (analysis based on FY12/19 data as figures for the broadcasting business can no longer be extracted after the changes in the segment structure from FY12/20).

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Rights business SMC sells broadcasting rights of TV shows purchased in South Korea to CS broadcasting companies and other parties under fixed-term contracts and contracts under which it collects a portion of the revenue generated from secondary use. However, the copyright of the TV shows is not transferred and remains with the Korean production company or TV station. SMC has not disclosed the fees it earns on sales of broadcasting rights.

Online streaming business As part of the merger with SMEJ in August 2020, SMC inherited Beyond Live Corporation as a subsidiary, and moved into online streaming business. It plans to aggressively push online performances as a new business via the Beyond LIVE service. Revenue from online performances on Beyond LIVE is calculated by multiplying ticket prices and number of viewers. That said, the company earned only a fraction of this as all concerts were held in South Korea during the first year of the business through March 2021 and it needed to pay production fees, performance fees to artists, and hosting fees to the V LIVE platform. As a result, earnings contribution by this business was small, at several percent of total revenue.

Cost structure Cost of revenue in FY12/19 totaled JPY5.0bn, including JPY1.8bn for broadcasting-related expenses (36.4% of total cost of revenue) and JPY921mn in amortization of copyright and other rights (18.6%). In FY12/19, the broadcasting business generated revenue of JPY2.3bn, but reported profit of only JPY36mn and a low OPM of 1.6% (versus 2.5% in FY12/18). (Analysis based on FY12/19 data, as figures for the broadcasting business can no longer be extracted after the changes to the segment structure implemented in FY12/20.)

Entertainment segment (24.2% of total revenue in FY12/20) Services provided Entertainment (including talent production) operations and management SMC exclusively manages the activities of artists affiliated with SM—its parent company—in Japan, and also promotes the music business of SM in Japan. Its entertainment and talent production operations span 1) training of artists, 2) production, 3) management, and 4) fan club operations. SMC handles production and management for all SM-affiliated artists in Japan. It is not involved in talent recruiting and training, which are areas handled by SM. Fan club operation for SM-affiliated artists is handled by SMEJ PLUS.

SMC’s management responsibilities range from management and support of artist activities (song production and performances) to business promotion in Japan. It manages artists’ schedules, manages music and live performance quality, and disseminates information about artists. It provides value to consumers by 1) producing music, 2) organizing and operating live performances and concerts, and 3) selling merchandise. SM has an extensive lineup of artists that includes BoA, TVXQ!, SUPER JUNIOR, Girls’ Generation, SHINee, EXO, Red Velvet, and NCT. BoA was one of the early Korean artists to break out on the global stage, and TVXQ! has built up a massive and stable following in Japan. Girls’ Generation became the first Korean girl band to sell a million albums in 2011.

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SM’s artist lineup

Source: Shared Research based on SM website

Music production (master production) The key parties involved in music (master) production are entertainment companies, record companies, record labels, and music publishers. Record labels produce music and enter into agreements with entertainment companies under which they secure the rights to sell the music.

Key players in the music industry Record companies: These companies produce music albums. Although records have been mostly replaced by CDs as the dominant physical media, the term “record company” has remained in use. Record companies handle recording, pressing (mass production of physical media for commercial use), and distribution to retailers. In exchange for shouldering the risk of making initial investments in recording, pressing, and distribution, record companies retain the master rights for the music they produce, and therefore earn royalties whenever the music is sold or broadcast. In the past, record companies fully owned master rights. This is no longer the case, however, as entertainment companies (including talent production agencies) and music publishers also incur upfront expenses, and consequently often own a share of the master rights.

Record labels: These companies perform functions for record companies. Whereas record companies produce and sell music of various genres, record labels identify such genres and tastes, improve brand recognition among consumers, and thus help establish brands. Record labels have developed into independent companies regardless of whether they have capital ties with record companies, and they play a leading role in music sales.

Music publishers: These companies are entrusted with songwriting/composition rights by copyright holders, and execute these rights by using the songs in CDs, concert performances, and audio and video broadcasts. They advertise and promote the songs to increase their popularity, and manage the songwriting/composition rights. Music publishers are often affiliated with record labels, entertainment companies, or broadcast stations.

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Retailers, rental shops, music streaming companies: These companies play a role for consumers to enjoy songs individually by distributing music. Retailers and rental shops supply packaged physical media such as CDs and DVDs, while music streaming companies stream songs online. When CDs are sold, or when songs are used in broadcasts, concerts, or at karaoke facilities, copyright royalties are collected by copyright management organizations such as the Japanese Society for Rights of Authors, Composers and Publishers (JASRAC), paid to music publishers, and subsequently distributed to the songwriters or song creators.

Live performances and offline concerts Back when CDs were still the mainstream medium to deliver music to consumers, live performances and offline concerts were essentially considered as a means to promote CD sales. Today, however, concert admission fees generate more revenue than CD sales. The main parties involved in organizing live performances and offline concerts are entertainment companies, concert promoters, and event production companies. SMC provides planning and operation services for live performances and concerts in Japan.

Merchandise sales The lion’s share of merchandise sales is generated at live performance and concert venues from sale of staple products such as T- shirts, towels, glow sticks, and pouches. Some merchandise is also sold through convenience stores. In addition, merchandise can be purchased on the e-commerce websites operated by SMC (k1stshop.jp, shop-smtown.jp [consignment]), as well as the one operated by Avex Entertainment Inc. (mu-mo.net).

Fan club operation Fan club members receive benefits such as priority access to ticket sales, allowing them to secure favorable seats. In the past, fans would pay an annual membership fee, in exchange for which they would periodically receive paper newsletters and book tickets in advance. Nowadays, however, members sign up on their mobile phone and pay a monthly fee to gain access to exclusive information. SMEJ PLUS handles fan clubs for SM-affiliated artists, while SMC operates fan clubs for famous Korean actors/actresses and artists who do not operate under the SM umbrella.

Fan clubs operated by SMC (acting talent and artists not affiliated with SM)

Source: Shared Research based on company data Customer base SMC’s business partners are major record labels (such as Avex Entertainment Inc. and Universal Music LLC), broadcasting stations, show producers, publishers, event planners, and advertising agencies. Its customers are regular consumers who purchase CDs, concert tickets, merchandise, or fan club memberships. The table below displays the top 50 K-pop concerts by attendance from 2013 to 2019. Of the roughly JPY22mn total concertgoers, about 9.4mn attended concerts of SM-affiliated artists, accounting for 42.9% of the total. 2018 concerts by TVXQ! (performed 48 times in that year) attracted 1.3mn fans, the top number per artist for concerts held in Japan (even including domestic artists). Each performance drew an average of 26,700 fans.

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Attendance of South Korean artists’ concerts in Japan (unit: 1,000 people) Entertainment office Artist 2013 2014 2015 2016 2017 2018 2019 2013–2019 total TOHOSHINKI 893 691 780 - 571 1,280 571 4,786 Girls Generation 368 308 - - - - - 676 S.M. Entertainment SHINee 229 254 458 539 275 - 1,755 SUPER JUNIOR 153 275 288 - - - - 716 EXO - 318 445 465 - 259 - 1,487 G-DRAGON 361 - - - 259 - - 620 BIGBANG 719 927 708 1,859 1,022 - - 5,235 YG Entertainment D-LITE - 169 - - 273 - - 442 iKON - - - 341 463 227 251 1,282 2PM 283 202 455 307 - - - 1,247 JPY Entertainment TWICE -----170399569 FNC Entertainment FTISLAND 168 177 - - - - - 345 SV ENT SUPERNOVA-153----- 153 FNC Entertainment CNBLUE - - 181 187 202 - - 570 HYBE (former Big Hit Entertainment) BTS - - - 201 309 375 531 1,416 Pledis Entertainment SEVENTEEN-----199445644 Total - 3,174 3,474 2,857 3,818 3,638 2,785 2,197 21,943 Source: Shared Research based on Nikkei Entertainment (December 15, 2019, etc.) Value provided to customers K-pop artists differ from other global artists holding concerts in Japan in that they translate their lyrics and sing in Japanese when performing in Japan, and consistently hold concerts at large arenas in Japan, such as Tokyo Dome. For example, TVXQ! has held a total of 28 concerts by itself at Tokyo Dome, the sixth highest total for that venue (even including domestic artists). Despite being foreign artists, K-pop artists operate much like Japanese artists when performing in Japan, and this approach has won them loyal fanbases.

Fans typically join the fan clubs of their favorite artists to get priority access to concert tickets. The period of activity of K-pop boy bands tends to be short-lived (seven or eight years) with some blank period in part because Korean men are required to serve in the country’s military between the ages of 18 and 28 (with a two-year extension granted to notable K-pop artists). Despite this fact, the Japanese fan club for TVXQ! has remained in existence for 15 years. This demonstrates the strong loyalty of Japanese fans, and the number of fan club members affects the earnings of SMC.

Earnings structure Generally speaking, concerts bring in the highest share of revenue, followed by merchandise sales, CD sales and music streaming revenue, and fan club membership revenue (however, the impact of the COVID-19 pandemic has altered the revenue composition). Concerts generate over 50% of total revenue in the Entertainment segment, but SMC must pay a portion of its concert earnings to parent company SM in the form of artist performance fees, portrait rights, and royalties. These payments are used to fund artist training and future investments.

Operating offline concerts Concert revenue is determined by ticket prices, number of attendees, and merchandise sales.

For example, a standard ticket price of a TVXQ! concert at Tokyo Dome was JPY12,100. Concerts organized by SMC drew some 1.5mn fans in 2017, 2018, and 2019. In 2019, SMEJ reported revenue of JPY6.2bn. Assuming that 60–70% of its revenue was generated by concerts, we infer that SMEJ generated JPY3.7–4.4bn in concert revenue that year. Ticket sales totaled JPY18.0bn (ticket price of JPY12,000 multiplied by 1.5mn attendees), and assuming SMC received 20–30% of that amount, its earnings range worked out to JPY3.6–5.4bn. Shared Research therefore estimates SMC received just under 30% of the total concert revenue.

Merchandise sales Merchandise sales have a margin of 30–50%, making significant contributions to its earnings. In principle, 70% of the total merchandise revenue (including revenue from e-commerce and convenience store sales) is generated at concerts. (However, the pandemic has altered the revenue composition.)

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Fan club operation Fan club revenue is generated from enrollment fees and annual membership fees (roughly JPY5,000/member) and earnings from exclusive events for fan club members. Cost of revenue includes newsletter creation and distribution costs, member website maintenance and update expenses, and manufacturing costs for merchandise. SG&A expenses correspond to administrative personnel expenses.

CD sales and streaming revenue CD sales are in principle calculated by multiplying the number of CDs sold by the CD price. The revenue per CD is typically allocated as outlined below. For example, a TVXQ! CD is sold for roughly JPY3,000.

(1) Master recording and production costs: The producers who fund the master recording are granted the master rights, and earn master royalties. Master rights can be owned entirely by the record company, or partially by the record company and other parties involved in the production. Master royalties entitle the holders to roughly 20% of CD sales.

(2) Production costs: Roughly 10% of CD sales, including CD case manufacturing and CD jacket production costs.

(3) Artist royalties, etc.: Artist royalties amount to roughly 1% of CD sales (in general terms). Producers also receive royalties. Royalty shares are determined through negotiations with the record producer.

(4) Copyright royalties: An organization such as the Japanese Society for Rights of Authors, Composers and Publishers (JASRAC) receives 6% of CD sales as copyright royalties, and shares this with song writers/composers.

(5) CD retailer margin: CD retailers take a margin of roughly 25% on CD sales.

(6) Advertising and promotion expenses: About 10% of CD sales goes to advertising and promotion expenses.

(7) Personnel expenses: Personnel and other expenses amount to 5% of CD sales.

(8) Record company profit: After subtracting (1) to (7) above from CD sales, record companies keep remaining about 20% as profit.

Music streaming Streaming services such as LINE MUSIC and Spotify must obtain permission to stream music from copyright management organizations such as JASRAC, and pay license fees. JASRAC collects streaming data from such services and allocates the license fees on a per-song basis in accordance with streaming frequency. It withholds a management commission from the license fees, and distributes the remainder to the record labels and artists. The master rights holder generally receives 40–50% of the license revenue.

Other (0.0% of revenue in FY12/20)

Everysing Japan Co., Ltd., a joint venture established in Japan, has operated the “everysing” karaoke app since October 2014. The app allows users to listen to songs, record audio and video, participate in auditions, and share their performances via social media services.

