Every now and then, a company does something that makes people just sort of go “…huh…why?”.
This last week was one of those times.
Sure enough, last week, Square (the fintech company that created Cash App and shares a CEO with Twitter — Jack Dorsey) announced that they were buying “a majority ownership stake” in the music streaming service Tidal, led by Jay-Z.
Not too surprisingly, this announcement was widely met with that “…huh…why?” reaction. A financial technology company buying a hip-hop-led music streaming service? What’s to be gained there?
The answer, interestingly, is: quite a lot!
Some M&A deals are strange because the two companies’ business models appear entirely opposed. Amazon buying Whole Foods in 2017 was a pretty unexpected move and appeared, on the surface, a strange one; while working hard to drive the shift to online commerce, why would you suddenly spend almost $14B to acquire a massive retail footprint across the United States? It quickly began to make more and more sense, as Amazon made further pushes into physical retail through Amazon Go and started building out their online grocery shopping service, Amazon Fresh. What seemed like a step backward initially proved to be a strategic long-term move.
Other M&A deals seem strange not because the two companies’ models are so opposed, but because they’re so (seemingly) unrelated. These are the more fun ones to figure out, and happens to be the type of deal we’re looking at today.
The best part about these deals is that they offer a great opportunity to dig into trends that might otherwise go unnoticed if you’re not paying particular attention.
So, let’s dig into it: why would a financial technology company want to spend almost $300M to own a relatively small music streaming service in a space dominated by entrenched giants?
Well, there might be a few reasons…
Hip-hop’s love for Cash App
To lay out the context, Square has had close ties with the music industry for a little while.
Square’s consumer mobile payment product, Cash App, in the last few years, has been met with much love by the music industry, and more specifically the hip-hop industry.
Though not explicitly marketed to artists and the music industry, Cash App has seen massive word-of-mouth growth through artists doing cash giveaways contests to their fans through the app. Quickly, as the trend grew among artists to engage their audiences with these sorts of giveaways, the brand gained attention in hip-hop culture in particular.
Square itself isn’t even too sure what initially sparked such interest in Cash App in the music scene. Here’s CEO Jack Dorsey in a 2019 investor conference:
“This is also something we weren’t expecting, but I think Cash App has touched in the culture. We’ve just benefited from people loving it and wanting to sing about it, and putting it in their music videos, and it’s amazing how much that spreads.”
As their traction in the space grew, Square (Cash App) was quick to lock in the interest, partnering up with massive artists to do virtual cash giveaways and get the Cash App brand front and center.
Fast forward to today, and Square’s purchase of a music streaming platform led by a huge hip-hop and rap figure begins to seem a little less random, although this is just the start to painting the full picture.
Considering Cash App’s massive brand presence in the industry, acquiring more significant inroads into the space lets Square start to take more control of the transactions that happen on and around its payments platform. This begins with Cash App, but goes much further.
It’s worth noting that in early 2020, Spotify introduced the ability to directly donate money to artists through PayPal and Cash App. When the acquisition settles, it’ll be interesting to see whether Square revokes this access in favour of offering it only via Tidal, or would prefer to take their rake of all transactions regardless of platform, and leave the feature (assuming Spotify doesn’t prefer to remove the Cash App option themselves).
Spotify questions aside, the Tidal acquisition signals a strategy in two parts.
- On one side, Square is taking a more active role in the transactions that happen between artists and fans in the music world — this through Cash App.
- On the other side, Square is positioning itself perfectly to offer more complex financial services to the artist side of the industry, through point of sale transactions, subscription services, and much more.
Square, artists’ new best friend
To understand how Square is looking to integrate itself across multiple layers of the artist-audience stack, it’s worth quickly laying out how Square segments its core “Square/Seller” business, and Cash App. We’ll mostly be focusing on the Seller business in this piece, but the difference is important.
