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East Asian Pop Music Analysis


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MOR 492: Global Management

Published in: Leadership & Management
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East Asian Pop Music Analysis

  1. 1. The Globalization of East Asian Pop Music: SM Entertainment Sanam Javid ⬥ Cameron Koziara ⬥ David Silvermintz ⬥ Zheng Xiao ⬥ Joy Xu ⬥ Yeung Yuk Ling !1
  2. 2. MOR492 Group ICA Table of Contents
 Introduction 3 East Asian Music Industry Analysis Korean Pop Music Has Room to Grow 4 The Global Trends of K-Pop in the Digital Sphere 5 Corporate Overview of SM Entertainment Key Strategies and Competitive Advantage 6 Market Analysis of Japan Japanese Music Market Trends - CAGE Analysis 8 Porter’s Five Forces 9 Market Analysis of China China’s Market is Growing but Underdeveloped – CAGE Analysis 10 Opportunity for Growth - Porter’s Five Forces 12 Market Analysis of Western Countries Mounting Concerns and Bleak Future 13 CAGE Analysis of East Asian Pop Music in the West 15
 Strategic Recommendations 17
 Conclusion 18 !2
  3. 3. Introduction In the latest report out from the RIAA (The Recording Industry Association of America), it stat- ed that the global music industry totaled $16.5 billion US dollars in global music sales. Over the past 15 years, this was the first time the industry had positively grown in global sales by 0.2%. One significant factor in global sales was the increase in digital downloads, which brought in $5.8 billion in global music sales. The increase, of 0.2%, was tiny, and the total rev- enue, $16.5 billion, wasn’t even close from the $38 billion that the global music industry took in at its peak more than a decade ago. Even though the numbers are not as high, the figures, reported by the International Federation of the Phonographic Industry, provide remarkable encouragement for the global music industry as a whole.
 While the global recording industry progresses onto the road to recovery, the East Asian mu- sic industry, specifically has known to have phenome- nal growth over the recent years. While global sales were in a major decline until this past year, the East Asian market was forecasted to grow about 18.5% in only 4 years. Particularly, the Korean pop industry, which has established itself as a phenomenon in Asia and is rapidly extending its reach to new global mar- kets. There are three popular record labels in Korea known as the “Big 3” that control much of the music industry in East Asia. They include: JYP, YG and SM Entertainment. In just 5 years, SM Enter- tainment went from a small five-person operation to a multi million dollar entertainment con- glomerate. With popular artists including H.O.T., BoA, TVXQ, and Kang Ta rose to stardom very quickly in South Korea.The CEO and founder of SM Entertainment has quickly become an icon for the Korean people and rose in popularity in neighboring Asian countries as well. From the early stages of the company, it was always focused on the Asian market as a whole and not just one part of South Korea, which expanded their opportunities far and wide.   !3
  4. 4. Korean Pop Music Has Room to Grow South Korea and its role in the East Asian Music Industry – Why Expand? While Asia in the late 1990’s is most often associated with the destructive financial crisis of 1997, an entirely different and far less deleterious process was slowly taking place as well. This process, known as the Hallyu (“Korean Wave”) featured the growth and expansion of South Korean popular culture and media into East Asian countries. The Hallyu began with Korean television shows that have been increasing in growth at a very rapid pace. Between 2001 and 2011, Korean television drama exports have risen from $8 million to $155 million. Although the United States boasts a very large audience, most of this growth has occurred in Asian countries such as Japan, Taiwan, Vietnam, and Cambodia because, according to a Korean broadcasting executive “US shows have specific genres – cop shows or medical shows – but we have universal stories.” Through this exposure, Korean music began to expand to these countries as well. The growth of this industry bodes well for the continued exposure of Asian countries to Korean music. Hallyu is not the first “wave” of Asian culture to gain a foothold in other Asian countries such as Taiwan and Hong Kong; Japan benefitted from the Harizu (“People Favorable to Japan and its Culture”) movement in the late 1980’s and early 1990’s. However, Harizu was neither a particularly large movement relative to Hallyu nor has it withstood the test of time. The following Google Trends chart demonstrates the prevalence of Google searches for K- Pop (blue) and J-Pop (red) from 2004 to 2014.  (Note that the major spike in K-Pop is the re- sult of Psy’s Gangnam Style, a YouTube sensation that gained the most views (1.9 billion) of any video in history). K-Pop has enjoyed a dramatic rise in popularity while J-Pop has declined. Most importantly, the major regions from which the searches are coming from are, in order, Indonesia, Malaysia, Kazakhstan, Vietnam, Philippines, South Korea, Saudi Arabia, Bolivia, Singapore, and Japan. All of the aforementioned countries, except for Bolivia, are Asian countries, which indicates a clear rise in popularity among Asian countries in particular. The following chart shows the number of K-Pop videos viewed on YouTube by country. The Global Trends of K-Pop in the Digital Sphere !4
  5. 5. While the United States has a Western-country lead with 240,748,112 views, the Asian countries simply dwarf the Western countries in terms of views with Japan alone tallying 423,683,759. This trend certain- ly seems likely to continue as more people in Asian countries gain access to the Internet. The following chart demonstrates the growth of Internet access in Asian countries: Between 2008 and 2012, there was a marked increase in Internet access in every one of these Asian countries. Furthermore, China, a country with the world’s largest population at 1.35 billion people, has achieved an Internet user penetration rate of 42.9% and an Internet user growth rate of 9.9% per year. Given that K-Pop is a very popular search term among Asian, it is very likely that the popularity and exposure of Korean popular culture will only grow in the coming years. The Asian mar- ket is substantially larger that the Western market and the combined population of Europe and North America, 1.27 billion. Additionally, this large market is much more hospitable to Korean music than Western music. First, Korean music, unlike much of the music that is popular in the West, is much less explicit and sexually focused. This certainly helps in a region dominated by a temperate and conservative Confucian background. Specifically with regard to China, having less sexually ex- plicit content is a vital quality if one hopes to expand in a country with China’s political struc- ture. Second, China, the largest of the Asian countries, has passed legislation limiting the import of American music, movies, and literature. This has allowed for Asian countries to rule their own market. However, intra-regional conflicts between China and Japan have led to situations like the Chinese boycott of Japanese products in 2012 as a result of the dispute over the Senkaku Islands. This leaves Korea as the only viable major player in the Asian music industry and it seems as if Korea’s market share will only be increasing in the coming years. !5
  6. 6. SM Entertainment as an Industry Leader Corporate Overview and Strategic Analysis SM Entertainment is one of the three big talent agency/record label combination firms in South Korea (in addition to YG and JYP). The independent Korean Record Label was founded by Lee-Soo-man in 1989 and is considered the company that really put East Asian music on the international music stage. They released and developed the transnational stars such as the likes of H.O.T., ShinHwa, TVXQ, BoA, Super Junior, and Girls’ Generation. From a one-man company in 1989, in just over 20 years, the company’s market capitalization is now US$1.24 billion dollars. !6
  7. 7. Key Strategies Competitive Advantage “Star Factory” and Idol System breeding multi-talented entertainers SM Entertainment has found success by redefining the meaning of the relationship between consumer and artist. The Korean music industry is focused on creating a connection between their talent and consumers, thus the product is not just the music, but also the artist as a human being. SM Entertainment has mastered the systemic “star factory” that breeds trainees to become top-notch performers. These trainees often take 5 to 10 years to be trained before they are perfectly tailored to the market demand of someone with personality, talent (dancing, singing), and good looks. 