The “everysing” karaoke app was developed by Dear U Co., Ltd., a Korean company under the SM umbrella, which also operates the app in South Korea. Everysing Japan handles the operation and promotion of the app in the Japanese market. The “everysing” app offers a rich lineup of songs, and brings the latest K-pop songs in karaoke format to Japan ahead of competitors.

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Parent company strategy SM Entertainment

Company overview and business model Largest of the “Big 3” entertainment companies in South Korea SM Entertainment Co., Ltd. (KOSDAQ: 041510; SM) is an entertainment company headquartered in South Korea. It was founded by Lee Soo-man (currently the head producer of SM, former singer) as SM Planning in 1989. This company has established a cornerstone of the K-pop scene by developing popular K-pop artists, including BoA, TVXQ!, and Girls’ Generation. In its core businesses, SM produces music, manages, and operates music copyright; manages and produces writers, musicians, singers, and actors/actresses; and plans and produces concerts and music events.

SM is also the largest record company in South Korea. Through its group companies, SM engages in a broad range of businesses including 1) management of entertainers, models, athletes, and influencers; 2) content production; 3) advertising agencies, and 4) merchandise, mobile app, live performance, travel, and restaurant businesses. Since 1998, the company has aggressively expanded overseas, setting up subsidiaries in Japan (2001), Hong Kong (2006), and the US (2008), and has heavily promoted the overseas activities of artists under its umbrella.

85.3% voting rights in SMC: SM Entertainment Japan Co. Ltd., a wholly owned subsidiary of SM that also controls SMEJ PLUS (operator of fan clubs for SMC- and SM-affiliated artists in Japan) owns 78.1% of the voting rights in SMC. KEYEAST Co., Ltd., another subsidiary of SM, holds 7.2% of the voting rights in SMC. Accordingly, SM totally holds 85.3% of the voting rights in SMC.

Focusing on the Japanese market as a key territory, but aspiring to become the leader in Asia SM moved into the Japanese market ahead of its rivals. Shared Research understands that a small South Korean market was the main reason behind this decision. The rationale was that because South Korea’s small population could only generate limited demand, SM had no choice but to rely on overseas demand. SM aims to expand its target market to Asia as a whole. The combined Japanese, Chinese, and Southeast Asian music markets are five times larger than the American music market. As its basic strategy, SM therefore looked to conquer the Asian market before expanding globally.

Another important factor behind the expansion into the Japanese market was that the country had become the last remaining market for CD (packaged) sales. In the US, streaming currently accounts for 75% of music distribution, with CD sales making up only 15%. In Japan, CD sales continue to generate 72% of the revenue in the music industry, while streaming still stands at only 21%. Also, CDs are sold for JPY3,000/album in Japan compared to only JPY1,000/album in South Korea, which is a significant price differential. Also, by preparing Japanese versions of Korean songs, the company can double its copyright royalties.

All-round business SM engages in music production and management as its core businesses. Its music production business mainly revolves around producing CDs and other products. Its production division internally handles nearly all aspects of the music production process from recording to packaging design. SM does this to operate an all-round business that integrates portrait rights and naming rights arising from contracts with affiliated artists, master rights and copyrights arising from music production, and music publishing rights.

SM has adopted an all-round business model because separating management operations from production in the South Korean market, which is only one-fifth the size of its Japanese market, may not be conducive to economies of scale or profit generation. SM also realizes that while a division of labor strengthens sales power, this comes at the expense of product development capabilities. It is committed to creating “finished products” (artists and brands) in-house before launching these into the market. This approach sharply contrasts with that of Japanese entertainment companies, which tend to expose inexperienced artists to the media and gauge their value as an entertainer through successive performances in variety and other programs.

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Visual performances The reason entertainment companies strive to develop K-pop artists into “finished products” is that the K-pop genre has to a large extent gained traction by virtue of its visual performances. The importance of visuals in music can be traced back to the 1981 launch of the MTV channel in the US, which aired popular music videos round the clock. Music videos such as the one of Michael Jackson’s Thriller blended his songs with memorable performances, raising the appeal of music videos among the general public. Meanwhile, Japanese pop stars (idols) had a distinctive visual branding. Aspiring idols in Japan are selected from auditions based not only on their singing ability, but also on factors unrelated to music such as their visual appearance and star charisma. (Source: K-POP as a “New-Sensation” Media, Kim Sungmin, Iwanami Shinsho).

In the 1980s, a series of Korean bands emerged that emulated the style of Japanese idols. From the 1990s, however, K-pop became heavily influenced by American pop music, aiming for a more polished sound and performance style. This was the era in which the K-pop that is prevalent today crystallized. K-pop authority Kim Sungmin, whose work was cited above, puts it this way: “Korean pop idols became a fusion of Japanese pop idols distinguished by their visual appeal (star charisma) and affable charm, and American pop idols notable for their singing and performance skills. The sound of K-pop similarly evolved into a blend of Japanese dance music with its focus on melody and endearing choreography, and American dance music that emphasized groovy beats and powerful performances. The characteristic features of modern K-pop girl groups and boy bands had already emerged back then.”

Original management method Training programs for artists Artist training can be broadly divided into four phases: recruiting, training, producing, and management. New talents are recruited through auditions or scouting by entertainment companies. Some auditions are held overseas with the aim of finding talent that can be groomed from the planning stage for a global career.

Training programs cover subjects such as song, dance, acting, foreign languages, and even character-building. Trainees are subjected to a strict training program led by a team of professionals, and only those who are favorably assessed are permitted to debut as pop idols. Training generally takes five years or more, and the necessary expenses are shouldered by entertainment companies. Those companies apparently invest several hundred million yen to launch each new K-pop star.

Producing refers to the production of music by artists who have completed the recruiting and training stages. Music production involves repeatedly going through the process of song writing/composition, singing, and song arrangement under the guidance of specialists such as song writers, lyric writers, singers, and producers. From the creation stage, SM actively seeks out the involvement of overseas professionals to gather ideas for songs and elevate the quality of its songs. For example, SM called on the Norwegian production company Dsign Music to create songs for BoA, Girls’ Generation, SHINee, EXO, RED VELVET, and NCT.

At the management and promotion stage, SM starts promoting and marketing artists who have been trained through the production stage. K-pop artists are trained to function under a “one-source, multi-use” business model, and are therefore deployed in a number of entertainment settings, including music, acting, commercials, print media, characters, and games.

Concept SM says it examines various concepts for singing ability, choreography, and visual appeal to create “complete idols.” Its artists each have a distinctive style. For example, Girls’ Connection are known for their Jegi-chagi dance (resembling the traditional Jegi- chagi game in which players kick a paper shuttlecock into the air), while KARA is famous for its synchronized hip dancing. SM strives to create a wholesome image for its artists, and does not emphasize the themes of sexuality and violence, which are prominent in the Western R&B and hip hop genres. It achieves a distinctive appeal by blending addictive song hooks, diverse melodies, lyrics about love and friendship, easy to perform yet eye-catching choreography, and visual style.

In addition, SM creates a unique universe for each of its artists. For example, EXO is portrayed as a band with special powers that is protecting the tree of life from evil forces. Red Velvet has both Red (light) and Velvet (dark) sides, and alternates its songs between the two sides. NCT stands for infinite expansion, and aims to consolidate and express the “culture universe” of SM. SM

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thinks providing such stories to fans creates opportunities for business expansion. For example, the universe of BTS has been adapted into a comic and a game.

Active use of YouTube and social media In tandem with the rise of the internet since the 2000s, social media platforms such as YouTube, Facebook, and Twitter have played a major role in disseminating K-pop throughout the world. While it took BoA and TVXQ! five years and four years, respectively, to break through and achieve some degree of success in Japan, Girls’ Generation topped the Oricon Album Chart with their debut album. Girl bands such as Girls’ Generation and KARA achieved millions of views on their music videos on YouTube before expanding into the Japanese market as their social media presence paved the way for a subsequent move into Japan. Girls’ Generation built a global following for its songs and brand by adeptly using digital media such as YouTube (rather than physical media such as DVDs), and did not have to develop a new concept to cross over into the Japanese market as a result.

Fandom culture Korean fans support their favorite artists with a passion that can border on fanaticism. In addition to consuming content provided by entertainment companies and TV stations, fans often cultivate a sense of individuality and solidarity that exerts a formative influence on the artists they support. For example, the multi-language subtitles provided for video clips distributed by artists through the V LIVE service are created by V Fansubs, a subtitle creation service mainly operated by a fan community. Subtitles are provided not only in Japanese and English, but also Chinese, Spanish, and a range of other languages. Social media posts and statements of artists delivered in media appearances or concerts are also fervently translated by fans online, and several translation accounts have been made by fans on social media platforms for each language (Source: CINRA.NET).

(Reference) SM earnings Income statement (KRWmn) FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 Revenue 349,870 365,387 612,227 657,826 579,876 YoY - 4.4% 67.6% 7.4% -11.8% Gross profit 102,259 116,404 202,713 215,618 198,783 YoY - 13.8% 74.1% 6.4% -7.8% Gross profit margin 29.2% 31.9% 33.1% 32.8% 34.3% Operating profit 18,963 32,761 46,946 23,767 -15,116 YoY - 72.8% 43.3% -49.4% - Operating profit margin 5.4% 9.0% 7.7% 3.6% - Pre-tax profit 22,599 24,405 45,975 10,961 -40,570 YoY - 8.0% 88.4% -76.2% - Pre-tax profit margin 6.5% 6.7% 7.5% 1.7% - Net income 3,649 4,328 30,596 -9,101 -70,156 YoY - 18.6% 606.9% - - Net margin 1.0% 1.2% 5.0% - - Balance sheet (KRWmn) Total assets 525,083 797,509 1,002,474 1,115,621 1,068,873 Liabilities 195,609 453,248 578,225 671,449 637,073 Net assets 329,473 344,261 424,249 444,172 431,799 Financial ratios ROA (NI-based) 4.3% 3.1% 4.6% 1.0% - ROE 1.1% 1.3% 7.2% - - Source: Shared Research based on Investing.com Group companies SM Culture & Contents Co., Ltd. SM Culture & Contents Co., Ltd. was established in 1980. The KOSDAQ-listed company BT&I Co., Ltd. was renamed to SM Culture & Contents Co., Ltd when it was acquired by SM. In 2017, SM Culture & Contents absorbed an advertising agency of the SK group.

Dream Maker Entertainment Co., Ltd. Dream Maker Entertainment Co., Ltd. was established in 1995. Headquartered in Hong Kong, this company organizes concerts as a representative for South Korea and Asia as a whole. It creates major events to disseminate Korean content to the world, organizing more than 80 concerts around the world each year.

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SM Life Design Group Co., Ltd. SM Life Design Group joined the SM group in 2018. It mainly supplies video content (distribution of DVDs and Blu-ray Discs under publishing agreements with Disney, Warner Brothers Korea, SHOWBOX, and NEW) and produces TV shows such as The Last Empress, Sister Is Alive, and Girls’ Generation 1979.

SM True Co., Ltd. SM True Co., Ltd. was established in 2011. It is the largest broadcaster, communications company, and distributor of video content in Thailand. It was formed as a collaboration between the Thai-based True group and SM. As the exclusive SM partner in Thailand, SM True exclusively licenses and sells master recordings, music, and products associated with SM-affiliated artists, and organizes concerts, fan meetings, and other events in Thailand. In addition, it locally manages and serves as the agent of SM- affiliated artists and new Thai artists, and recruits and trains new talents.

SM Brand Marketing Co., Ltd. SM Brand Marketing Co., Ltd. develops business products, leveraging the SM brand and managing the brand image. It operates the SUM shop, where customers can experience the lifestyle of celebrities, provides F&B services and products in collaboration with outstanding small and medium-sized companies, operates the SUM MARKET that revolves around Creating Shared Value (CSV), and runs the SUM CAFÉ chain that offers a new form of eating spaces.

DEAR U Co., Ltd. DEAR U Co., Ltd. was established in 2017. It operates the paid mobile apps everysing (karaoke) and Lysn (communication). It also provides the DEAR U Bubble service, which facilitates communication between artists and fans, and the Dear U letter service, which allows fans to receive letters from artists. DEAR U plans to list in fall 2021.

ESteem Co., Ltd. ESteem Co., Ltd. is a leading Korean management company. It manages South Korean and overseas top models, trains new models, and plans and manages fashion celebrity activities.