This graphic from their most recent 10-K saves me some work…
To give a rough rundown of the differences: Square itself primarily focuses on SMB clients (retail stores, restaurants, hair salons, etc.). It offers a full range suite of services starting with point of sale tools (wireless digital card readers, order-placing interfaces, etc.) and spanning the gamut of payment and payroll management systems, team management systems, banking services, and plenty more.
Cash App, on the other hand, is primarily consumer-focused. It began by offering a way to quickly send and receive money simply through the app, no bank account required. Today it’s expanded its services to include direct deposit banking, stock and crypto trading features, and a Visa-issued debit card.
Square’s mission, from its outset, was to provide new tools to help companies better run their business and help them secure new income formats. When they launched in early 2009, this took the form of simplifying the process for small businesses to accept debit and credit cards by leveraging new technologies of the time.
Over the last 12 years, the company’s mission has stayed the same: to provide tools to help owners better found and run their businesses. Today, that takes the form of a wide range of tools and technologies that centralise and answer all the financial needs a business can have to run its operations. Quoting from the 10-K (emphasis mine):
Square offers a cohesive commerce ecosystem that helps our sellers start, run, and grow their businesses. We combine software, hardware, and financial services to create products and services that are cohesive, fast, self-serve, and elegant. These attributes differentiate Square in a fragmented industry that traditionally forces sellers to stitch together products and services from multiple vendors, and more often than not, rely on inefficient non-digital processes and tools. Our ability to add new sellers efficiently, help them grow their business, and cross-sell products and services has historically led to continued and sustained long-term growth.
I quote from the filing at length because it’s so relevant to the recent acquisition.
In just a single paragraph, Square has laid out the entire root of its strategy as it looks to get a foothold in the music space. Though the “fragmented industry” they talk of in this passage refers to traditional small businesses, the principle is the same.
For creators, creation is no longer the most challenging part of the process, distribution, and — crucially — monetisation are. Artists today have to work hard to produce good content, absolutely hustle for distribution (to the point that “Check out my SoundCloud” has become the de-facto follow-up under any successful Tweet), and someday, somehow, hope to make some actual money off their craft, beyond the few cents per thousand plays that Spotify offers.
The last decade has made the ability to record, produce and release new music fantastically accessible to all, but artists have never made less per listen of their songs than today.
The key monetisation routes for artists looking to grow a small fanbase, or begin to earn money from a larger one, are typically through merch sales, album or (occasionally) vinyl sales, a negligible bit of streaming revenue, and ticket sales. The first and last ones of these have been, well… killed over the last year. As chance would have it, these two also tend to be by far the most profitable.
It’s right about here that the needs of creators intersect quite perfectly with the offerings that Square and Cash App propose. Sure enough, this has been the public line that Jack Dorsey shared on Twitter.
Square has sought to empower businesses with new tools to facilitate making money, and Tidal long has too, by creating a platform that sells itself as being more “by artists, for artists” than the more corporate and inaccessible Spotify or Apple Music.
With this new opportunity, Square is in a perfect place to provide the backbone for the quest to help artists gain income from their work. Tidal is the entry key for Square to be the middle-man facilitating the artist-fan transactional relationship. This acquisition is not really about Square gaining a foothold in the streaming space, it’s a move to empower the individual artist.
This was clear as day in a Billboard interview with the incoming interim head of Tidal, Jesse Dorogusker, stating (emphasis mine):
“We think the streaming service is an important part of it, and it is growing and will continue to grow, but we’re especially interested in creating new adjacent opportunities in service of the whole artist experience and their experience with their fans in addition to the streaming service.“
The possibilities for monetisation streams that a Square x Tidal duo can offer creators are endless.
Picture in-app integrated product and merch lines that can be ordered in just a couple taps (through Square/Cash App of course), exclusive content drops, early access to new releases, private livestreams and concerts, all hosted under a Square-owned property. Giving creators such avenues is the exact way forward to empower them, as the company’s mission statement lays out.