 The G-L-G Production Strategy (Global to Local to Global) and the “SMP” Music Genre 
 SM focuses on producing music with a Global to Local to Global Strategy. This first Global part means importing Westernized music, fashion, melodies, beats, language and bringing it to a Korean production company. Here, the gathered material is “localized” and translated into Korean pop culture – creating a pseudo-hip Korean culture. Performers are selected from local areas and trained to play the part. Their global strategy is to then take this localized Western material – “K-pop” – and market it internationally, as music that is relatable across cultures because of it’s unique production process. SM has mastered its own version of this process and in the K-Pop world is even known for their “SM Pop” genre of music – a mash up of Western pop, hip-hop, and dance music. !7
  8. 8. Key Strategies and Competitive Advantages Development Abroad SM Entertainment’s highly structured, strategic, and successful methods of pumping out stars (specifically BoA) attracted Japanese entertainment firms – specifically AVEX. In 2001, AVEX and SM joined hands and signed a licensing deal in which they would distribute music for each other in their re- spective companies. BoA’s intense training in dance, language, and singing as well as her “star quality” quickly made her a big success in Japan, even topping major Japanese music charts. This lead to SM breeding a wave of similar cross-cultural stars, most notably the boy bands Super Junior and TVXQ. In 2006, SM Entertainment, AVEX, and AVEX China formed “SMAC”, a joint venture to utilize Japan’s business experi- ence, Korea’s cultural content production, and China’s market potential to create a new mar- ket. Looking Forward The focus of SM Entertainment has always been to become the biggest entertainment com- pany of Asia. SM Entertainment has set off to a good start making K-Pop something to be no- ticed internationally, specifically in Japan, but the biggest and most undeveloped country in Restructuring the Revenue Channels 
 One of SM’s core business strategies is to alter traditional revenue channels by shifting from a B-2-C (business to customer model) towards a B-2-B business model, where most of their business is done with YouTube, TV companies, and merchandise distributors rather than through direct record sales to consumers. By making their music widely available and easily accessible, they have reached much greater audiences than they would have previously. In turn, they focused their efforts on increasing consumer spending in areas beyond record purchase. This strategy something that the Japanese and Chinese industries have yet to adapt. This is characterized by a large number of musical inputs (i.e. performers, bands, composers, song-writers), a low number of producers (i.e. SM as a production company) and a distributor with a large reach (YouTube). SM acts as a venture capitalist, investing large amounts of money into training talent, and reaping most of the profit. !8
  9. 9. East Asia had yet to be tackled. Becoming an industry leader in China is the ultimate goal for SM Entertainment, but globalization of their company is the key focus. Japanese Market is Stable but Saturated A CAGE Analysis of Japanese Music Market Market Growth Japanese music industry has long been the second largest single market in the world. However, Japan topped the ranking in 2010 which ob- tained 44.5 millions of singles in the music market (IFPI, 2010). Accord- ing to PwC, the market value of Japan music industry was around 5400 millions dollars with a positive 0.1 CAGR from 2002-2010. Although the market had experienced negative growth due to economic recession and Asian financial crisis from 2002-2003 and 2007-2008 respectively, the growth rate has gradually stabilized and maintained a positive con- stant growth rate of 0.8% from 2009 to 2011. Target customers In Japan, consumers in their teens and twenties are used to the buyers of the greatest amount of records. However, as the population under the age of 25 shrunk, the middle-aged or 25 above are increasingly important to the company growth. According to report of IFPI in 2006, 22% of music buyers were between the ages of 30-39 while 15% of the sales are from the age group of 20-29. Therefore, we expect that the target customers should be the age group from 30-39 in the near future in Japan music market. CAGE of Japanese Music Market !9
  10. 10. Competition in Japanese Market is Fierce Porter’s Five Forces Analysis 
 The music industry in Japan is very well developed and a few dominant companies occupy the entire market and the competition between them is fierce. There is little room for new companies to move in. This means that in order to enter the Japanese music industry, it must be through some sort of partnership with an existing industry leader –which SM has already done (partnered with AVEX, with great success, i.e. BoA). The bargaining power of suppliers and buyers creates some attractiveness to SM entertainment as it has the talent management skills to mold idols to fit current trends of the music industry. To conclude, the attractiveness of the industry is moderate, but SM has already grown with AVEX in Japan. While there has been great success, there is little room for further growth. 
 Same “idol” training system: scout and train young people from the age of 13-14 with singing, dancing, and acting lessons • Idols are in groups, usually more than 5 idols in one group Popular Music Style: Rock and Pop Different Language: Japanese Buddhism and Shinto vs. Christianity Aging population = shifting target audience 
 Near South Korea (about 576 mils apart) Similar Climate Same Time Zone (UTC+9:00) ADMINISTRATIVE - LOW ECONOMY - MODERATE Different Currency: Yen Free reign – no shared trading bloc No colonial ties Implementing for new business models in order to create new business (i.e. hybridization) Existing developed entertainment markets: J- Pop and Japanese Dramas Higher GDP per capita: $46,720 Similar infrastructure and technology available to consumers !10
  11. 11. Chinese Market is Growing but Underdeveloped An Analysis of Chinese Music Market (CAGE Analysis) 
 Newfound hunger for entertainment sparks growth It is apparent that China’s entertainment in- dustry lacks development and saturation. According to PricewaterhouseCoopers’ industry research, in 2005 China’s entertainment industry recorded the world’s fastest growth rate, with a 26% CAGR. In addition to this, it is predicted Forces Power of Suppliers: HIGH Suppliers in this industry are usually the talent agencies. They scout and train young people to become popular celebrities that dominate the music industry. They also produce their own music for the singers in their own company, avoiding commission fees to other organizations. In addition, antitrust laws ensure that music albums produced in Japan cannot be sold at a discounted price in other markets. This maintains a pricing status quo and preserves the market influence of the suppliers.