MYSTIC STORY Co., Ltd. MYSTIC STORY Co., Ltd. was established in 2013. As implied by its name, the company is a content creator that aims to produce fresh content by thinking outside of the box.

In April 2021, SM set up the wholly owned subsidiary SM Studios Co., Ltd. as part of an effort to reorganize its group companies. It plans to transfer its shareholdings in various group companies (namely, SM Culture & Contents, KEYEAST, SM Life Design Group, MYSTIC STORY, and DEAR U) to SM Studios as a capital contribution in kind. The purpose of the restructuring is to allow SM to focus more on the music business.

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Market and value chain Korean government policy to promote content and market expansion Global content market valued at roughly JPY128.8tn In 2018, the global content market was worth USD1.2tn (roughly JPY128.8tn assuming an exchange rate of JPY109/USD). North America was the largest market with a value of USD423.1bn, accounting for 35.8% of the global market, and the Japanese market was valued at USD97.4bn (roughly JPY10.6tn), amounting to 8.2% of the global market. The global market is projected to grow at a CAGR of 1.9% to USD1.3tn through 2023, and the Japanese market is expected to follow a similar trajectory, expanding at a CAGR of 1.2% to USD103.7bn. The Ministry of Economy, Trade and Industry (METI) defines content industries as “industries that produce and/or distribute creative products such as video content (movies and animated works), music, games, or publications.”

Global and Japanese content market (USDmn) 2016 2017 2018 2019 2020 2021 2022 2023 2019–2023 CAGR Asia Pacific 320,779 337,866 349,371 363,293 378,085 391,361 405,179 418,136 3.6% Japan 93,628 95,756 97,411 98,957 100,654 101,598 102,714 103,678 1.2% % of total 8.2% 8.3% 8.2% 8.2% 8.2% 8.1% 8.0% 8.0% North America 419,564 420,661 423,105 424,424 428,844 430,201 432,941 434,502 0.6% % of total 37.0% 36.3% 35.8% 35.3% 34.8% 34.3% 33.9% 33.4% Lagin America 52,658 52,641 54,401 56,117 58,179 60,025 61,367 63,177 3.0% Europe 316,269 321,148 326,252 330,427 336,048 340,837 345,621 350,340 1.5% Middle East and Africa 26,159 27,307 28,205 29,235 30,247 31,306 32,321 33,382 3.4% Total (worldwide) 1,135,428 1,159,622 1,181,335 1,203,497 1,231,402 1,253,730 1,277,430 1,299,537 1.9% Source: Media and Content Industry Division, Commerce and Information Policy Bureau, METI Korean content industry one-third of the Japanese market As shown in the table below, the Korean content market was valued at JPY3.3tn in 2015, roughly 1/14th of the US market and one-third of the Japanese market. In the same year, the Korean music market was worth JPY31.7bn, equivalent to 1/17th of the US market and 1/13th of the Japanese market.

Content market by country (by content type)

(JPYbn) US China Japan UK Germany France South Korea Brazil Italy India Total market 47,181.3 13,096.6 10,729.3 8,254.9 6,431.9 4,128.7 3,270.5 2,724.0 2,388.2 2,219.1 Movie box office 1,344.2 763.5 217.1 231.0 157.4 181.7 183.8 81.9 89.4 192.7 TV broadcasting 20,702.5 3,914.0 3,502.6 2,533.7 1,886.0 1,298.4 845.5 1,585.9 1,026.0 1,030.2 Movie software for sale 738.7 23.6 216.9 252.1 216.3 95.2 1.0 40.3 37.2 2.9 Movie software for rental 371.8 5.3 202.1 19.7 18.4 3.4 0.8 30.3 5.0 0.0 Movie streaming 1,355.0 96.5 269.8 202.1 77.9 42.8 23.7 36.2 37.4 4.4 Music software for sale 141.6 2.1 214.0 56.7 95.2 36.9 10.7 7.4 14.3 3.8 Digital music streaming 399.5 18.4 200.3 71.4 40.3 20.4 21.0 11.5 9.8 7.0 Radio broadcasting 2,574.6 282.8 127.6 232.5 474.0 175.2 31.0 46.7 64.4 37.6 Console games 1,251.6 0.6 194.9 353.2 140.6 234.8 31.7 18.8 64.1 Games (PC, online) 427.0 1,249.8 83.9 141.8 97.0 78.5 748.6 27.7 16.1 50.4 Games (mobile, social media) 238.4 627.2 987.7 151.3 19.6 60.9 77.2 9.6 33.3 Magazines (ads and sales) 2,970.6 604.8 1,024.4 557.4 488.0 696.8 181.5 175.1 227.4 26.6 Books 3,665.1 1,210.6 742.0 617.4 858.0 341.0 276.4 150.9 257.9 238.4 Newspaper 3,788.9 1,214.7 1,826.6 741.9 1,043.7 458.0 519.4 325.0 258.9 511.1 Online advertising 7,211.8 3,082.7 919.4 2,092.7 819.5 404.7 318.2 176.7 247.0 114.0 Source: Shared Research based on HUMANMEDIA INC. materials

Content export value of South Korea (2018, by destination)

(USDmn) Greater China Japan Southeast Asia North America Europe Other Total Publications 17.8 39.9 52.0 72.8 11.4 55.1 249.0 Comics 2.5 11.6 8.2 5.3 11.9 1.0 40.5 Music 112.0 367.3 69.4 7.2 7.0 1.4 564.2 Games 2,981.5 908.0 661.6 1,020.5 418.5 421.4 6,411.5 Movies 17.2 4.6 4.7 3.3 1.8 10.1 41.6 Animation 7.6 32.7 3.7 91.8 33.0 5.7 174.5 Broadcasting 60.5 95.8 109.0 56.9 1.6 37.6 277.1 Characters 158.4 68.2 281.2 176.5 153.8 79.1 745.1 Knowledge information 56.5 244.1 40.3 29.0 11.7 11.4 633.9 Content solutions 27.8 70.4 1,254.7 24.7 27.4 24.4 214.9 Total 3,441.8 1,842.6 1,254.7 1,488.1 678.1 647.2 9,352.4 % of total 36.8% 19.7% 13.4% 15.9% 7.3% 6.9% 100.0% (USDmn) Greater China Japan Southeast Asia North America Europe Other Total 2016 1,812.8 1,376.1 873.1 710.7 561.2 407.8 5,741.7 2017 3,837.2 1,656.0 1,304.4 811.6 522.5 457.9 8,589.5 2018 3,441.8 1,842.6 1,254.7 1,488.1 678.1 647.2 9,352.4 YoY -10.3% 11.3% -3.8% 83.4% 29.8% 41.4% 8.9% CAGR 37.8% 15.7% 19.9% 44.7% 9.9% 26.0% 27.6% Source: 2019 Content Industry Statics Survey by the Korea Creative Content Agency (KOCCA)

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Korean content exports The Korean content industry actively pushes exports of cultural content. In 2018, the total value of Korean content exports reached USD9.4bn (roughly JPY1tn, +8.9% YoY). The main export destinations were China, Japan, the US, and Southeast Asia (in descending order). Exports to Japan totaled USD1.8bn, representing 19.7% of the total. This broke down into games (49.3%), music (19.9%), and knowledge information (13.2%). K-dramas and other video content only accounted for 5.2%. Japan is the largest export market for Korean music, followed by China and Southeast Asia. Of the USD564.2mn in total exports of Korean music, the US accounts for only USD7.2mn or 1.3% and Japan for USD367.3mn or 65.1%.

Music revenue by country in the Global Music Report 2018 by the International Federation of Phonogram and Videogram Producers (IFPI) suggests that the US generated the highest music revenue at USD6.8bn, followed by Japan in second place at USD2.8bn. South Korea ranked sixth, with domestic music revenue of USD583mn. The size of the Korean music market was only 1/12th of the US market and one-fifth of the Japanese market, but its music exports of USD564.2mn were on par with the revenue for its domestic market. Despite the relatively small size of its domestic market, South Korea generates gains from foreign trade through exports of content (chiefly music) to Japan and other countries.

Top 10 countries by music revenue (2018) 2017 2018 (USDmn) Revenue breakdown Music Music Yo Y Physical Streaming Performance rights Synch licensing revenue revenue US 15.0% 75.0% 7.0% 3.0% 5,916 6,804 15.0% Japan 72.0% 21.0% 5.0% 1.0% 2,728 2,820 3.4% UK 30.0% 50.0% 18.0% 2.0% 1,311 1,351 3.0% Germany 43.0% 36.0% 20.0% 1.0% 1,323 1,192 -9.9% France 36.0% 34.0% 27.0% 3.0% 925 942 1.8% South Korea 37.0% 59.0% 4.0% 0.0% 494 583 18.0% China 3.0% 90.0% 7.0% 0.0% 292 526 80.0% Australia 19.0% 68.0% 11.0% 2.0% 413 458 11.0% Canada 21.0% 65.0% 14.0% 1.0% 437 439 0.5% Brazil 5.0% 60.0% 34.0% 0.0% 296 341 15.4% Source: Shared Research based on Global Music Report 2018 by IFPI Growth underpinned by Korean government content promotion policy After receiving financial support from the International Monetary Fund (IMF) to help restore the health of its economy in the wake of a currency crisis in 1997, the South Korean government vowed to “become one of the top five global content exporters by 2007” (President Kim Dae-jung declared himself the “culture president” in 1998). It recognized that cultural content was a value-added industry built on the “one-source, multi-use” concept. Because content could be repurposed and distributed through various media, the government reasoned that an expansion in content exports would support growth in its manufacturing industries. (Source: Korean Government Policy to Promote Contents in Korean Wave, Gosuke Saito, 2005).

This government policy, initially launched by the Kim Dae-jung administration, was adopted by successive administrations, and remains in effect today. It has produced the Korean wave phenomenon as its major achievement. The release of Winter Sonata in Japan sparked a local boom for the K-drama genre around the year 2000. Thereafter, K-pop artists and idols found success in Japan, paving the way for an increase in the popularity of Korean content in general (including areas outside of K-dramas and K- pop). The impact of the Korean culture boom was not limited to the content industry, but reverberated in industries such as fashion, cosmetics, and tourism. Statistics show that each dollar in Korean content exports generated consumer goods exports worth USD412 (Current State and Future Development of Content Industry [2014], METI).

The South Korean government provides support for the content industry. For example, it decided to subsidize up to 50% of the total expenditures (up to KRW100mn) of the Korean Popular Music Overseas Expansion Project Support Initiative—launched by the Korea Creative Content Agency (KOCCA) in 2010—in an effort to promote popular Korean music abroad. A comparison of the cultural budgets of major countries in FY2016 shows France leading with JPY423.8bn (0.89% of national budget), followed by South Korea at JPY252.5bn (1.09%). By contrast, Japan spent only JPY104.0bn on cultural projects (0.10%), less than half of the Korean budget (source: 2012 Research Study on Cultural Policies in Various Countries, project commissioned by the Agency for Cultural Affairs).

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However, some industry observers think that in contrast to, for example, the impressive budget and systematic efforts of the French government to support its culture, Korean cultural support in the context of national TV shows amounts to little more than granting awards for screenplays. There is no consensus on how to evaluate government spending in this context.

K-pop market K-pop artist popularity as reflected in numbers of views on YouTube and social media followers

Numbers of views on YouTube (by song) and social media followers

Number of YouTube channel Total view counts Instagram twitter fan cafe Gr oup Offic e Song registrants followers followers members 1 PSY YG 14,800,000 GANGNAM STYLE 4,034,737,418 1,558,680 4,335,592 - 2 BLACKPINK YG 59,900,000 DDU-DU DDU-DU 1,547,851,560 36,704,973 3,760,397 49,366 3 BTS HYBE 47,300,000 DNA 1,244,597,587 39,721,858 34,325,243 1,500,225 4 JENNIE YG 6,090,000 SOLO 646,893,531 43,030,261 - - 5 TWICE JYP 10,300,000 TT 577,156,223 17,648,346 7,668,901 - 6 BIGBANG YG 13,500,000 BANG BANG BANG 523,070,561 - 1,788,018 - 7 MOMOLAND MLD 523,000 BBoomBBoom 499,834,355 2,315,311 278,807 17,561 8 ikon YG 7,990,000 Love Scenario 488,022,064 3,584,030 1,105,181 41,732 9 EXO SM 7,420,000 Love Shot 396,897,723 8,825,272 10,884,592 - 10 GOT7 JYP 1,560,000 Just right 370,495,159 7,373,180 9,741,731 - Source: Shared Research based on K-POP Radar (as of April 11, 2021) Number of views on YouTube by region Fandom Research Institute BLIP, the operator of the K-pop ranking site K-POP Radar, has analyzed the number of views on YouTube for 76 Korean idol bands from July 1, 2018 to June 30, 2019. It found that the music videos of these bands were viewed roughly 26.6bn times during the survey period. Viewers residing in countries other than South Korea accounted for 89.1% of the total. This means 89 of 100 viewers watched the videos in a country other than South Korea.

