- Psy's record label plans to expand in China
- YG Entertainment seeks to capitalize on K-pop's popularity
- But piracy makes it hard for record labels to make money
- China ranks 20th globally in terms of recorded music revenue
Buoyed by the runaway success of "Gangnam Style," the South Korean company behind music sensation Psy is taking on what has been a tricky market for international record labels to crack -- China.
"While our previous activity in China had been putting on concerts occasionally, we will now be setting up an office in China and aggressively pursue the China market," a representative for YG Entertainment told CNN in Seoul.
YG is one of three South Korean companies that have largely been responsible for Hallyu -- the Korean wave of sugary and attractive girl and boy bands that have taken Asia by storm over the past decade.
And China has not been immune to K-pop's allure.
YG's chief operating officer Choi Sung-jun says that acts like Psy, boy band Big Bang and rapper G-Dragon are extremely popular among Chinese fans. G-Dragon's concert on Friday and Saturday at Hong Kong's Asia World Expo has been completely sold out, he added.
China's airwaves have been dominated by Chinese-language "Mandopop," but tastes are evolving as the internet gives young people access to different types of music, says Nathaniel Davis, operations director of China-based music industry consultancy Splatter.
However, high rates of piracy on both digital and physical products make it very difficult for a label to discover steady revenue streams.
"Labels cannot function or sustain themselves from record sales revenues and so much of their income comes from the 'other' ways artists generate revenue -- endorsements, commercial appearances, ringtone sales, and live shows," Davis says.
Reflecting these challenges, Choi says the company's initial focus in China will be on making money from concerts.
In March, music giants Universal, Warner and Sony, along with China's Gold Typhoon Entertainment, settled a hard-fought music-piracy law suit with Chinese Internet company Sohu that will see the record companies receive royalties and licensing fees. The labels reached a similar agreement with search engine Baidu in 2011.
Despite being the world's second largest economy, China ranks 20th globally in terms of recorded music revenue, according to the International Federation of the Phonographic Industry (IFPI).
In 2012, recorded music revenues totaled $92.4 billion, up 9% from 2012 but equal only $0.1 per person. Digital downloads accounted for more than 80% of sales in China, compared with 42% globally.
China is aware of the problems facing the industry and is concerned that it has not produced a act of global or even regional standing.
"Psy's success seems to be haphazard but it isn't," Zang Yanbin, president of the China Record Working Committee told the China Daily in March.
"Behind Gangnam Style are great efforts by the Korean government and music companies to develop and promote Korean pop music. The Chinese government should also try to create better environments for Chinese pop music."
YG's ambitions are not limited to China. The company recently incorporated in the United States and speaks of a "digital silk road" spreading K-pop to the world.
Last year, the music video to Psy's Gangnam Style went viral to become the most-watched video on YouTube. The song was also the third best-selling single of the year, according to the IFPI, and has helped boost the financial fortunes of YG.
The company, which went public in Korea in 2011, reported a 45% increase in net income to 18.8 billion won ($17 million) in 2012.
YG said it was too early to say whether they planned to develop local Chinese acts or simply promote their existing artists in the country.
But one novel strategy has been adopted by rival SM Entertainment, which is trying to make inroads into the Chinese market with Exo -- a boy band that performs their songs in Mandarin as well as Korean.