Lex Letter from Seoul: Baby Shark surfs the Musk effect

Elon Musk’s tweets can move markets. Endorsements — explicit or implied — from the Tesla founder have sent valuations of everything from bitcoin to GameStop shares soaring. They put social media apps Signal and Clubhouse on the map. The latest example of the influence of Musk’s tweets is Baby Shark, a kids’ character owned by SmartStudy of South Korea.

In a tweet on Wednesday, Musk said: “Baby Shark crushes all! More views than humans”, and attached the video “Baby Shark Dance”. The earworm ditty, sung by two kids amid cute animated sharks, went viral on YouTube in 2018. It has since become the world’s most-watched clip with 8.7bn views

Some online Muskologists read deeper meaning into the tweet, seeing it as an endorsement of Baby Shark Tank Coin, an obscure cryptocurrency also know as bashtank.

A more convincing theory is that Musk is simply showing mischievous disdain for the sober view of a chief executive’s duties promulgated by the financial authorities. Reports on the same day alleged his use of Twitter had twice violated a court-ordered policy requiring tweets to be preapproved by company lawyers.

Endorsement from the entrepreneur comes at a perfect time for SmartStudy, the educational media company that created Baby Shark, which has been tipped for a listing in New York.

The South Korean group has many attributes of character marketing enterprises. This includes Sanrio of Japan, owner of the Hello Kitty franchise. Another is Hit Entertainment, the UK business behind Peppa Pig, which US toymaker Hasbro bought for $4bn in 2019.

Samsung Publishing — no relation to tech group Samsung — is the second-largest shareholder of SmartStudy, behind the founding family, with an 18 per cent stake. The two companies are inextricably connected.

Samsung Publishing’s Seoul-listed shares benefited from a 10 per cent pop in morning trading. The stock is up 400 per cent since the song went viral and has more than doubled in the past year. It still trades at just 8.6 times trailing earnings.

SmartStudy’s operating margins are high, at more than 27 per cent. Costs are low because it makes extensive use of Baby Shark content that was created in 2016. The growing popularity of new distribution channels, from YouTube to Netflix, has allowed it to maximise profits from its single most important investment.

The Baby Shark song has been distributed in more than 20 languages and received a boost from the global popularity of Korean pop music during the pandemic. YouTube ad revenue and licence contracts have surged in the past two years.

The company has a private valuation of about $1bn from its last funding round earlier this year. It has downplayed local reports of a New York listing.

But the timing would be right. SmartStudy increasingly relies on worldwide licensing of intellectual property for growth. Overseas markets account for about 80 per cent of total sales. Its characters are licensed to global companies including Hasbro, Kellogg’s and Crayola, with this business making up two-thirds of revenues.

One of the challenges SmartStudy faces is that its future rests on the shoulders of just one pink baby shark. Its other characters — Pinkfong the fox and Hogi the hedgehog — are household names in South Korea. They have yet to achieve the international fame of Baby Shark.

The good news is that SmartStudy has more time than K-pop music agencies to prove it is more than a one-hit-wonder. Small children enjoy repetition. Every year a new generation of tots can discover a music video they can watch for years.

Baby Shark’s addictive jingle should, meanwhile, remind investors what SmartStudy is when the business is ready to list.