By country, South Korea generated 10.1% of the total 26.6bn views, Indonesia 9.9% (2.6bn), Thailand 8.1% (2.2bn), Vietnam 7.4% (2.0bn), the US 7.4% (2.0bn), and Japan 6.8%, pointing to considerable interest in Southeast Asia. By artist, BTS enjoyed the most views (20.9%), followed by BLACKPINK (17.3%), TWICE (7.7%), MOMOLAND (4.4%), and EXO (4.0%). Together, these five bands accounted for more than half of the total views for K-pop music videos.

Global popularity of K-pop artists Country South Korea Indonesia Thailand Vietnam US Japan Philiipines Braizil Mexico Malaysia Market share 10.1% 9.9% 8.1% 7.4% 7.4% 6.8% 6.8% 4.4% 4.3% 3.1%

Ranking Art ist US Europe Asia Top three popular countries 1 BTS (Bangtan Sonyeondan) 30.6% 27.9% 19.0% US Vietnam Indonesia 2 BLA CKPINK 13.7% 14.7% 15.3% Indonesia Thailand Philippines 3 TWICE 5.3% 7.4% 9.4% Japan South Korea Philippines 4 EXO 4.0% 4.2% 5.8% 5 PSY 3.1% 4.1% 3.8% 6 Other 43.3% 41.7% 46.7% Source: Shared Research based on “2019 Global Map of YouTube Views for K-pop Idols” by Fandom Research Institute BLIP Size of K-pop market Authoritative sources that provide a clear analysis of the magnitude of the K-pop market are hard to find. Based on basic data, writer Ichishi Iida estimated the market was worth JPY417.5bn in 2017 (source: “K-pop a Massive Market?”, November 2018 issue of Eureka). This amount comprised JPY50.0bn of the Korean music market, JPY93.0bn of the live concert market, JPY71.3bn of the merchandise market, JPY40.0bn of music export value, JPY93.4bn of overseas live performances and merchandise, JPY28.0bn of advertising, and JPY40.0bn of tourism. These figures suggest the K-pop market in 2017 (JPY417.5bn) was comparable to the Japanese comic (manga) market, which was valued at JPY433.0bn in the same year by the Research Institute for Publications.

Reception of K-pop in Japan In September 2020, 570,000 Japanese men and women were asked the question “Which boy or girl idol group do you like?” through the LINE Research Platform. BTS, TVXQ!, and BIGBANG topped the responses for boy bands, and NiziU, TWICE, and BLACKPINK for girl bands. Fans of TVXQ! are mainly women in their 40s and above.

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Boy and girl idol groups popular with Japanese fans 10s 20s 30s 40s 50s and older Male idol group Male Female Male Female Male Female Male Female Male Female (J) Arashi 20.6% 15.0% 18.0% 19.3% 12.8% 19.5% 12.5% 20.8% 14.9% 26.6% (J) Sandaime J SOUL BROTHERS from EXILE TRIBE 2.6% - 3.4% 3.0% 3.0% 5.0% 3.6% 5.3% 2.8% 4.7% (J) King & Prince 1.1% 4.4% 1.1% 4.9% 1.3% 4.3% 1.2% 4.2% 0.8% 3.3% (J) KinKi Kids - - - - 3.4% 4.2% 1.3% 2.2% 1.6% 2.2% (J) Kanjani Eight 2.0% - 2.2% 3.6% 2.7% 3.4% 2.4% 2.6% 2.9% 2.9% (J) EXILE 1.4% - 2.9% - 4.4% 2.8% 4.9% 3.6% 5.8% 5.1% (SK) BTS (Bangtan Sonyeondan) 2.6% 5.4% 1.6% 3.5% 1.5% 2.7% 1.1% 3.5% 0.8%- (J) TOKIO 3.7% - 7.8% - 8.3% 2.0% 8.1% 2.2% 8.3% 3.6% (SK) TOHOSHINKI - - - - 1.5% - 1.1% 2.2% 0.8% 3.4% (J) V6 1.6% - 1.4% - 1.5% - 1.1% - 1.3% 1.9% (SK) BIGBANG 1.1% - 1.4% - 1.3% 2.0% - 1.6% - - ・・・・・・(SK)SEVENTEEN -2.4%------・・・・・・10s 20s 30s 40s 50s and older Female idol group Male Female Male Female Male Female Male Female Male Female (J) Nogizaka46 11.6% 8.0% 14.7% 7.6% 10.7% 3.7% 9.5% 3.0% 9.9% 3.6% (SK) NiziU 1.8% 5.5% 2.7% 7.9% 3.5% 9.8% 2.6% 7.5% 2.0% 4.7% (J) Perfume 3.3% 5.7% 6.0% 5.7% 6.6% 6.9% 6.5% 5.3% 7.8% 4.5% (J) Momoiro Clover Z 2.0% 4.3% 2.8% 5.8% 3.5% 6.3% 3.5% 7.8% 5.3% (SK) TWICE 3.9% 8.5% 3.6% 5.2% 1.7% 2.6% 2.3% 2.5% 1.9% 1.7% (SK) BLACKPINK 2.0% 4.0% 3.7% 2.6% 1.9% (J) E-girls 2.8% 2.6% 2.2% 1.8% 1.6% 1.8% 1.7% (SK) Girls Generation 1.9% 1.7% 2.6% 1.9% 4.2% 2.3% (J) AKB48 1.6% 2.3% 2.6% 3.8% 1.4% ・・・・・・(SK)ITZY 2.4% ・・・・・・Source: Shared Research based on @DIME materials from the Shogakukan DIME website Note: The question was sent to roughly 570,000 people through the mobile (smartphone) research platform LINE Research (September 2020, single-select question, roughly 50,000 responses collected).

Japanese music market Japanese music market is 4.8x the size of the Korean market In 2020, the Japanese music market was valued at JPY272.7bn, making it the second largest music market in the world, behind the US. Revenue from physical media such as CDs, records, and music videos was JPY194.4bn and revenue from digital distribution such as streaming stood at JPY78.3bn.

Trends in the Japanese music industry (JPYmn) 2012 2013 2014 2015 2016 2017 2018 2019 2020 Music software revenue 310,800 270,500 254,100 254,500 245,700 232,100 240,300 229,200 194,400 Audio records 227,700 198,500 186,400 182,600 177,700 173,900 157,600 152,800 129,900 Music videos 83,100 72,000 67,700 71,900 68,000 58,200 82,700 76,400 64,500 Music streaming revenue 54,300 41,700 43,800 47,100 52,900 57,300 64,500 70,600 78,300 Downloads 40,500 30,500 29,700 28,800 27,500 27,100 25,600 22,500 17,900 Subscription 1,000 3,100 7,900 12,400 20,000 - - - - Streaming - - - - - 26,300 34,900 46,500 58,900 Other 12,800 8,100 6,200 5,900 5,400 3,900 4,000 1,600 1,400 Total 365,100 312,100 297,900 301,500 298,500 289,300 304,800 299,800 272,700 YoY 3.2% -14.5% -4.5% 1.2% -1.0% -3.1% 5.4% -1.6% -9.0% Source: Shared Research based on materials of the Recording Industry Association of Japan (RIAJ) and the All Japan Concert & Live Entertainment Promoters Conference (ACPC) Japanese concert market In 2019, live performances, attendance, and revenue in the Japanese concert market all increased YoY. The number of outdoor performances was down due to factors such as the extremely hot summer in 2018 and natural disasters. In 2019, a series of typhoons caused major damage and led to the cancellation and postponement of live performances. This depressed total attendance by some 540,000 people and put a dent of about JPY5.2bn in the market. Performances by Japanese artists were up 1.7% YoY and attendance up 2.5% YoY, while performances by overseas artists were down 4.6% YoY and attendance down 2.3% YoY. Ticket prices averaged JPY7,397 (+4.3% YoY) (source: All Japan Concert & Live Entertainment Promoters Conference [ACPC]). In 1H 2020, performances, attendance, and revenue all declined sharply YoY due to the COVID-19 pandemic. On

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February 26, 2020, the Japanese government called on companies to refrain from holding large events, and nearly all performances thereafter had to be either postponed or cancelled. Performances fell by 10,523 events YoY, attendance was down by 15,558,732 people, and overall revenue dropped JPY104.1bn. The average ticket price was JPY7,674 (+9.7% YoY). According to estimates by PIA Research Institute (as of October 2020), the live entertainment market contracted to JPY130.6bn in 2020, down roughly 80% from the historical high of JPY629.5bn recorded in 2019.

Live performance market in Japan (JPYmn) 20122013201420152016201720182019 Concert revenue (JPYmn) 170,100 231,800 274,900 318,600 310,000 332,400 344,800 366,500 YoY 6.6% 36.3% 18.6% 15.9% -2.7% 7.2% 3.7% 6.3% YoY change 10,500 61,700 43,100 43,700 -8,600 22,400 12,400 21,700 No. of concerts 20,044 21,978 27,581 29,546 29,862 31,674 31,482 31,889 YoY 8.7% 9.6% 25.5% 7.1% 1.1% 6.1% -0.6% 1.3% Attendance (mn people) 32.3 38.9 42.6 47.5 47.7 47.8 48.6 49.5 YoY 16.4% 20.4% 9.7% 11.5% 0.3% 0.2% 1.7% 1.9% Source: Shared Research based on materials of the All Japan Concert & Live Entertainment Promoter Conference Japanese online live performance market PIA Research Institute conducted a market survey to gauge the size of the paid online live performance market in Japan, and estimated it was worth JPY44.8bn in 2020. The market for online live performances supported by full-fledged online ticketing systems emerged from around May 2020, and rapidly expanded in a short period thereafter.

For example, AbemaTV, Inc. has launched ABEMA PPV ONLINE LIVE, a service that streams online live performances through a mobile app (including to viewers overseas). Since August 2020, the service has streamed live performances of popular Japanese bands such as Momoiro Clover Z, EXILE, and Perfume. Other streaming platforms include GYAO!, ZAIKO, and U-NEXT. The number of events streamed online and viewer numbers continue to rise steadily. Once the pandemic subsides, offline live performances are expected to make a comeback.

Broadcasting market and subscription-video-on-demand (SVOD) market Broadcasting market Japanese television is transmitted via terrestrial broadcasting, satellite broadcasting, cable TV (CATV), and Internet Protocol TV (IPTV). As of end-FY2018, 127 companies provided terrestrial broadcasting. The satellite broadcasting landscape consisted of 22 companies providing Broadcasting Satellite (BS) service, 20 companies Tokei Communication Satellite (CS) 110-degree service, and four general satellite broadcasting companies.

The Japanese broadcasting industry broadly divides into two groups: the public broadcaster NHK, which generates earnings from reception fees, and private broadcasters that generate earnings from a combination of advertising and subscription fees for paid channels. Terrestrial broadcasters (TV stations) maintain their own broadcasting facilities and provide programs to consumers over radio waves. CATV operators resemble terrestrial broadcasters in that they also maintain their own facilities, but they source nearly all of their content from external providers. Satellite broadcasting is divided into basic and general satellite broadcasting. In basic satellite broadcasting, companies that produce and edit programs subcontract the broadcasting to companies that manage broadcasting stations. In general satellite broadcasting, companies broadcast content by renting satellite broadcasting facilities from telecommunications carriers.

Japanese broadcasters generated total revenue of about JPY3.9tn in FY2018, breaking down into JPY2.3tn for terrestrial broadcasters, JPY361.9bn for basic satellite broadcasters, JPY503.0bn for CATV providers, and JPY737.3bn for the public broadcaster NHK (Source: 2020 White Paper on Information and Communications in Japan).

Subscription broadcasting market The Multi-Channel Broadcasting Research Institute has conducted a survey covering 87 channels operated by members of the Japan Satellite Broadcasting Association. The results of the survey pointed to a downtrend in subscribers of multi-channel broadcast services in the coming years.

