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Ok-pop band BTS is turning into multimillion-dollar shareholders of their music label within the latest business shift

South Korean boy band BTS backstage during the 61st Annual GRAMMY Awards at the Staples Center on February 10, 2019 in Los Angeles, California.

John Shearer | Getty Images Entertainment | Getty Images

Members of popular South Korean "K-Pop" band BTS could raise up to $ 7.7 million each as shareholders if the label they represent is expected to go public next month.

The seven members of the band each received 68,385 shares of common stock as a gift from Bang Si-hyuk, CEO of Big Hit Entertainment, which could mean they will each receive 9.23 billion won shares (more than $ 7.7 million) if the IPO price is as expected. The award valued Big Hit Entertainment at up to 4.8 trillion won (more than $ 4 billion).

The gift from Si-hyuk, who is also Big Hit's largest shareholder, should "strengthen long-term partnerships with great artists and raise morale," according to a government filing by the company.

It's a reminder of how much the music industry has changed with the advent of streaming and social media, allowing artists to control more of their own revenues. However, according to Jeff Peretz, professor at New York University and an expert in music copyright law, this type of business is still "unprecedented." Nor is it something that has been seen in other fields such as film, professional sports, or professional sports.

"This may be the future – but it's usually the other way round, where artists create their own labels that they own and then try to get other artists to sign with them and grow," said Peretz.

He noted that it was a smart move by Big Hit, especially since BTS has achieved international popularity. Just last week, BTS secured South Korea's number one spot on the US Billboard music chart. It's also only the third group in 50 years to have three number 1 albums on the Billboard 200 charts in less than 12 months. (The Beatles and The Monkees are the other two bands.)

BTS is also a major moneymaker for Big Hit, responsible for more than 87 percent of its sales in the first half of 2020 and more than 97 percent in the first half of 2019.

"Companies in the industry are trying to block potential revenue streams in ways they have never done in the past," said Peretz. "If BTS is the main source of income, it makes sense to partner them and never run the risk of them switching to another label after they close their deal."

Peretz said the move, while unique, is reminiscent of Bowie bonds that were first issued in 1997. Artist David Bowie raised $ 55 million from investors with a promise to generate revenue from his 25 album catalog. Investing in an artist catalog is similar to investing in stocks in that its value can fluctuate over time, Peretz said.

There are also cases where management companies and record labels have entered into joint ventures with artists, which is an implicit investment, said Errol Kolosine, music manager and professor at NYU. He also said there have been cases where some companies have experimented with profit-sharing businesses, but noted that giving away shares in a public company is rare, if not unheard of.

"It is unique in the world of sports and music at what level one or two people can completely change the success of a franchise or business – but rarely do they get equity," said Kolosine.

He noted that the relationship could have interesting ramifications for both BTS and Big Hit. While the deal gives members some say in the game, none of them get a controlling stake in the company, so their input may not be that different from what they said – even as a major revenue driver for the company.

"If you're responsible for that much profit, you probably already have a say so over time the deal can create a conflict of interest. But it also presents opportunities," said Kolosine. "For example, if you're used to being the king of the castle and then another artist gets attention, it can be frustrating. However, if you own the business, another artist's success is your family success."

Kolosine noted that it also raises questions about whether Big Hit will use this model to attract other already established artists. He said it could also lead to major changes in the music industry, which is already buzzing with a lot of money.

Of the three major labels, Warner Music Group went public in June, Universal Music Group reportedly plans to go public within the next three years, and Sony Music is owned by publicly traded Sony Corporation. The relationship that BTS has with its label could potentially lead to similar deals among artists on the top three labels.

Granting shares is not yet a trend, but it is also interesting for Peretz, as some start-up artists no longer have to rely on labels as they used to.

"Many artists these days avoid big labels. In the past, the ultimate goal was to sign with a label," said Peretz. "Now it is a matter of contributing to every possible cookie jar, regardless of whether it is business or creative."

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