(Source)
Well, I covered it in passing in an opinion piece in The Korea Herald over a year ago, and many times on the blog (and on Busan Haps) since, but hey: I admit that The Economist is probably a more authoritative-sounding source. See here then, for a discussion of how the dynamics of the Korean digital music industry are forcing labels to financially rely on celebrity endorsements, and which is a big factor behind why 2 out of 3 Korean advertisements feature them, one of the highest rates in the world.
While frustratingly brief, it does have some money quotes:
…SM Entertainment’s boss complains that even 1m downloads cannot cover the cost of making a music video….
….SM Entertainment and other purveyors of K-pop cover this shortfall at home by having their stars hawk the latest phone, or appear on television variety shows. The biggest labels have become adept at squeezing cash out of their pop stars’ names, rather than their music. But only a handful of musicians are famous enough to benefit.
South Korea’s old business model, perfected by its carmakers, was to use a captive home market as a launch-pad from which to invade foreign shores. The country’s pop musicians have turned this model upside down: they have to export their tunes to make up for meagre pickings at home.
(Source)
See bloop69’s comment also, who contends that things are not as dire as they seem (for a similar discussion between abcfsk and myself, see here):
A huge chunk of the money is made in “collectable” CDs and DVDs, which can run north of $150 per shot and are constantly churned out. It’s not a case of INVADING other shores you clueless dolt. It’s a case of using Youtube and videos as LOSS LEADERS to capture a small number (tens to hundreds of thousands) of hardcore fans who spend $100s US EACH to support their “fandom”
You don’t even begin to perceive it but in fact the Koreans are using a very progressive model… similar to League of Legends or FarmVille to give customers a free “taste” of the music. Like Kpop free to play MMOs also rely heavily on “whales” and heavily invested customers to carry the rest of the customer base. It has nothing to do with “invading” other shores. This is the strategy they have been using in Korea and are using around the world.
Finally, a quick request: please ask your Korean partners, friends, colleagues and so on if they know what “celebrity endorsement” is in Korean. If they struggle to answer, as my wife did, then I think that will be testament to just how pervasive they are here! (Eventually, she came up with “유명인 보증”).
The Grand Narrative 
Will you be adding to the online discussion of Psy’s Gangnam Style? Would love to hear your take.
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Sorry, but like I said in another comment earlier today, frankly the disproportionate number of “You’re White so STFU about Korea”-type comments I’ve read about it have dissuaded me from bothering.
On the plus side though, there’s already dozens of good articles about it already out there (just a handful of which are linked to in my latest KGR post), so I don’t really think I could add much to those anyway!
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I seriously have to agree with the bloop69’s comment on that one. I don’t think kpop groups really intend to make money off of their digital sales. They’re really just intending to recoup costs with those sales. The songs are more intended to create a fanbase who will spend a lot more money on collectible albums, stickers, posters, concert tickets, and photobooks. And of course, fans who’ll give them attention at variety shows and for CFs.
In order to get an idea of the economics of the situation, we only need to look at the situation of Kara. Last year, they were threatening to break up and so we got one of those few instances where we got to see the financial statements of the girls.
From All Kpop:
He continued, “The representatives of the three KARA members claimed that each member only received $860 USD from January through June of 2010 from album sales made during their ‘Lupin‘ promotions. Their claim made it seem as if this amount was all that the members received for their income during this time period, but they are hiding the accurate truth.”
Im continued, “Aside from their album sales, KARA was distributed a total of $200,000 USD per member from income made through CFs, events, broadcast appearances, digital sales, and mobile sales.”
DSP Media’s lawyer further revealed that all promotional expenses were taken out from the income made through their album sales, and the girls were given a total of $1 million USD during this promotional period, which was divided into $200,000 USD per member.
And contrary to the article, it isn’t just the biggest names that sell their image. A lot of rookie groups do fan signings. I find it interesting that there are many rookie groups who don’t regularly hold showcases beyond the music shows (as you would expect for musicians) but do fairly often hold fan signings (as you would expect from a celebrity). This isn’t the fault of poor music sales, but rather their business model.
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