 Power of Buyers: HIGH The individual consumers have a high bargaining power due to piracy, which often forces the music industry to drive down their album prices. Also, music industry heavily depends on the preferences of consumers. Companies need to compose media that matches with current trends. 
 Threat of New Entry: LOW The entrant barrier is high due to a few dominant market players. They have established a well-developed supply chain to produce songs and train idols to fit in the market, hence making it very difficult to break into the market for any new company. Threat of Substitutes: HIGH There are a lot of substitutes available to replace J-POP. Entertainment media such as manga, anime, and console games are very popular in Japan. Manga generates around $6 billion revenue every year while console game industry generates $12 billion. Industry Competitiveness : HIGH There are a few strong rivalries in the Japanese music industry. The Big Four including Universal Music Group, Sony BMG, Warner Music and EMI are powerful global companies that dominate the market share. In addition, the largest indie label Avex Group Holdings dominates 15% of the market share. !11
  12. 12. that China would likely surpass Japan in 2009 as the largest entertainment market in Asia. Just 30 years ago the country was reopened to foreign investment. Going off the notion that, “The Chinese were hungry for different kinds of entertainment. The market in China was huge and people were getting more willing to spend” it is crucial for companies to capitalize on this po- tential growth. It was forecasted that China’s entertainment industry would grow at an 18% CAGR to $137.4 billion in 2011, the biggest increase in the world during the forecasted peri- od. Combating piracy and consolidating the fragmented market pave the road to success in China Trends that currently affect the Chinese market include the rapid expansion of mobile phones. It was predicted that mobile phones were expected to be the biggest platform for the future recording industry in China. According to the IFPI, in 2005 there were 417m mobile phone subscriptions in China, as opposed to 41m broadband lines. The second trend that greatly affects the economic side of the Chinese entertainment industry is piracy. Piracy had forced record labels to sell CDs at discounted prices. The cheaper pirat- ed copies easily found their way into local markets. The IFPI estimated that about 85% of recordings in China were illegal, representing a total value loss of $410m in 2006. Finally, the last trend of slowly consolidating the geographically widespread businesses in the entertain- ment industry presents a challenge. Two targets with a mutual goal Young adults dominate the growing Chinese market and they demonstrate a willingness to experience new forms of entertainment. The market is being influenced by western enter- tainment trends and Korean preferences. Chinese talent agencies and broadcasting compa- nies had collaborated to host widely publicized singing contests and auditions. Furthermore, buyers in China could be divided into two groups: consumers of music, and intermediate buyers such as record stores, karaoke lounges, and TV networks. This gives the market a wide base from which to exploit its consumers demand for new entertainment sources. Finally, live entertainment is establishing a footprint. In some prosperous coastal cities, such as in Beijing and Shanghai, a significant number of consumers were even willing to pay high prices to at- tend live concerts. CAGE ANALYSIS
 China is an under developed market with a growing population that is receptive to new enter- tainment options. The CAGE model clearly shows that the Chinese market has low cultural !12
  13. 13. and geographic distance, moderate economic distance, and high administrative distance be- tween Korea and China. It is clear that the over all distance is limited, yet it is important to note that a lack of common currency, lack of laws, and the need to adapt to the various fragmented regions throughout China are key challenges to overcome in future ex- pansion. Opportunity for Growth in the Chinese Market Porter’s Five Forces Analysis It is clear that the Chinese entertainment industry is crucial in the global expansion of any company. With a massive population and even larger growth rate, the potential gold mine in CULTURAL - LOW GEOGRAPHIC - LOW Politically conservative music is less likely to create issues with Chinese government – similar Confucian historical backgrounds Linguistically, Korean and Chinese are very similar. Language: Korean vs. Chinese Existing interest in Korean Culture (TV dramas) Popular Music Style: Pop/Ballad, still mostly undeveloped No existing music industry structure – entertainment dominated by TV and Movie Industries. 
