Kakao's acquisition of "Melon" for 1.87 trillion won in 2016 is being mentioned as a case of failure in mergers and acquisitions (M&A). This is due to the lack of synergy with Kakao's main business, mobile messaging, and because the service is limited to the domestic market, resulting in a loss of growth momentum. Recently, Melon has been losing ground amid the onslaught of global companies like YouTube Music and Spotify, leading to its decline. This is the result of reckless expansion without considering business synergy.
According to data from application retail analysis service WiseApp and Retail on the 2nd, Melon users numbered 6.01 million in April, a decrease of about 16% from 7.14 million in April 2023. The revenue of Kakao's content division, including Melon, is also in decline. In the first quarter of the year, Kakao's content division reported revenue of 870.7 billion won, down around 16% from one year earlier when it was 1.33 trillion won.
In contrast, competing services to Melon are showing significant growth. The number of YouTube Music users reached 9.79 million in April, up 88% compared to 5.21 million in April 2023, and Spotify also saw its user base grow to 3.29 million in April, a 229% increase from 1 million in April 2023.
Recently, Naver has been discussing including Spotify in its shopping membership service, which is expected to accelerate Spotify's market share expansion. If Spotify's service is offered through Naver's membership, which has over 10 million paid subscribers, it is only a matter of time before Melon loses its position as the second-largest music service in Korea.
There is considerable criticism within and outside the industry that Kakao's decision to acquire Melon, which did not have significant synergy, was a "bad move" in 2016. The cost of acquiring Melon alone amounts to 1.87 trillion won, the largest sum among companies acquired by Kakao to date. In 2015, Kakao's annual revenue was 932.2 billion won, which was nearly equivalent to two years' worth of revenue. In 2015, Loen Entertainment (the operator of Melon) had revenue of 357.6 billion won and an operating profit of 63.4 billion won.
Considering that the price SK Telecom proposed for acquiring CJ HelloVision in 2016 was 1 trillion won, Kakao's acquisition price for Melon was striking. Kakao explained that its goal in acquiring Melon was to create a new market combining mobile platforms with music content and to expand the content ecosystem based on music creators.
However, since the acquisition of Melon, there has been little synergy with KakaoTalk or other services. The content ecosystem and services have remained confined to Korea, limiting growth. An industry source noted that "music platforms require separate copyright agreements for each country, making international expansion very difficult. Given that overseas companies like Spotify and YouTube Music have already established a foothold in the global market," they said, "it's hard to understand why Kakao spent nearly 2 trillion won to acquire a domestic company that struggles to expand overseas."
This contrasts with the case of Google, which acquired YouTube for a similar amount. In 2006, Google acquired YouTube for $1.65 billion (about 2.3 trillion won). By acquiring the video platform "YouTube," which was primarily focused on text and image searches, Google expanded its business scope and maximized synergy with its search business. It integrated video content into search results, thereby improving search quality. YouTube has rapidly grown through its global business, increasing its corporate value significantly. According to market research firm MoffettNathanson, YouTube's corporate value is estimated at $550 billion (approximately 766 trillion won), more than a 333-fold increase compared to its value at the time of Google's acquisition.
Ryu Jong-ki, a visiting professor at Sogang University’s Graduate School of Knowledge Convergence Media, pointed out that "Kakao's acquisition of Melon is a typical case of failure brought about by a reckless merger focused solely on service expansion without business synergy." He added, "While YouTube Music and Spotify are rapidly expanding their influence in the global market, Melon did not pursue international expansion," stating that "Kakao focused solely on scaling up without considering how to achieve business growth and synergy through the acquired company."
Meanwhile, according to the Fair Trade Commission, the number of Kakao's subsidiaries increased to 147 in May 2023 but has since decreased to 116 as of February this year.