Cash App and Tidal — A Match Made in Heaven or Fool’s Errand?
In one of this year’s more confusing media acquisitions, Square paid $297 million in a cash-and-stock deal for a “significant majority” in Jay-Z’s failed music service, Tidal. The question on everyone’s mind at the time was, quite simply, “Why?”
Cynics were quick to point out it wouldn’t be the first time bored millionaires have found ways to move money from their listed companies to fun celebrities that they like hanging out with. And Twitter and Square CEO Jack Dorsey certainly enjoys the company of Jay-Z based on photos of the pair shared to his Twitter account.
But fast forward a few months, and Dorsey revealed what seems like a well-conceived plan behind the acquisition. So, what does Square intend to do with Tidal, and what does it say about the convergence of the digital finance and entertainment industries?
The History of Tidal
The origins of Tidal lie in an obscure Norwegian streaming app that Jay-Z procured for $56 million in 2015. He intended to rebrand and market it as an artist-owned service, bringing in the likes of wife Beyoncé, as well as Madonna, Rihanna, Daft Punk, and Kanye West as co-owners.
However, even had they been interested in such an endeavor, few of these artists own the rights to their own material. As a result, they wouldn’t have been able to make it exclusively available on a single platform of their choosing. In the end, Jay-Z himself was forced to make his work available on competitor apps that already had far more significant, established audiences.
Tidal’s 2018 reports showed a loss of $37 million, despite a $200 million cash injection from Sprint in 2017. In addition, delayed royalty payments and accusations of manipulating user streams likely impacted the app’s “by artist, for artist” narrative. It also remained a relatively small player in the streaming industry, with an estimated 1 million subscribers compared to Spotify’s 155 million.
Tidal’s Cultural Relevance and Tie-in to Square’s Cash App
In the currently booming frenzy of NFTs (non-fungible tokens), it is relatively easy to imagine how Square and a streaming service could produce rollouts in the future. Dorsey’s love of Blockchain is well known, and NFTs are just blockchain-authenticated collector items — be it digital ephemera like cartoon gifs, animated sports trading cards, or guitar riffs by your favorite rock legend. But why Tidal?
While Tidal didn’t take off quite as Jay-Z hoped, he did manage to make it culturally relevant; this may be what attracted Square’s interest. Cash App is Square’s neobank — a smartphone-based payments and money transfer service now worth $40 billion. Cash App, launched in 2013, accounts for most of Square’s current $65 billion market value, making up more than 50 percent of the company’s total revenue of $5.06 billion in Q1.
Cash App already had a partnership with Spotify, which facilitated fan payments to artists through its platform. However, it was hip-hop influences specifically that grew Cash App’s membership from 7 million in 2017 to 30 million in 2020. According to Genius, the music database, around 200 hip-hop artists have name-checked Cash App in their lyrics. Tidal and its all-star rapper roster could potentially further this social media phenomenon.
Dorsey’s Plan to Unify Square’s Offerings
On July 16, Dorsey tweeted that Square is looking at creating a new business that will unify its Seller, Cash App, and Tidal businesses. He said the new business will focus on “building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services.” All this with a primary focus on Bitcoin. It’s a focus that makes sense given Square’s $220 million investment in Bitcoin has yielded revenues making up 69.4 percent of its total revenues in Q1. Square also facilitates Bitcoin purchases through its Cash App, applying a nominal margin to market cost.
Interestingly, though the market has responded positively, Dan Dolev, Wall Street analyst at Mizuho Securities, isn’t betting on new business lines. Instead, he reckons Square’s “golden egg” already lies within its Cash App, which he says could be the ultimate neobank of the future, and equates buying Square stock now with buying J.P. Morgan in 1871. Doley envisions Cash App increasing its average revenue per user by adding products like in-app insurance and home loans. It could also offer payday lending with an annual percentage rate (APR) of 60 percent to 65 percent, far below the 400 percent APR found in traditional payday lending operations.
Unlike some analysts who still question the need to spend $300 million on a failing minnow of the streaming industry, Dolev seems to get the connection between Square and Tidal. He opines the acquisition will expand Cash App’s ecosystem to ramp up engagement and offer creative use cases for cryptocurrency. He’s suggesting that at 40 million subscribers, Cash App taps less than 10 percent of its potential user base. He adds that tapping just 15 percent of the US’s potential bank account market would result in a six-times multiple of the app’s 2021 Q1 gross profits.