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Projected subscribers for multi-channel broadcast services End-FY2019 End-FY2020 End-FY2021 End-FY2022 ('000 contracts) Actual Estimated YoY Forecast YoY Forecast YoY SKY PerfecTV! 124/128 degree 930 881 -5.3% 799 -9.3% 693 -13.3% SKY PerfecTV! 110 degree 2,160 2,129 -1.4% 2,120 -0.4% 2,103 -0.8% SKY PerfecTV! Premium Service Hikari 80 77 -3.8% 73 -5.2% 70 -4.1% SKY PerfecTV! (subtotal) 3,170 3,087 -2.6% 2,992 -3.1% 2,866 -4.2% CATV 6,820 6,721 -1.5% 6,648 -1.1% 6,566 -1.2% IPTV 860 877 2.0% 885 0.9% 890 0.6% Total 10,850 10,685 -1.5% 10,525 -1.5% 10,322 -1.9% Source: 2020 Report on Survey of Multi-Channel Broadcasting by the Multi-Channel Broadcasting Research Institute (March 2021) Subscription video on demand market Market worth JPY323.8bn According to GEM Partners, a company that provides data marketing services for the entertainment industry, the subscription video on demand (SVoD) market was valued at JPY323.8bn (+35.4% YoY) in 2020. Combined with the transactional video on demand (TVoD) and electronic sell-through (EST), the total rose to an estimated JPY389.4bn (+33.1% YoY). By share, Netflix led the SVoD market at 19.5%, followed by Amazon Prime Video at 12.6%, and U-NEXT at 11.1%. Revenue and share of SVoD have been expanding. Netflix’s share increased sharply YoY from 13.8% in 2019, Amazon Prime Video’s share was up 1.7pp YoY, and U-NEXT’s share was up 0.4pp YoY.

Market share by SVoD service provider 2016 2017 2018 2019 2020 Market size (JPYmn) 122,800 142,900 168,000 239,200 323,800 YoY - 16.4% 17.6% 42.4% 35.4% Market share (%) Netflix 4.3% 6.4% 8.9% 13.8% 19.5% Amazon Prime Video 5.9% 9.5% 9.8% 10.9% 12.6% U-NEXT 12.3% 11.3% 11.1% 10.7% 11.1% DAZN 8.8% 10.6% 11.2% 9.8% Hulu 13.0% 12.0% 11.6% 10.5% 8.8% dTV 24.1% 18.1% 13.7% 9.7% 6.5% d anime store 7.9% 6.1% 5.5% 4.4% 4.1% Disney+ 1.5% 3.8% NHK ondemand 3.0% Video Pass 6.4% 5.5% 4.3% TELASA 3.3% 2.9% Paravi 0.0% 2.1% 2.2% 2.7% AbemaTV Video (Premium) 0.6% 2.2% 2.2% 2.4% FOD (FOD Premium) 2.9% 2.2% TSUTAYA TV 3.5% 2.9% 2.7% 2.1% 1.7% Anime Hodai 3.7% 2.8% 2.4% 1.8% 1.2% Other 18.9% 16.0% 15.1% 12.8% 7.7% Source: Shared Research based on the “5-year forecast (2021-2025) of Video On Demand (VOD) Market in Japan” by GEM Standard

Japanese–Korean relations

In a public opinion survey conducted by the Cabinet in October 2020, 26.7% of the respondents indicated they feel an affinity with South Korea (total of “feel a strong affinity” [6.3%] and “feel some affinity” [20.4%]). By age group, positive responses were seen more from respondents aged 18–29 and those in their 30s, while negative responses were seen more among respondents in their 60s and 70s and above. When asked about the relations between Japan and South Korea, 16.6% of the respondents indicated current relations are good (total of “good” [1.6%] and “somewhat good” [15.1%]). By age group, positive responses were seen more from respondents aged 18–29, while negative responses were found more among respondents in their 60s.

Compared with the years through 2010, the overall perception of South Korea among Japanese citizens has deteriorated from 2012. The start of this downtrend coincided with an increase in diplomatic tensions surrounding a territorial dispute following then-President Lee Myung-bak’s visit to the Liancourt Rocks (a group of islets that are claimed by both countries, they are called “Dokdo” in Korean and “Takeshima” in Japanese). Since 2011, the share of respondents indicating they feel an affinity with South Korea in public opinion polls has exceeded the share of those thinking current relations are good, which is a departure from the trend seen through 2004. This seems to indicate that, irrespective of political relations between the two countries, the share of Japanese people who feel an affinity with South Korea—particularly, the younger generations—may be stemming the deterioration in the general stance toward South Korea.

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Public opinion surveys on diplomatic relations between Japan and South Korea

(%) Feel an affinity View as good 70

60

50

40

30

20

10

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Shared Research based on Cabinet’s Public Opinion Surveys on Diplomacy

Main competitors Competition in online live performance streaming market The subscription-video-on-demand (SVoD) market is home to a large number of companies such as Netflix, Amazon Prime Video, and AbemaTV. Below, we take a closer look at AbemaTV, Inc., a broadcaster that streams multiple channels online for free of charge.

AbemaTV, Inc. AbemaTV, Inc. operates the video streaming service AbemaTV under an advertising revenue model, allowing viewers to watch multiple channels around the clock for free. Some 500 companies run commercials on the service annually. Unlike SVoD services, AbemaTV channels stream content in accordance with a predetermined program guide. AbemaTV, Inc. represents a threat to SMC because AbemaTV gives its users free access to Korean content. AbemaTV also offers a premium service, under which users can watch programs, whose broadcasting has already ended, on demand.

AbemaTV, Inc. derives its revenue from commercials and fees (from paid members). The ratio between these sources of income was 3:1 in 2018 and 6:4 in 2019. In 2020, it reported pay-per-view revenue of JPY2.4bn. In June 2020, AbemaTV launched a pay- per-view service under which users can purchase online live performances with ABEMA coins (virtual currency). It is expected to expand its pay-per-view offerings to events, sports, fashion shows, and theater, in addition to live performances. For each content genre, it provides multi-angle views and support for overseas streaming.

AbemaTV Income statement (JPYmn) FY09/16 FY09/17 FY09/18 FY09/19 FY09/20 Revenue 200 1,900 6,041 13,800 21,100 YoY - 850.0% 217.9% 128.4% 52.9% Gross profit - - -13,462 - - YoY ----- Gross profit margin - - - - - Operating profit - - -18,976 - - YoY ----- Operating profit margin - - - - - Recurring profit - - -19,081 - - YoY ----- Recurring profit margin - - - - - Net income -9,182 -19,125 -19,084 -19,420 - YoY ----- Net margin - - - - - Balance sheet (JPYmn) Total assets - 2,155 7,783 8,663 - Liabilities - 30,535 54,947 75,222 - Net assets - -28,380 -47,164 -66,559 - Financial ratios ROA (RP-based) ----- ROE ----- Source: Shared Research based on materials and financial reports of CyberAgent Inc.

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Reference companies: Korean entertainment companies

YG Entertainment (KOSDAQ: 122870) YG Entertainment (YG) is the entertainment company behind K-pop bands such as BIGBANG, BLACKPINK, WINNER, iKON, and TREASURE. YG focuses on artists’ talent and originality, and has cultivated a brand image of “free street culture,” which is embodied by BIGBANG. Many of its artists stand out by virtue of their individual and unconventional style. YG-affiliated artist PSY rose to fame in 2012 when his single Gangnam Style became a global hit, including in Europe and the US.

Earnings trends Income statement (KRWmn) FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 Revenue 321,839 349,861 269,016 253,579 255,262 YoY - 8.7% -23.1% -5.7% 0.7% Gross profit 95,006 100,666 90,040 75,540 80,792 YoY - 6.0% -10.6% -16.1% 7.0% Gross profit margin 29.5% 28.8% 33.5% 29.8% 31.7% Operating profit 26,982 22,043 17,940 1,149 9,104 YoY - -18.3% -18.6% -93.6% 692.5% Operating profit margin 8.4% 6.3% 6.7% 0.5% 3.6% Recurring profit 32,968 30,032 37,289 1,748 20,494 YoY - -8.9% 24.2% -95.3% - Recurring profit margin 10.2% 8.6% 13.9% 0.7% 8.0% Net income 18,726 17,807 17,800 -21,534 9,417 YoY - -4.9% 0.0% - - Net margin 5.8% 5.1% 6.6% - 3.7% Balance sheet (JPYmn) Total assets 486,836 583,600 594,324 516,347 542,818 Liabilities 205,963 240,789 234,555 179,548 191,438 Net assets 280,873 342,811 359,770 336,798 351,379 Financial ratios ROA (RP-based) 6.8% 5.1% 6.3% 0.3% 3.8% ROE 9.1% 7.4% 7.6% - 4.9% Source: Shared Research based on Reuters materials

JYP Entertainment (KOSDAQ: 035900) JYP Entertainment (JYP) manages boy bands and girl groups that are distinguished by acrobatic performances and a “cute” aesthetic, respectively. The consensus seems to be that these artists have a certain level of dance skills across the board. In the case of boy bands, JYP excels in creating acrobatic dances and powerful vibes. Many of its bands feature members of multiple nationalities. When recruiting aspiring artists, JYP focuses on the ability to perform as part of a team rather than as an individual. In February 2019, JYP started the new girl band project Nizi Project in collaboration with Sony Music Entertainment. The partners recruited members in global auditions, and launched the band NiziU in 2020.

Earnings trends Income statement (KRWmn) FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 Revenue 73,645 102,242 124,821 155,436 144,399 YoY - 38.8% 22.1% 24.5% -7.1% Gross profit 27,326 39,274 56,162 76,077 76,898 YoY - 43.7% 43.0% 35.5% 1.1% Gross profit margin 37.1% 38.4% 45.0% 48.9% 53.3% Operating profit 13,635 19,250 28,744 42,959 44,136 YoY - 41.2% 49.3% 49.5% 2.7% Operating profit margin 18.5% 18.8% 23.0% 27.6% 30.6% Recurring profit 13,067 21,068 30,199 43,017 37,988 YoY - 61.2% 43.3% 42.4% -11.7% Recurring profit margin 17.7% 20.6% 24.2% 27.7% 26.3% Net income 8,380 16,176 23,845 31,302 29,534 YoY - 93.0% 47.4% 31.3% -5.6% Net margin 11.4% 15.8% 19.1% 20.1% 20.5% Balance sheet (JPYmn) Total assets 86,572 124,428 159,342 207,840 223,950 Liabilities 20,134 39,524 32,514 48,938 41,278 Net assets 66,438 84,904 126,828 158,902 182,672 Financial ratios ROA (RP-based) 15.1% 16.9% 19.0% 20.7% 17.0% ROE 41.6% 40.9% 73.3% 64.0% 71.5% Source: Shared Research based on Reuters materials

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HYBE (formerly Big Hit Entertainment; KOSDAQ: 352820) Big Hit Entertainment, listed on the Korean Securities Dealers Automated Quotations (KOSDAQ) in October 2020, and changed its name to HYBE in March 2021. It subsequently established the new subsidiary BIGHIT MUSIC, which inherited the operations from the former Big Hit Entertainment. HYBE recently acquired US-based Ithaca Holdings—which manages artists such as Justin Bieber and Arianne Grande—in a deal worth USD1.1bn (roughly JPY116.0bn). Its lineup of South Korean artists includes BTS, who rose to the top of the US Billboard Hot 100 chart in 2020, and TOMORROW X TOGETHER.

Earnings trends Income statement (KRWmn) FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 Revenue 301,372 587,224 796,283 YoY - 94.9% 35.6% Gross profit 111,393 201,538 374,745 YoY - 80.9% 85.9% Gross profit margin 37.0% 34.3% 47.1% Operating profit 79,901 98,728 145,516 YoY - 23.6% 47.4% Operating profit margin 26.5% 16.8% 18.3% Recurring profit -48,449 98,492 126,247 YoY - - 28.2% Recurring profit margin - 16.8% 15.9% Net income -70,466 73,823 85,721 YoY - - 16.1% Net margin - 12.6% 10.8% Balance sheet (JPYmn) Total assets 205,529 362,990 1,924,443 Liabilities 118,270 188,806 729,108 Net assets 87,260 174,184 1,195,335 Financial ratios ROA (RP-based) - 27.1% 6.6% ROE - 39.1% 11.8% Source: Shared Research based on Reuters materials

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Strengths and weaknesses

Strengths

◤ The 25-year broadcasting history and 100,000-strong subscriber base for the paid TV channel KNTV, which has a track record of popularizing Korean content in Japan: The company operates the premium KNTV channel that broadcasts Korean TV shows (K-dramas) and music and variety programs featuring K-pop artists. The channel debuted alongside the launch of the direct broadcast satellite service SKY PerfecTV! in 1996, well ahead of competitors such as KBS World (launched in 2006) and Mnet (service resumed in 2006 following a hiatus). For example, KNTV broadcast a subtitled version of the K-drama “Jewel in the Palace”—a show from Korean broadcaster MBC—before it was broadcast by NHK, Japan’s public broadcaster. By bringing subtitled K-dramas to Japan at an early stage, SMC has been instrumental in popularizing Korean pop culture throughout the country (a phenomenon often referred to as Korean wave or hanryu in Japanese). KNTV has over 100,000 subscribers but it is not clear how this compares to the subscriber bases of rival channels because rival channels have not disclosed the number of subscribers. That said, Japan had 435,459 residents of Korean descent as of June 2020 and was home to 190,246 families with at least one member of Korean descent in 2010. Considering these numbers, SMC looks to have built a solid customer base that will be hard to achieve by its competitors.

