Melon, the nation's largest music service platform, is under investigation by prosecutors for allegedly creating a ghost music record company and siphoning off billions of won in copyright fees that should have been returned to creators, the Hankyoreh newspaper reported on June 3.
If the allegations turn out to be true, it will create a stir in the music industry as music service platform companies have long been suspected of not properly allocating their profits to creators.
According to the paper’s report, the Cyber Investigation Department of the Seoul Eastern District Prosecutors' Office raided the office of former LOEN Entertainment (currently Kakao M) in Samseong-dong, southern Seoul, on May 27.
"We raided Melon's former office on suspicion of misappropriating billions of won in copyright fees," a prosecution official was quoted as saying. Mellon, which was started as an in-house service of SK Telecom in 2004, had been operated by LOEN since January 2009 following the mobile operator’s acquisition of the entertainment company. Kakao Corp. acquired LOEN in 2016.
Prosecutors are looking into allegations that Melon created a ghost music label between 2009 and 2011 when it was a subsidiary of SK Telecom and siphoned off billions of won in copyright fees by reducing the share to actual copyright holders. Prosecutors are also suspecting that Melon misappropriated copyright fees in another way even after 2011. If the prosecution's investigation is expanded to cover the period from 2011 to 2013 when Melon was sold to a private equity fund, the amount of money it allegedly siphoned off could rise to tens of billions of won.
According to the Hankyoreh report, in 2009, Melon paid 54 percent of its income from recorded music to copyright holders and took the remaining 46 percent for itself. Copyright holders were paid in accordance to the download rate of their recorded music. LOEN is alleged to have established a ghost label called LS Music and included it in the copyright fee distribution system and siphoned off a share of the copyright holders. LS Music received copyright fees by sending music with dubious copyright claims to subscribers' "gift boxes" and included them in the total number of downloads.
The Hankyoreh suspects that LOEN took 10 to 20 percent of the royalties that should have gone to copyright holders through the ghost company, on top of the 46 percent share for itself. The amount of money LOEN had allegedly diverted from the copyright holders’ income is estimated at about 5 billion won.
In July 2013, SK Telecom sold a 52.56 percent stake in LOEN, which was held by SK Planet, a subsidiary of SK Telecom, to Star Invest Holdings, a Hong Kong-based private equity fund, for 265.9 billion won. Kakao Corp. bought a 76.4 percent stake in LOEN for 1.87 trillion won in January 2016.
LOEN changed its name to Kakao M last year. It has been absorbed by Kakao Corp. and is operated by Kakao itself. LOEN’s alleged misappropriation of copyright holders’ income took place before Kakao Corp. acquired it.