 Near South Korea (1,315 miles) Similar Climate One hour time difference ADMINISTRATIVE - HIGH ECONOMY - MODERATE Lack of common currency Lack of laws to combat piracy Lack of laws to protect individual property rights Nature of demand varies based on different income levels throughout China Companies need to be highly agile and adaptive to local populations Lack of Chinese entertainment industries means there needs to be careful development of infrastructure !13
  14. 14. China is growing. The Chinese entertainment industry is under-developed and highly fragmented, and therefore provides an opportunity for consolidation. Furthermore, it is impor- tant to note that the people of China are receptive to music trends from other nations. Al- though alternatives for entertainment exist in the country in the form of video games and theme parks, the overall TV and music industry is yet to be saturated. Despite the exis- tence of different companies that have established themselves in the C-pop market, they are not currently consolidated to form a powerful entity. As time goes by, the Chi- nese government progresses the development of laws that combat piracy and individual property rights, leading to an environment that is regulated and friendly. Ultimately, the pre- mature development and receptive environment create an opportunity for companies to leverage cultural arbitrage and consolidate the Chinese industry. Mounting Concerns and Bleak Future An Analysis of the Western Music Market Forces Power of Suppliers LOW Two types of suppliers: Talent agencies that developed and represented singers; and production companies that recorded albums, and produced dramas and films. Highly dependent on the popularity of stars. Power of Buyers HIGH Two types of buyers: Consumers of music; and intermediate buyers such as record stores, karaoke lounges, and TV networks. Threat of New Entry HIGH The entrant barrier is high due to a few dominant market players. They have established a well-developed supply chain to produce songs and train idols to fit in the market, hence making it very difficult to break into the market for any new company. Threat of Substitutes HIGH Alternative entertainment options include video games, theme parks, and TV shows - 23.6% growth rate in China’s video game market - By 2006 there were over 200 theme parks and more being developed during the “theme park fever” Industry Competitiveness Moderate Industry competitiveness is moderate due to the fact that there are a number of well-established companies that currently streamline the C- pop market, but no one dominant player. Companies are established in main cities and segregate the market based on language and economic level !14
  15. 15. Although the Asian music market has seen miraculous growth, similar outcomes did not appear in counterpart Western markets. Since 1999, the global music industry has witnessed a steady decline of sales. Profits in the United States dropped from $14.6 billion in 1999 to just $6.3 billion in 2009. In 2010, the UK recorded a loss of over 90 million Euros from declines in CD purchases. This decrease is largely attributed to the growing popularity and availability of digital music and the diminishing demand of physical music copies. With the invention of Mp3 music play- ers and the I-pod, consumers no longer need to buy hard copies in order to listen to music. In fact, information processes have become so digitalized that newer generations of laptops (such as the UltraBook) no longer come with CD readers. Nowadays, if a consumer wanted to listen to a song, they could simply search it up on YouTube. Due to the rapid growth of the internet, it has become exceedingly difficult to regulate the online distribution of music. As a result, piracy rates have skyrocketed to disastrous levels. In a study done by the BSA in 2007, the United States was estimated to have lost over $8 billion dollars due to online piracy. Glimmer of Hope Despite these harsh economic conditions, digital sales have been steadily rising. According to the IFPL, digital sales accounted for over 25% of total music revenue in 2010. After several !15
  16. 16. consecutive years of growth, the revenues from the UK digital market (63 million Euros) finally offset the loss from CD declines (39 million Euros) in 2012. This progress seemed to occur globally, as the year of 2012 produced the first global revenue increase in 13 years. This per- centage (0.3%), although small, presents a positive outlook for the future. Furthermore, recent studies have also shown growing profits in the music performance sector. In the United States, concerts have been earning more and more since 1999, almost tripling the total revenue from 1999 in 2011. As international tours become more popular, with popu- lar Western artists performing all over the world, this positive trend is set to continue. Fig. 1: Source- Washinton Post Fitting in or Standing Out? !16
  17. 17. CAGE Analysis of East Asian Pop Music in the West Despite its growing success in local and regional markets, East Asian pop music has had diffi- culty maintaining steady levels of success in Western countries. Ever since the hit Japanese song “Sukiyaki,” sung by Kyu Sakamoto back in 1963, no other Asian singer has managed to top the Billboard’s singles chart. However, recent musical trends have shown that the pop genre is on the rise, being the only music genre to show positive growth in 2011. This trend, coupled with the success of Korean artist Psy, presents the East Asian Pop Music industry with a positive outlook in the West. !17 ? = ? =