◤ Fan mobilization capability of SMEJ, which has developed idol bands that consistently sell out concerts at large stadiums: Rather than achieving fame in South Korea first and subsequently crossing over to Japan, artists under the SM Entertainment (SM) umbrella such as TVXQ! and SHINee have found success directly in the Japanese market. These bands regularly sell out concerts at large stadiums in Japan, which is a feat that very few artists can replicate. Doing this consistently requires the support of a dedicated fan club with 50,000-plus members. The rationale here is that selling out 90,000 tickets for a concert held over two days at a stadium with capacity for 45,000 people can only be achieved if fan club members turn out in large numbers, each accompanied by a friend or two (total of 100,000–150,000 potential attendees). However, a large fan club by itself does not guarantee artists’ success—their agencies must be able to successfully market them to record labels and promoters. It is difficult for artists to fill up venues in Japan reliably over the long term without a competent agency that is able to help book a stable concert schedule and secure earnings. For instance, TVXQ! has held 28 concerts at Tokyo Dome (sixth highest total) and SHINee nine concerts. This shows that SMC (and SMEJ) rivals Japanese top entertainment companies such as Johnny & Associates when it comes to mobilizing fans.

◤ Merger with SMEJ which has provided access to content of artists affiliated with SM and unlocked opportunities for synergies by utilizing fan club member data of SMEJ PLUS: SMC originally operated as a broadcaster and provider of contracted management services. Through the merger with SMEJ, SMC sharply expanded its business domains into music and concerts, and also gained access to fan data of major SM-affiliated artists through SMEJ PLUS, which operates the official fan clubs for artists such as BoA, TVXQ!, and Girls’ Generation. This data will be instrumental in designing strategies to convert casual fans into core fans and in building new platforms to communicate with fans. In other words, SMC is favorably positioned to develop or expand into new businesses by utilizing SM-brand content and fan data.

Weaknesses

◤ Earnings growth trajectory for KNTV obscured by downtrend in paid TV channel subscribers and the rise of free video-streaming services: At end-FY2019, the number of subscribers for multi-channel broadcasting services such as SKY PerfecTV! Premium Service (124/128-degree communication satellite [CS] digital broadcasting service), cable TV (CATV), and Internet Protocol TV (IPTV) was about 10.9mn (source: 2020 Report on Survey of Multi-Channel Broadcasting, released in March 2021 by the Multi-Channel Broadcasting Research Institute). However, this number is projected to have a CAGR of - 1.6% to 10.3mn by end-FY2022. SKY PerfecTV! Premium Service and SKY PerfecTV! Premium Service Hikari, in particular, are poised to see sharp drops in their subscriber bases (CAGRs of -9.3% and -4.4%, respectively). SMC launched the KNTV801 channel on SKY PerfecTV! 110-degree CS, which can be captured via broadcasting satellite (BS) and is therefore accessible to 43mn households across Japan. However, the subscriber base for 110-degree CS is similarly expected to have a CAGR of - 0.9%. On the other hand, the subscription-video-on-demand (SVoD) market grew at a CAGR of 27.4% from 2016 to 2020, and is becoming increasingly oligopolistic, with Netflix controlling 19.5% of the market, Amazon Prime Video 12.6%, and U- NEXT 11.1%. SMC’s premium channel KNTV has signed up core fans of Korean pop culture as subscribers, but it risks losing

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such customers when the quality of free offerings in this space catches up with its own content. The company also has limited room to increase subscription fees or subscribers, leaving its earnings growth uncertain.

◤ High earnings dependence on offline concerts, and delays in developing own video streaming platform: In FY12/20, the company did not achieve the earnings targets it had envisioned at the time of the merger with SMEJ as it was unable to hold offline concerts due to the COVID-19 pandemic. In FY12/19, SMEJ reported revenue of JPY6.2bn, with concert revenue generating 60–70%. Its offline concerts attracted 1.5mn fans in 2019. If SMC remains unable to hold offline concerts in the foreseeable future, fan club members may decide to cancel their memberships as their primary purpose in joining fan clubs is to gain priority access to ticket sales for concerts. To counter this, the company launched an online streaming business that provides added value to customers through Beyond Live Corporation (BLC), which became a new subsidiary through its merger with SMEJ. However, SMC has yet to bring its Beyond LIVE streaming system in-house, and its reliance on the third-party V LIVE platform continues to undermine its profitability. If this situation continues, the company will eventually struggle to offer Japanese fans a reason to join or remain enrolled in its fan clubs. If there are no profit incentives for the company to provide services to customers, it certainly cannot provide added value. In other words, the delays in efforts to optimize streaming operations—particularly, Beyond LIVE—could impede the growth targeted by the company.

◤ Difficulties in recruiting personnel that excel in planning due to the company’s low name recognition in Japanese music and video streaming industries: Over the medium term, SMC aims to expand its platform business centering on the video streaming business. To this end, the company raised funds of roughly JPY2.8bn through a third-party allotment of new shares to NAVER Corporation in November 2020 and plans to invest JPY1.7bn of the proceeds into new businesses, including Beyond LIVE, use JPY322mn to reinforce its existing businesses, and invest JPY698mn in recruiting and training personnel to fuel business expansion. It plans to spend more on personnel than on reinforcement of existing businesses because it views the development of new businesses as a prerequisite for future growth. The company seeks to hire personnel with strong planning capabilities, social networks, and experience, but it has struggled to secure such human resources as a result of its low brand recognition in the music and broadcasting industries. Amid the global rise of K-pop, its parent company SM in South Korea has started attracting human resources with the credentials sought after by major business conglomerates, and SMC therefore realizes that improving its brand recognition is essential.

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Historical performance and financial statements Income statement

Income st at ement FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Cons. Sales 3,907 4,409 3,796 2,497 3,328 4,534 7,770 7,059 6,114 4,270 YoY - 12.9% -13.9% -34.2% 33.3% 36.2% 71.4% -9.2% -13.4% - Cost of sales 2,952 3,674 3,711 1,949 2,701 3,733 6,392 5,919 4,959 3,914 Cost ratio 75.6% 83.3% 97.8% 78.1% 81.2% 82.3% 82.3% 83.9% 81.1% 91.7% Gross profit 955 735 85 548 628 801 1,378 1,140 1,155 356 YoY - -23.0% -88.5% 548.4% 14.6% 27.5% 72.0% -17.3% 1.3% - Gross profit margin 24.4% 16.7% 2.2% 21.9% 18.9% 17.7% 17.7% 16.1% 18.9% 8.3% SG&A expenses 860 923 585 525 559 795 1,077 1,066 1,083 1,556 SG&A ratio 22.0% 20.9% 15.4% 21.0% 16.8% 17.5% 13.9% 15.1% 17.7% 36.4% Operating profit 95 -188 -500 23 69 6 301 74 71 -1,200 YoY - - - - 200.8% -91.4% - -75.6% -3.1% - Operating profit margin 2.4% - - 0.9% 2.1% 0.1% 3.9% 1.0% 1.2% - Non-operating income 12 59 28 28 13 19 9 3 3 15 Interest income 291512643222 Foreign exchange gains - 47610- 12- - 0 1 Outsourcing income ------9 Rents income ------2 Reversal of provision for doubtful accounts - - 5 5 6 2 - - - - Interest on tax refund ------1 - Other 10222006001 Non-operating expenses 40 9 66 14 103 8 2 3 1 22 Loss on investments in capital - - 16 ------Equity in loss of affiliates - 950141012- - - - Interest expenses - - - - - 0 1 1 1 1 Share issuance expenses - - - - - 5 - - - 21 Foreign exchange losses 33 - - - - - 2 2 - - Other 6110200000 Recurring profit 68 -139 -539 37 -22 16 308 73 74 -1,207 YoY ------76.3%1.0%- Re curring profit margin 1.7% - - 1.5% - 0.4% 4.0% 1.0% 1.2% - Extraordinary gains 36 4 177 48 - 5 20 6 6 7 Gain on sale of investment securities 20 ------Gain on redemption of investment securities - - 104 ------Other 15 2 73 - - 5 19 6 6 7 Extraordinary losses 134 77 65 12 29 0 1 4 516 40 Loss on retirement of fixed assets 24 10 1 - 0 0 0 1 4 - Impairment losses 135510- 1- 140 Loss on sale of shares in affiliates 45658------Loss on change in equity - - - 10 29 - - - - - Provision for head office relocation expenses 35 ------4 - - Loss on valuation of investment securities ------510 - Special retirement benefits 566------Other - - 0 1 - - - - 0 - Pre-tax profit -31 -211 -426 73 -51 21 327 75 -437 -1,241 Income taxes 16 4 8 6 13 7 38 13 47 -11 Implied tax rate -51.7% -2.1% -1.8% 8.1% -24.6% 35.6% 11.7% 17.8% -10.7% 0.9% Ne t in c o me -53 -216 -434 67 -64 14 289 61 -483 -1,241 YoY ------78.8%-- Net margin - - - 2.7% - 0.3% 3.7% 0.9% - - Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. The net loss in FY12/19 was attributable to the booking of JPY510mn extraordinary losses, reflecting losses on the valuation of some investment securities classified under other “investment securities” as the market values of these investment securities had declined substantially, and there was no prospect of a recovery in value.

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Balance sheet

Balance sheet (JPYmn) FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Cons. ASSETS Cash and deposits 2,018 795 1,317 771 671 1,906 3,288 1,644 953 3,485 Notes and accounts receivable 531 386 192 225 320 565 572 479 488 2,109 Content 13 17 1 1 1 0 - - - - Merchandise 4254641- 1929 Content in process 11 25 ------Short-term loans receivable from affiliates - - 400 100 ------Broadcasting rights - - - - 118 896 776 817 755 574 Content business rights - - - - 374 601 727 1,300 1,744 1,824 Advances paid 180 1,236 176 403 109 1,002 693 1,108 794 329 Supplies - - - - - 1 0 0 0 - Prepaid expenses ------9 12 17 - Other 59 30 96 76 95 258 91 141 23 480 Allowance for doubtful assets -5 -1 0 0 - 0 0 -2 -2 -8 Total current assets 2,811 2,514 2,186 1,582 1,692 5,230 6,156 5,518 4,775 8,802 Buildings ------14 6 37 - Tools, furniture, and fixtures ------11 9 27 21 Vehicles ------3 4 3 - Land ------1 1 1 - Lease assets ------24 18 13 - Total tangible fixed assets 52 21 13 13 14 33 57 39 80 34 Goodwill ------Software ------28 88 68 51 Software in progress ------47 - 40 - Other 130 89 41 28 26 29 - 1 1 4 Total intangible assets 1308941282629768910955 Investment securities 131 690 44 520 390 40 40 539 40 40 Shares in affiliates ------1 - Long-term loans receivable - 96 91 86 80 79 79 114 104 119 Long-term loans receivable from affiliates - - - 200 100 70 - - - - Long-term prepaid expenses ------2 0 0 - Distressed receivables ------19 24 24 - Deferred tax assets ------0 39 30 - Other 223 117 31 32 43 53 50 158 131 51 Allowance for doubtful assets -44 -112 -91 -86 -80 -97 -97 -102 -103 -103 Investments and other assets 310 790 75 752 533 165 92 773 227 106 Total fixed assets 492 900 129 794 573 227 225 901 416 195 Total assets 3,303 3,414 2,315 2,376 2,265 5,457 6,380 6,419 5,191 8,997 LIA BILITIES Notes and accounts payable 391 346 298 370 218 814 823 516 429 2,474 Short-term borrowings - 100 ------Current portion of long-term borrowings ------Lease obligations ------6 6 5 - Accounts payable–other ------52 56 60 - Accrued expenses ------15 11 11 - Income taxes payable ------53 18 54 - Consumption taxes payable ------151 - 19 - Advances received 212 485 111 84 79 83 433 879 255 228 Provision for sales returns 666666- - - - Deposits received ------154 221 86 - Provision for head office relocation expenses 35 ------4 - - Asset retirement obligations 21 ------Other 139 97 102 73 181 182 - - - 229 Total current liabilities 805 1,034 516 533 484 1,086 1,720 1,710 921 2,932 Long-term borrowings ------Lease obligations ------21 15 10 - Asset retirement obligations ------Deposits received from members ------12 12 12 - Total fixed liabilities 3 33 1 4 3 14 33 27 22 16 Total liabilities 808 1,067 517 537 487 1,100 1,753 1,737 943 2,948 NET ASSETS Shareholders' equity 2,390 2,175 1,741 1,818 1,754 4,333 4,611 4,673 4,190 5,720 Capital stock 3,999 3,999 3,999 3,999 3,999 4,591 4,591 4,591 4,591 5,969 Capital surplus - - - - - 1,972 1,826 1,826 1,826 3,366 Retained earnings -1,577 -1,792 -2,226 -2,149 -2,213 -2,199 -1,773 -1,711 -2,194 -3,582 Treasury stock -32 -32 -32 -32 -32 -33 -33 -33 -33 -33 Accumulated other comprehensive income ------11 - - Valuation difference on marketable securities - 50 ------11 - - Share subscription rights 104 122 57 21 23 25 16 20 59 249 Non-controlling interests ------80 Total net assets 2,495 2,347 1,798 1,839 1,778 4,357 4,627 4,681 4,248 6,049 Total liabilities and net assets 3,303 3,414 2,315 2,376 2,265 5,457 6,380 6,419 5,191 8,997 Working capital 144 65 -102 -140 224 648 525 798 816 218 Total interest-bearing debt - 100 - - - - 27 21 15 - Net debt -2,018 -695 -1,317 -771 -671 -1,906 -3,261 -1,624 -938 -3,485 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Cash flow statement