It’s not to say these services don’t already all exist individually. Teespring has been a go-to in the creator space for years; private access to content through Patreon and Bandcamp has been a staple of online creator relations for a while now. What Square changes here is unification. Bandcamp can come close, offering private releases, merch fulfillment and more, but they don’t control the streaming experience — the entry point of the artist-fan relationship.
Tidal and Square do.
Escaping the ticket cartel grip
In fact, Tidal wasn’t slow to spot the opportunity to control a deeper (read: more $$$) relationship beyond streaming. Very quickly after launch, Tidal announced TIDAL X:
TIDAL X is a program that connects artists directly with fans by giving them a platform to engage with them in unique ways, including one-of-a-kind live shows, events, artist meet & greets, and concert tickets for TIDAL members to enjoy.
Through Tidal X, artists can already offer exclusive content to paying audience segments, and through close ties with top artists, Tidal has gone a step further.
What no other platform (Bandcamp, Patreon, Spotify, etc.) has been able to do at scale is bridge the gap between small exclusive releases and real-life, physical experiences. Tidal has been the first to put this in place at scale, providing exclusive access to select listeners to tickets to concerts and listening parties, for artists like Kanye West, Jay-Z, Beyonce, and plenty more.
What’s interesting about this isn’t that a billionaire hip-hop star was able to offer free tickets to his own concerts or those of his wife and friends, but that it’s one of the rare opportunities for concert-holders to go direct to consumers, completely circumventing the shady and seemingly inescapable grip of the ticket sale/resale cartels.
Just a handful of ticket resale companies are responsible for almost 100% of online ticket sales to sport events, concerts, festivals, etc. A report from Grand View Research estimates the online event ticketing market to reach $68B by 2025 — almost entirely driven by resale companies like TicketMaster, StubHub, or SeatGeek.
If you’ve ever tried to buy a ticket to almost anything online, you’ll not be surprised that these platforms are little liked by almost anyone — fans or artists. Performers struggle to circumvent the stranglehold these companies have on the ticketing market, fueled by instant-purchase bots designed to resell tickets at a significant markup. Meanwhile, event-goers have to pay a multiple of the original ticket price for the same thing.
Square and Tidal are in a position to build off their subscription model to build out a true artist-first method of selling tickets to fans.
By offering exclusive early access to upcoming concert tickets only to paying Tidal subscribers, Tidal and Square can offer a best-in-class artist and consumer experience for artists’ most dedicated fans, while circumventing the bot resale market, as ticket purchases would be linked with personal information through their billing information in existing accounts.
Square’s customer relationship management suite is perfectly positioned to combine with Tidal’s existing platform to build exclusive fan-artist relationships, all while now tapping into more personal user data thanks to transactions through Tidal.
For Square, the benefits are obvious.
- Firstly, for artists (Tidal), where the main benefits come from process centralization and being able to control the entire fan relationship experience.
- Secondly, the collaboration increases the ability for artists to effectively integrate and value upsells: as you’re at the checkout for your concert tickets, Tidal can directly integrate up/cross-sell related products such as merch to wear at the concert (bonus points if it’s limited edition, exclusive merch just for this event).
- Finally, this allows artists to take back control of their ticket distribution, a stage that has long challenged artists of all sizes. No more scalping (or at least less, if they still sell a part of their tickets through traditional channels), so no more wild markups, and no more profiteering off the artist’s back while granting them no additional profit.
With Square now perfectly centred in the online artist-fan relationship, there’s still further opportunity to be found. The last money-making stage of this entire process — a stage in which Square is now front and center — happens in real life, at the event location.
Square has long followed the strategy of investing in its best clients’ ecosystem.
From supplying a free Square reader to new client businesses, to creating the Square Kitchen Display System to streamline restaurant operations, Square is no stranger to spending money to make money, by helping their clients make money.
Square is following the same approach in the music industry.
By investing in a key potential customer segment, they’re accelerating their ubiquity in the space and making themselves the go-to through point for transactions.
