Blackpinks contract extension sent YG shares on a wild ride

Blackpink’s contract extension sent YG shares on a wild ride. Why K-Pop Contracts Matter – CNBC

  • When the girl band’s members’ contracts were up for renewal, the shares of their label YG Entertainment soared.
  • Why are these contracts important in K-pop and how are they different from Western music acts?

INDIO, CALIFORNIA – APRIL 22: BLACKPINK’s Jennie, Jisoo, Lisa and Rosé perform on the Coachella stage during the 2023 Coachella Valley Music and Arts Festival on April 22, 2023 in Indio, California. (Photo by Emma McIntyre/Getty Images for Coachella)

Emma Mcintyre | Getty Images Entertainment | Getty Images

In the oversaturated K-pop music scene, groups come as quickly as they go.

Most contract extensions happen without much fanfare – but not with Blackpink, one of the biggest girl groups in the world.

When the girl group’s members’ contracts were up for renewal, shares of their label YG Entertainment soared.

In September, shares of Kosdaq-listed YG Entertainment plunged twice. The entertainment conglomerate’s shares fell 9% on September 14 and slumped 13% on September 21 as media reported that three of its members would not be renewing their contracts with the label.

Still, YG stock has risen so far this year, with the company posting a year-to-date gain of 23.38% as of November 21.

Just this week, South Korean outlet Munhwa Ilbo announced that individual members will not be renewing their exclusive contracts with YG, but the group will reportedly continue their group activities as Blackpink under the label. Shares of YG rose about 3% on the news.

Analysts have mixed opinions on the latest developments.

[YG Entertainment] has relied too heavily on a few artists while its competitors have bolstered their roster of artists.

Minha Choi

Senior Analyst, Samsung Securities

Minha Choi, senior analyst at Samsung Securities, cut his price target on YG Entertainment by 9.5% to 76,000 won, up 41% from Tuesday’s close.

“It has been three months since Blackpink members’ contract expired in August. However, there was no official announcement about the contract extension. Uncertainty is weighing on stocks,” Choi said in a Nov. 14 note.

However, given that members Jennie and Rosé released material under YG in October and November respectively, the analyst’s current assessment assumes that the contract extension will take place, although he is “conservative in terms of the group’s number of activities ” remains “conservative”.

New girl group Babymonster’s upcoming debut on November 27 will likely serve as a growth engine for the company, Choi added.

However, he pointed out that YG has “relied too heavily on a few artists while its competitors have strengthened their artist roster.”

On the other hand, NH Investment and Securities maintained its “Buy” rating and 87,000 won price target on the stock, indicating an upside potential of more than 60%.

Analysts Hazell Lee and Seungjun Lee said in a Nov. 14 report that the company’s current stock price has taken into account all key risk factors, including artist departures, meaning a reduction in earnings uncertainty for YG.

Unlike Western artists and music acts, who are typically formed before signing with a label to promote them, K-pop artists typically join a management company as interns.

They train over a period of months or years before being selected as full-fledged artists. If the trainee does not make his debut, he will have to leave the company.

Contract extensions are a milestone for K-pop groups, with artists signing standardized seven-year contracts with labels – it has even been dubbed the “seven-year curse”, which sees groups disband at the end of their contracts.

Some media outlets even questioned whether Blackpink would survive the “seven-year curse.”

So should a successful group leave a label, it would represent a huge loss to the company given the costs involved in training and creating a new group from scratch.

South Korean media outlet JoongAng Ilbo reported in December that the cost of forming a girl group can range from 2 billion won to 5 billion won (about $1.55 million to $3.89 million).

Citing South Korean entertainment company Fantagio, the report said the cost of forming a girl group with three years of training for its members is estimated at 3.18 billion South Korean won, or just over $2.47 million.

Bokyung Suh, Director and Senior Research Analyst at Bernstein, said: “We know that entertainment is often viewed as a lottery business as we cannot easily predict the future and performance before bringing intellectual property like Squid Game or Game of Thrones to market bring.”

“So that’s why the world’s leading entertainment companies are looking to diversify their IP portfolios to run their businesses more sustainably,” he said in a Sept. 25 interview on CNBC’s “Street Signs.”