Cash flow statement FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Cons. Cash flows from operating activities (1) 433 -842 323 -191 -272 -726 1,388 -947 -599 -1,228 Pre-tax profit -31 -211 -426 73 -51 21 327 75 -437 -1,241 Depreciation 77 48 25 17 17 22 24 44 54 79 Impairment losses 135510- 1- 140 Share issuance expenses - - - - - 5 - - - - Amortization of goodwill 172219 5------Change in allowance for doubtful accounts -1 -4 -6 -5 -6 -2 0 6 2 6 Change in provision for sales returns 0 0 0 0 ------Change in provision for head office relocation expenses 35-16- - - - - 4-4- Interest and dividend income -2 -9 -15 -12 -6 -4 -3 -2 -2 -2 Interest expenses ------1 1 1 1 Gains on retirement/sale of fixed assets 26 10 1 0 0 0 -1 1 4 - Gains on sale of shares in affiliates 45658-7------Gains on reversal of share subscription rights -15 -2 -73 -40 - -5 -19 -6 -6 -7 Foreign exchange gains 33 -47 -46 -11 1 13 -4 4 1 0 Gains on sale of investment securities -20------Gains on valuation of investment securities ------510 - Gains on redemption of investment securities - - -104 ------Gains on investment in capital - - 16 ------Equity in earnings of affiliates -8 95014101 2- - - - Gains on change in equity - - - 10 29 - - - - - Change in accounts receivable -4 3 101 -33 -96 -19 -13 93 -9 327 Change in inventories 19 -44 21 -2 2 -102 -4 -632 -366 104 Change in advances paid 250 -1,061 1,061 -227 -197 -893 309 -414 313 466 Change in other current assets 93 12 36 -13 -19 -69 143 -101 112 -185 Change in accounts payable 40 104 -2 72 -152 443 10 -307 -87 -746 Change in advances received -32 273 -355 -27 -5 3 383 413 -625 -26 Change in other current liabilities -27 -38 14 -29 100 -131 208 -81 -101 -155 Other -8 28 15 8 6 14 29 0 42 4 Subtotal 466 -863 323 -206 -275 -701 1,389 -903 -595 -1,176 Interest and dividend income 16721626222 Interest expenses -2-1-1 0 0 0-1-1-1-1 Income taxes paid -3216-7-6-3-27-7-46-6-54 Cash flows from investing activities (2) 67 -96 239 -366 174 -14 5 -687 -85 -5 Loan advances - -1-500-30------Collection of loans receivable 30 1 106 135 206 2 - - - - Purchase of tangible fixed assets -10 -39 -1 -1 -5 -8 -13 -6 -74 -5 Purchase of intangible assets -52 -24 -17 -6 -13 -9 -63 -38 -48 -10 Proceeds from sale of tangible fixed assets - - - 1 0 - 2 1 2 - Purchase of shares in affiliates - - - -495 - - - - -1 - Proceeds from sale of shares in affiliates - - 10 11 ------Proceeds from divestments - - 3------Proceeds from withdrawal of time deposits 135 511 ------Proceeds from sales of shares of subsidiaries affecting scope of consolidation - - 25 ------Payments for sales of shares of subsidiaries affecting scope of consolidation -28-101-13------Payments of leasehold and guarantee deposits -4 -38 -1 -3 -16 - -1 -109 0 - Proceeds from refund of leasehold and guarantee deposits 1833825 3 0 1 - 37 0 Purchase of investment securities - -486 ------510 - - Payments of loans receivable ------48 - - Collection of loans receivable ------80 23 10 10 Other -1 -3 -1 -2 -1 - -1 - -10 - Free cash flow (1+2) 500 -939 562 -556 -98 -741 1,393 -1,634 -685 -1,233 Cash flows from financing activities 29 177 -87 -1 -1 1,176 -4 -6 -6 2,734 Net increase in short-term borrowings - 0 0 -1 -1 -3 -4 -6 -6 -5 Proceeds from short-term borrowings - 130 ------Proceeds from long-term borrowings 50 50 15 ------Proceeds from issuance of shares - - - - - 1,179 - - - 2,734 Purchase of treasury shares -4000- - 0000 Proceeds from share issuance to non-controlling shareholders ------5 Other -16-3-1------Effect of exchange rate change on cash and cash equivalents -13474611-1-13 4-3-1 0 Change in cash and cash equivalents 517 -714 522 -546 -100 422 1,393 -1,643 -692 1,501 Cash and cash equivalents (beginning of year) 993 1,509 795 1,317 771 671 1,895 3,288 1,644 953 Increase in cash and cash equivalents resulting from merger - - - - - 813 - - - 1,032 Cash and cash equivalents (end of year) 1,509 795 1,317 771 671 1,906 3,288 1,644 953 3,485 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Cash flows from operating activities Net cash used in operating activities totaled JPY1.2bn. The main cash inflows were declines of JPY326mn in accounts receivable and JPY465mn in advance payments, and the main cash outflows were pre-tax losses of JPY1.2bn and a decline of JPY746mn in accounts payable.

Cash flows from investing activities Net cash used in investing activities came to JPY5mn. The main cash inflow was JPY9mn in collection of loans receivable, and the main cash outflows were JPY4mn in purchases of tangible fixed assets and JPY9mn in purchases of intangible fixed assets.

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Cash flows from financing activities Net cash provided by financing activities amounted to JPY2.7bn. The main cash inflow was JPY2.7bn in proceeds from the issuance of shares, and the main outflow was JPY5mn in repayments of lease obligations.

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Historical performance

FY12/20 results Summary

▷ Revenue: JPY4.3bn (-30.2% compared with non-consolidated FY12/19 results prior to merger)

▷ Operating loss: JPY1.2bn (versus profit of JPY71mn in FY12/19 [same basis])

▷ Recurring loss: JPY1.2bn (versus profit of JPY74mn in FY12/19 [same basis])

▷ Net loss attributable to owners of the parent: JPY1.2bn (versus net loss of JPY483mn in FY12/19 [same basis])

The company anticipated sharp YoY increases in revenue and operating profit thanks to the merger with SMEJ, but it was unable to hold concerts—the core earnings driver at SMEJ—as a result of the COVID-19 pandemic, and this eroded merchandise sales. Along with the absence of concerts, fan club and music businesses stagnated. The company booked operating loss due mainly to merger costs, expenses for the launch of KNTV801, and higher costs to close the DATV and Kchan! Hanryu TV channels.

In the core broadcasting business, the company launched the KNTV801 channel on communication satellite (CS) 110-degree broadcasting, which can be received without a dedicated tuner. Making Beyond Live Corporation a subsidiary as part of the merger with SMEJ, SMC launched an online streaming business and actively developed new businesses such as holding online performances through the Beyond LIVE service.

On October 28, 2020, the company raised funds of about JPY2.8bn through a third-party allotment of shares to NAVER Corporation, laying the foundations for an accelerated rollout of the online streaming business and other new businesses. It had planned to transfer “software in progress” in the Entertainment segment to the online streaming business, but the transferable portion was small, and the company found that a transfer would incur additional substantial development expenses. As a result, it recorded JPY39mn in impairment losses in FY12/20.

However, these were mainly one-time external factors and investments to drive future growth, and the company will work to improve its earnings and recoup the losses by restoring normal operations going forward.

By segment Rights & Media To adapt to the diverse ways audiences are consuming video content these days, SMC reviewed its existing channel structure consisting of KNTV, DATV, and the linear-streaming Kchan! Hanryu TV, in an effort to increase its channel competitiveness. Consequently, it launched the new KNTV801 channel (in June 2020) that can be viewed without a dedicated tuner, and decided to close the Kchan! Hanryu TV channel. In this way, it established the foundations for an improved earnings structure through a strategy of selection and concentration.

For Beyond LIVE, the streaming service dedicated to online performances in the online streaming business, SMC collaborated with the SM group and JYP Entertainment to hold online performances by popular K-pop bands affiliated with the two Korean entertainment companies such as TVXQ!, SuperM, and TWICE, which attracted considerable interest. Beyond LIVE recently held an online fan meeting with TVXQ! to celebrate the 17th year anniversary since their debut, as well as the “Beyond LIVE - NCT: RESONANCE ‘Global Wave’” concert in which all NCT members performed together for the first time. These events were viewed by 200,000 fans across 124 countries, generating a lot of attention.

In the rights business, major K-dramas licensed to channels continued to be greenlit for CS and BS broadcasting, and DVD and video-on-demand (VoD) operations were strong.

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However, the company was affected by an increase in temporary expenses such as initial expenses accompanying the launch of KNTV801 and costs to close the Kchan! Hanryu TV channel. As a result, the segment reported revenue of JPY3.2bn and an operating loss of JPY194mn.

Entertainment In event and concert businesses, offline concerts were cancelled or postponed due to restrictions on events and travel cause by the pandemic. This also had a severe impact on the merchandising and fan club businesses.

In the management business, SM-affiliated artists managed by SMC in Japan attracted attention through appearances at various online events and media.

In the music business, new releases stalled temporarily due to the pandemic, but operations gradually returned to normal toward the end of the year, as artists and bands such as BoA and SUPER JUNIOR-K.R.Y. released new albums/CDs in quick succession. However, the company was unable to hold concerts after the merger at all due to the pandemic-related restrictions on public events.

The absence of offline concerts depressed merchandising, fan club, and music businesses across the board. As a result, the segment posted revenue of JPY1.0bn and a segment loss of JPY307mn.

Other The Other segment recorded revenue of JPY1mn and a segment loss of JPY13mn.

Cumulative Q3 FY12/20 results Summary

▷ Revenue: JPY3.2bn (-36.4% YoY)

▷ Operating loss: JPY555mn (versus profit of JPY76mn in cumulative Q3 FY12/19)

▷ Recurring loss: JPY545mn (versus profit of JPY77mn in cumulative Q3 FY12/19)

▷ Net loss attributable to owners of the parent: JPY555mn (versus net loss of JPY53mn in cumulative Q3 FY12/19)

In cumulative Q3 FY12/20, the company reported revenue of JPY3.2bn, an operating loss of JPY555mn, a recurring loss of JPY545mn, and a net loss attributable to owners of the parent of JPY555mn. The results mainly reflected the absence of major events due to the COVID-19 pandemic and an increase in costs due to the merger.