Onto the subject of at-event transactions. Square organises around how people gather and transact, namely focusing on the under-banked or under-served. In their SMB and restaurant verticals, the data they gather tells Square where, when, and in what quantities all different types of transactions are taking place — helping identify burgeoning trends and gaining insights into seller industries. This same principle applies perfectly to the music and concert vertical.
By sitting at the point of conversion from the digital to the physical realm, Square now gets a deep look into what is driving signups, which events and artists are gaining traction, what sort of merch lines are attracting the most attention, and a probably infinite list of other data points to mix and match.
This helps bridge the physical divide as consumers make real-life payments rather than online, and establish Square more prominently among merch vendors on-site at concerts, developing new reward programs or exclusive deals along the way.
Imagine you’re a growing artist with a merch stand at your concert to 200 people.
Offering Square’s Cash App QR scan feature or using the Square card reader at the point of sale, you can seamlessly announce, say, a 30% discount on all merch purchases at the concert but only if you’re a Tidal subscriber. No complicated integration setup required. No needing to show proof of subscription at the merch stand. No having to scan the buyer list, cross-referencing the buyers with registered Tidal accounts and then issuing the 30% rebates (in the more needlessly complicated scenario). Square makes it easy to offer new ways to reward your most dedicated fans.
Now, when your fans’ Tidal accounts are linked to the same identity as their Cash App account or your Cash App virtual card, Tidal x Square will automatically deduct the discounted amount from their purchase (and probably subsidize you the artist a % of the difference).
Of course, this isn’t just charity by either company, but an incentive program to drive subscriptions to Tidal. After all, recurring revenue — even at a lower monthly price point — is almost always more valuable than sporadic higher-value purchases. By incentivising fans to subscribe to Tidal to benefit from digital exclusive offers and on-site discounts, Square is building a win-win-win situation:
- The artist sells more merch (and gets more data about who’s buying),
- Square/Tidal get new recurring revenue subscribers (and also get valuable purchase data which can be packaged and offered to third-party buyers — such as indie merch stores wanting to get an early lead in stocking up on rare merch drops),
- The fan gets a deeper relationship with the artist, gaining access to limited-release events and drops, all while getting discounts on things they already wanted.
The benefits to both companies having been made increasingly clear, there’s, there’s still been a nagging question on my mind: why now?
Tidal has been growing new subscribers steadily, increasing revenues over the reported years. On the surface, Tidal X seems like a strong initial opening through which they could have developed many of these features and integrations themselves while retaining (relative) independence. Its exclusive releases are already fairly established and seem to offer plenty of chances to expand in the ways we’ve explored. Why give up control?
The answer, I believe, lies largely in the timing of the deal, during the largest drought of events in recent history. For a subscription platform that particularly differentiates itself through upsells and benefits around the subscription service itself, a lack of events equals a lack of revenues.
The COVID context has only exacerbated the financial difficulties that Tidal has been facing for a while, as net losses deepen despite growing revenues, and they face increasing challenges in paying licence-holders, and legal investigations loom.
Given the situation, the instant cash injection provided by a majority share acquisition likely sounded like a solid deal to solve a fair few short-term struggles and let the company think about a longer-term outlook. Not to mention, on Square’s side, the situation and timing almost certainly helped lock in a more attractive price for an expansion that might have been in the plans for a while.
Price aside, sure, Tidal could surely have built out more complex artist tools and routes to monetisation over the next few years. But they’ve decided that Square’s involvement might speed up the future enough to be worthwhile.
Looking at this larger picture, what started as a “…huh? Why?”-type deal might well shape up to be a handsomely profitable move for Square, as they gain new data streams and a foothold in a new vertical, and a fuel injection for Tidal to build the tools critical to their mission.
In one aspect, though, the underlying gain is the same for both brands. Each has gained a partner aligned with their worldview, as they work to empower the non-conformists and the creators of the world.