  18. 18. Recommendations: The Korean pop industry creates direct economic value and product branding opportunities for the country. Their songs, singers and fans provide opportunities for companies from other countries nearby to develop new products and marketing strategies, as well as new ways to expand their own markets. The first K-pop strategy that businesses could use is to expand their markets in Korean televi- sion dramas, the internet and the gaming industry. Specifically for the game and animation industries to develop animated characters using K-pop stars. By connecting the Korean idols with products, it would give companies an opportunity to enjoy substantial marketing effects. CULTURAL - HIGH GEOGRAPHIC - HIGH 
 Language barrier causes issues in musical expression and understanding - while American lyrics are deemed “cool” in Asia, Asian lyrics/ language is not received as well in Western countries. Asian artists are often labeled “copies” of pre- existing American artists (“the Asian Mariah Carey.”) Originality is of a big concern to Western consumers, not so much East Asian. 
 Physical distance between Eastern and Western markets increases time gap between tour dates; harder to accommodate fans on both ends without losing popularity in either region Although communication links exist, becomes harder to predict/understand trends if different parts of management are stationed in different locations of the world. ADMINISTRATIVE - LOW ECONOMY - MODERATE 
 Lack of regulation against internet piracy - Raises concerns given the increasing size of the digital music market. Differing government policies regarding the sale and distribution of physical music Mandatory military service for Korean artists 
 East Asian music has only found success in niche markets in the West Consumer distribution is very un-clear in the U.S. (majority of viewers on Asian channels are non-Asian) + no structured method of targeting costumers Difference in music industries; Korea has 3-1 market while U.S. has 3 separate industries !18
  19. 19. Another strategy SM Entertainment could adopt is the “globalization” strategy in entering the Chinese market. As stated in the CAGE framework, mentioned earlier in the report, there is a cultural distance between China and South Korea due to the lack of originality. The company should do something similar as it did with entering the Japanese market. They by localizing their idols, to attract consumers. Such training included singing and greeting in their local language, and also recruiting local Chinese people and training them to become idols. It is traditional for Chinese people to have a strong sense of unity. With this said, it should be eas- ier for them to accept idol groups from foreign countries. With the support from the Chinese market, SM Entertainment is bound to experience a higher level of success. The third safest and most profitable option for SM entertainment would be to adopt a trans- national strategy within Asia, focusing on first developing a strong domestic market and then expanding products and services regionally. Because of its location, Asian countries such as China not only offer a huge consumer base but also decreases the distance created by lan- guage barriers. A transnational strategy will also be able to take advantage of multiple corre- lated media industries to music such as television and movies. By horizontal integration, SM should be able to expand its services all across East Asia and become a dominant company in the global industry. Conclusions: With the successes that the Korean pop industry has already had they will be able to win the hearts of the East Asian market completely, in the next 10 years. With the world becoming smaller and smaller, and with the help of technology, the digital sales in the global music in- dustry is on the rise. With the rise in digital sales through YouTube will aid in keeping the in- dustry alive for years to come. With the close proximity these East Asian countries have with one another, SM entertainment will take over that entire population, meshing the various countries into one. !19
  20. 20. With Japan of course, it seems to be a little different. With a highly saturated market and a shrinking population of the age demographic between 18-24, the middle-aged or 25 above are increasingly important to the company growth. Therefore, the future of Japan lies in the hands of the 30-39 age demographic. Currently, China has the world’s second-largest movie and entertainment market right behind the U.S., with estimated box-office grosses of $2.75 billion last year. Many analysts forecast that China will take the number one top spot within the next five years. Factors such as the digitalization of the music industry, and with the help of the Chinese gov- ernment’s easing of controls over entertainment businesses, KResearch estimates that China also will become the world’s largest overall entertainment market by 2020, at $65 billion.  !20