Why Did Square Acquire TIDAL?

Max-Friedrich-241

By Max Friedrich | @mfriedrichARK
Analyst

Last week, many investors wondered why Square announced a $297 million deal for a majority stake in TIDAL. In 2015, Jay-Z acquired the struggling music streaming service for $56.2 million out of frustration that “ people are not respecting” music. TIDAL attracted high-profile artists to take ownership positions in the platform and market to their fans paid subscription tiers for exclusive content and high-quality streaming. Jay-Z was not alone in his concern that technology was diluting the value of music by offering it for free. In 2014, Taylor Swift criticized music streaming in a Wall Street Journal op-ed stating, “Music is art, and art is important [and valuable]” and that “valuable things should be paid for.”

Unfortunately, TIDAL did not live up to high expectations and faced criticism focused on artist compensation and inflated user numbers. In 2019, even Jay-Z seemed to reject TIDAL’s value proposition when he offered his music catalogue to competitor Spotify. Today, the streaming service seems to serve only 1 million users,* down from 3 million in 2016 and a fraction of Spotify’s and Apple Music’s 155 million and 60 million premium subscribers, respectively.

Why did Square acquire TIDAL? In our view, the partnership is a more natural fit for Cash App than most observers might expect. Cash App’s partnerships with musicians have integrated it into urban culture, accelerating the digital wallet’s growth. Leveraging learnings from its partnership with Spotify, Cash App could enable TIDAL artists to sell merchandise powered by Square eCommerce, increasing both the engagement and reach of both platforms. Perhaps more important, Square and TIDAL together could disintermediate record labels by offering artists loans backed by the cash flows associated with their streaming revenue, much like Square underwrites business loans based on merchant cash flows. Ultimately, the partnership could reinvigorate TIDAL's original mission, giving artists the opportunity to build relationships with fans by offering exclusive content.

Consistent with Taylor Swift's belief that music is rare and valuable, Square's deep crypto expertise could enable TIDAL artists to sell non-fungible tokens (NFT), a topic we discuss below.

*TIDAL’s parent company disclosed subscription revenue of $166 million in 2019. At an average subscription fee of $13 per month, therefore, TIDAL had roughly 1.6 million subscribers in 2019.