Headquarters of SM Entertainment/ Courtesy of SM Entertainment

The antitrust regulator said Thursday it has decided to give conditional approval to IT giant Kakao's acquisition of a controlling stake in K-pop powerhouse SM Entertainment, as the deal could hinder fair competition in the music streaming market.

In March 2023, Kakao and its entertainment unit of Kakao Entertainment increased their stake in SM to 39.87 percent from 4.9 percent to become the largest shareholder of the iconic K-pop agency.

"We decided to approve the merger on conditions that Kakao's online music streaming platform, Melon, takes corrective measures based on the judgment that Kakao solidifies its vertical integration in the industry and it practically hinders competition in the domestic digital music streaming market," the Fair Trade Commission (FTC) said.

According to the decision, Kakao is banned from refusing or delaying music supply requests from Melon's competitors without reasonable grounds.

Kakao was also ordered to establish an independence entity to be in charge of checking regularly if Melon gives any preferential treatment to artists affiliated with Kakao and SM.

Kakao is required to abide by the measures for three years to come, though it can request adjustment in case of major changes to the market circumstances.

"It is the first case that the FTC ordered corrective measures as conditions for a corporate merger in the entertainment field," the FTC said. "We will continue thoroughly review corporate merger cases to ensure fair competition and to prevent damage to customers."

The regulator launched a review on Kakao's stake acquisition since last year, as the merger is expected to give a significant impact on the entertainment industry.

Kakao purchased the additional shares through a tender offer after Hybe dropped a bid to take control of SM. (Yonhap)