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Why Alibaba Bought $30M Stake In K-Pop Giant SM Entertainment, Home To EXO And Girls' Generation

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South Korea’s top entertainment agency S.M. Entertainment said on Thursday it has formed a strategic partnership with Alibaba Group Holding.

The Chinese e-commerce giant will buy around $30 million worth of S.M.’s newly issued shares, gaining a 4% stake in the Kosdaq-listed company.

"Through this partnership, we'll synergize in various fields, including China's digital music industry," S.M. said in a statement. "We'll continue to localize and expand our business in China."

With its minority stake in S.M., Alibaba looks to tap into some of the most popular K-pop groups through its new music division, Ali Music, and its music streaming apps Xiami and Tiantian. S.M.'s artists include EXO and Girls' Generation, both topping Forbes Korea's Power Celebrity 40, in 2015 and 2014, respectively.

Ali Music was formed in July 2015 as part of the e-commerce group's attempt to expand into the online music industry. In November, it bought Youku Tudou, known as "China's YouTube," which has more than half a billion online video users.

Alibaba will also gain access to some of the entertainment agency's expertise in online music distribution and marketing. S.M.’s videos on its YouTube channel, SMTOWN, has amassed over 3.8 billion views, more than Bruno Mars and Lady Gaga.

In November, S.M. posted a 41% jump in profits of $30 million over the first three quarters of 2015, while its revenue rose 14% to about $200 million. The entertainment agency said the growth was mainly due to its increased revenue from Japan and China, with $10 million coming from China alone in the second quarter, a 110% jump from the previous year.

Most of the revenue came from concerts and other events, not from music royalties, so S.M. expects to generate even more revenue from China since it started to regulate illegal music streaming services in July 2015.

S.M. has been trying to establish itself in China for more than a decade, and has tried all sorts of strategies to appeal to the Chinese market, such as having a Chinese representative in a group, creating Mandarin-speaking subgroups, and even getting its Korean members to adopt Chinese-sounding names.

After its partnership with Alibaba, S.M. is now working with the three biggest internet companies in China, as it is also contracted with  Baidu and Tencent Holdings as a music content provider.

Back in 2014, there was speculation that Alibaba was going to purchase a $90 million stake in S.M. Entertainment, with Korea Economic Daily reporting that it would make Alibaba S.M.’s second-largest shareholder, but the entertainment company then denied it.

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