By segment Rights & Media

▷ Revenue: JPY2.5bn

▷ Segment profit: JPY141mn

In the broadcasting business, the company concentrated on continuously securing stable subscription revenue and expanding sales channels, not only for its three existing TV channels (KNTV, DATV, and the linear-streaming Kchan! Hanryu TV), but also for its new KNTV801 channel that launched in June 2020. KNTV aired “The World of the Married,” the highest-rated drama in Korean cable television history, for the first time in Japan. Beyond LIVE, the online concert platform, started weekly broadcasts from September. Among shows premiering on DATV were “Drama Stage 2020” (a compilation of one-act dramas aired by Korean cable TV network tvN; each drama is based on a screenplay selected annually from applications received through an open call) and the Chinese drama “Ten Years Late” (featuring a stellar cast). Kchan! Hanryu TV streamed the Korean news program “MBC News Day” in real time, as well as the “Power of K SOUL LIVE,” an original music program.

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In the newly launched online streaming business, Beyond LIVE held the “Beyond LIVE - TWICE: World in A Day” event (an online performance by the popular K-pop girl band TWICE) and the “Beyond LIVE - SUPER JUNIOR-K.R.Y.: The moment with us” event (an online performance by the popular vocalist trio SUPER JUNIOR-K.R.Y.).

Entertainment

▷ Revenue: JPY735mn

▷ Segment loss: JPY127mn

In the events business, SMC was unable to hold any offline events due to the COVID-19 restrictions on activities and travel. However, the company explored and held other events in compliance with government guidelines, including an online autograph session with HwaSa (a member of the popular K-pop girl band MAMAMOO) to celebrate the announcement of her first mini album. In the management business, SM-affiliated artists managed by SMC in Japan—namely, SUPER JUNIOR, EXO, Red Velvet, and SuperM—came into the spotlight by performing at the “a-nation online 2020” event. Fan club and merchandise businesses were supported by the start of preorder sale for the original soundtrack of the K-drama hit “Itaewon Class” on K1stshop, an e-commerce store operated by the company that specializes in Korean entertainment merchandise. The soundtrack received favorable reviews from customers. SMC manages the fan club for the lead actor of “Itaewon Class,” Park Seo-jun.

1H FY12/20 results Summary

▷ Revenue: JPY2.2bn (-45.0% YoY)

▷ Operating loss: JPY102mn (versus profit of JPY96mn in 1H FY12/19)

▷ Recurring loss: JPY96mn (versus profit of JPY99mn in 1H FY12/19)

▷ Net loss: JPY91mn (versus net income of JPY72mn in 1H FY12/19)

In 1H FY12/20, no events were held in the Rights & Media Communication segment, but the rights business continued to deliver strong performance. In the Broadcasting segment, the company complemented its existing KNTV, DATV, and linear-streaming Kchan! Hanryu TV channels with the launch of the new KNTV801 channel on SKY PerfecTV! communication satellite (CS) 110- degree broadcasting, which can be received without a dedicated tuner. On August 1, 2020, SMC merged with SMEJ, Inc., another SM group company, deepening its relationship with other companies under the SM umbrella. SMC looks to expand its content and effectively utilize SM platforms to generate synergies with its core businesses.

By segment Rights & Media Communication

▷ Revenue: JPY1.2bn (-58.5% YoY)

▷ Segment profit: JPY122mn (-69.4% YoY)

In 1H FY12/20, events and management businesses were weighed down by the absence of events as a result of the pandemic. In the fan club business, the official artist merchandise sold at the company’s e-commerce store was favorably received. In the rights business, major K-dramas licensed to channels continued to be greenlit for CS and BS broadcasting, and DVD and video-on- demand (VoD) operations were also steady.

Broadcasting

▷ Revenue: JPY995mn (-17.9% YoY)

▷ Segment loss: JPY9mn (versus loss of JPY75mn in 1H FY12/19)

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In the Broadcasting segment, the company launched the new KNTV801 channel on SKY PerfecTV! communication satellite (CS) 110-degree broadcasting to complement its existing channels (KNTV, DATV, and the linear-streaming Kchan! Hanryu TV), aiming to continuously secure stable subscription revenue and expand sales channels. Among the shows that premiered on KNTV were “Dr. Romantic 2” (the second season of the hit K-drama about a genius surgeon who guides younger colleagues) and “SuperM, the Beginning” (a special feature that follows the road to the launch of SuperM, an SM-affiliated international band with global appeal, whose debut album has topped the US Billboard chart). DATV broadcast “HOW ARE u BREAD” (a fictional romantic K- drama about an extremely talented pastry chef [played by EXO member Suho] and a female screenwriter) and “Legend of the Phoenix” (a historical Chinese drama that generated attention by logging 100mn views in the first two days it was streamed in China). This marked the first time both shows were broadcast in Japan. Kchan! Hanryu TV aired original content such as “B Of You K-STAR TV” (a program that featured an original interview with the fresh “B Of You” duo Kim Kook-heon and Song Yu-bin who gained popularity following an excellent performance in an earlier audition program) and “JG Band Induction Closeup 3 Days” (a special feature that covered the three days leading up to the enlistment of two band members into the dance and vocal act JG).

Other In the Other segment, revenue was JPY0mn (versus JPY1mn in 1H FY12/19) and segment profit JPY0mn (versus loss of JPY0mn in 1H FY12/19).

Q1 FY12/20 results Summary

▷ Revenue: JPY1.2bn (-35.1% YoY)

▷ Operating loss: JPY2mn (versus loss of JPY5mn in Q1 FY12/19)

▷ Recurring loss: JPY3mn (versus loss of JPY4mn in Q1 FY12/19)

▷ Net income: JPY0mn (versus net loss of JPY7mn in Q1 FY12/19)

In Q1 FY12/20, economic activity stagnated as the global spread of the COVID-19 pandemic broadly depressed inbound demand and domestic consumption, raising further concerns of an economic slowdown. While communication satellite (CS) broadcasting subscribers remained in a downtrend, over-the-top (OTT) media services (provided directly to viewers via the internet) attracted renewed interest as the general public refrained from going out and live events were cancelled due to the pandemic. In the Rights & Media Communication segment, no events were held, but the rights business was steady.

By segment Rights & Media Communication

▷ Revenue: JPY727mn (-42.9% YoY)

▷ Segment profit: JPY68mn (-33.3% YoY)

In Q1 FY12/20, the events and management businesses were affected by the absence of events. In the fan club business, SMC aimed to expand operations by renewing its e-commerce website and launching two new fan club sites. However, this proved insufficient to offset impact of the discontinuation of another major fan club site. In the rights business, the company continued to broadcast major licensed K-dramas on its KNTV and DATV channels. In addition, such shows were successively greenlit for CS and BS broadcasting, and DVD and video-on-demand (VoD) operations were steady.

Broadcasting

▷ Revenue: JPY528mn (-21.9% YoY)

▷ Segment profit: JPY20mn (-1.3% YoY)

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In the Broadcasting segment, the company worked to continuously secure stable subscription revenue and expand its sales channels by operating its three existing channels: KNTV, DATV, and the linear-streaming Kchan! Hanryu TV. KNTV aired popular K-drama and Korean variety shows for the first time in Japan. Among those premiering on the channel were “My Country: The New Age” (a large historical K-drama featuring a stellar cast), “Doctor John” (a K-drama based on an acclaimed Japanese medical novel), and “Toho Shinki Chang-min’s Great Taste in Food” (a cultural variety program featuring Shim Chang-min of TVXQ!). DATV continued to broadcast popular Chinese and Korean dramas such as “Put Your Head On My Shoulders” (the highest rated show on China’s most popular review site in 1H 2019) and “Doctor Detective” (a K-drama that brought a fresh perspective to the medical detective genre), both airing in Japan for the first time. Kchan! Hanryu TV streamed original content, including the “Power of K Lab7” music program that included monthly live performances of featured artists from Seoul.

Other In the Other segment, revenue and segment profit were both JPY0mn.

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Other information

History

Month & Year Event Apr 1998 Launched company to engage in delivery of digital contents and other operations. Jul 2000 Shares listed on the NASDAQ Japan market (currently JASDAQ). Dec 2000 Started selling merchandise through major convenience store chains. Nov 2004 Started the distribution of Hanryu Now!, launched Korean content delivery business. Apr 2005 The K-drama "The Sad Love Story" premiered on Fuji TV; launched the rights business. Aug 2006 Launched fan clubs for Song Seung-heon and Kim Rae-won. Aug 2008 Started operating own e-commerce website bofi (currently DATVshopping); stepped up operations in merchandise May 2009bi Merged with BOF International Inc.; launched the management business. Oct 2009 Launched paid TV channel DATV on SKY PerfecTV!; established the broadcasting business; started broadcasting "Winter Sonata - The Animation." Jun 2010 Entered management agreement with Kim Hyun-joong. Oct 2011 “Dream High,” a K-drama broadcast on DATV, won the “SKY PerfecTV! First Prize” and the "SKY PerfecTV! Award for Korean & Chinese Drama" at the SKY PerfecTV! Awards 2011. May 2013 Sold off a group company that operated digital content delivery to concentrate on entertainment operations. Jul 2014 Invested in KNTV Co., Ltd. May 2016 Merged with KNTV Co., Ltd.; moved to channel structure consisting of paid channels KNTV and DATV. Sep 2016 Received investment from SM entertainment Japan Co., Ltd.; entered management agreement with BTS. Jan 2018 Launched the Kchan! Hanryu TV channel under a linear-streaming model. Jan 2019 Changed company name to Stream Media Corporation. Jun 2020 Launched KNTV801 broadcast on SKY PerfecTV!. Aug 2020 Merged with SMEJ Inc. Nov 2020 Raised JPY2.7bn in capital through a third-party allocation of shares to NAVER Corporation. Mar 2021 Discontinued Kchan! Hanryu TV service. May 2021 Discontinued DATV broadcasts. Source: Shared Research based on company data

News and topics

Corporate governance and top management Corporate governance Form of organization and capital structure Form of organization Company with Audit & Supervisory Board Controlling shareholder and parent company Y Directors and Audit & Supervisory Board members Number of directors under Articles of Incorporation 12 Number of directors 8 Directors' terms under Articles of Incorporation 2 Chairman of the Board of Directors President Number of outside directors 1 Number of independent outside directors 1 Number of members of the Audit & Supervisory Board under Articles of Incorporation 4 Number of members of the Audit & Supervisory Board 3 Number of outside members of the Audit & Supervisory Board 2 Number of independent outside members of the Audit & Supervisory Board 2 Other Participation in electronic voting platform None Providing convocation notice in English None Implementation of measures regarding director incentives Stock option Eligible for stock option Inside directors, employees Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology None Corporate takeover defenses None Source: Shared Research based on company data

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Dividend policy

SMC’s basic policy is to pay dividends commensurate with earnings while taking into overall consideration its financial condition and business performance. The company, in principle, pays interim and year-end dividends from surplus. The interim dividends are determined by the Board of Directors, and the year-end dividends at the general meeting of shareholders. The company did not pay dividends in FY12/20, and does not have a plan to pay dividends in FY12/21.

Major shareholders

Top shareholders Shares held ('000) Shareholding ratio SM Entertainment Japan Co., Ltd. 90,000 78.12% NAVER Corporation 8,693 7.55% Keyeast Co., Ltd. 8,276 7.18% Goldman Sachs International 441 0.38% Aslead Growth Impact Fund 335 0.29% KT Corporation 230 0.20% Jun Yoshihara 220 0.19% Korea Securities Depository-Korea Investment and Securities 136 0.12% Kyoraku Sangyo Co., Ltd. 100 0.09% Hoten Daido 90 0.08% SUM 108,521 94.20% Source: Shared Research based on company data As of end-December 2020

Employees

▷ Number of employees: 100 (Rights & Media: 42, Entertainment: 42, Other: 2, corporate [shared services]: 14)

▷ Average employee age: 38.0 years

▷ Average years of service: 6.3 years

▷ Average annual salary: JPY4.9mn

Profile

Company Name Head Office 21F Roppongi Grand Tower, 3-2-1 Roppongi, Stream Media Corporation Minato-ku, Tokyo 106-6221, Japan Phone Listed On +81-3-6809-6118 JASDAQ of the Tokyo Stock Exchange Established Exchange Listing December 1971 (Start of operations: April 1998) July 27, 2000 Website Fiscal Year-End https://www.streammedia.co.jp/english/ December IR Contact IR Web – https://www.streammedia.co.jp/english/ir/

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