12 years ago, Square started solving small business problems by making easy tools that facilitate financial services. Then it went on to solving individual financial problems with the CashApp product. That wasn’t enough, in 2020, it secured a banking license and just last week launched an actual bank. And now, Square just bought a music streaming company, TIDAL. To help artists find new ways to support their work through an array of financial services products and other innovations. Square seems to have no end on its quest to build easy tools to empower and enrich people.
Why we invest in Square
At Rise, Square holds a good position in our stock portfolio and we’ve been buying more of it since 2020. As of this writing, Square has contributed up to 122% return to the portfolio. That’s since we’ve been adding it. So you can understand our interest in this company among others.
Harvard digital innovation and entrepreneurship said it well in 2015 from one of its case studies when it said “Square has the potential to revolutionize the future of transactions.” In the past 5 years, Square has done that and more. And it has returned more than 19x since when it was listed in 2015.
Last week, Square announced a new deal with Jay Z. It acquired Jay Z’s TIDAL for $297 million. TIDAL is a global music and entertainment platform that brings fans and artists together through unique music, content, and experiences.
TIDAL has been under the management of Jay Z since 2015 when he bought it for $56 million. From 2015 until now TIDAL has struggled to fulfil the goal which Jay-Z bought for. It struggles to get listeners and invariably to get exclusive contents on the platform that will allow it to be differentiated. Yet, Square thinks it’s time to enter the creative industry and the best way to do it is through TIDAL.
Explaining why Square went in on the deal, Jack Dorsey, CEO of Square through is Twitter handle said:
It comes down to a simple idea: finding new ways for artists to support their work. New ideas are found at the intersections, and we believe there’s a compelling one between music and the economy. Making the economy work for artists is similar to what Square has done for sellers. (Emphasis by us).
First, Square wants to use its infrastructure to help artists find new ways to support their work. To understand this statement you need to understand the traditional support that is usually available to artists.
How record labels work
Traditionally, record labels act as a bank to artists, giving them money in advance, but taking full control and ownership of the artists’ work. Meaning record labels make finance available to artists even before artists sell their music. Think about the life cycle like this, an artist makes music, record labels take on all the cost to make the music. They go on tours, record labels take care of that as well, and so on until enough music is sold for the record label to make their money back. So in a way, the only way for an artist to survive is to deal with a record label that will make both the financial provision for the production of the movie and also the marketing of the music to ensure it brings in enough revenue.
This traditional model though has been such that it doesn’t favour the artist and it has historically been a source of controversy. It was an attempt to fix that also motivated Jay-Z to buy TIDAL.
With Square in the picture, with a renewed mission to find new ways to support artists, a lot would be on them and we expect a lot of experimentations before this can work out. One apparent advantage though is that Square could work with real data while exploring these new ways. As Tyler Crowley noted, “Tidal + Square can now make loans to creatives based on data. Now young artists can start and show their potential, get a loan, make their art, put it out, the platform collects the dollar and pays the artist directly.” What we see playing out here is a scenario where everyone wins and new markets are unlocked. Meaning?
One of the major challenges confronting new artists is always the cost of production. But imagine a scenario where a new artist instead of doing a full album on a huge budget sings just a few singles on a low budget. Distribute their work on their social media and a lot of people listen plus shows a lot more potential which data can reveal. Square through TIDAL sees all this data and as such determines that the artist qualifies for a loan up to a specific amount, all data-driven. If this play out, history would be happening before us as we witness record label disintermediation.
Why Square is better
All of a sudden what artists needed record labels for Square can do through a data-driven approach. Before we know it, all forms of financial services for the artist would be provided by Square from loan to savings to finance management and all. And yes, there will be enough incentives from the end of the artist to make Square the primary finance broker because the more data Square has about the artist the better it can serve the artist.
Add to the fact that Square not only has a banking license, it has also launched its own bank. The possibilities are limitless. And we are just as hopeful about this deal as the management of Square is.
What challenges are ahead?
The major challenge before Square + TIDAL would be customer acquisition. The success equation of this deal is not dependent on the artist alone, it is just as much dependent on customers who would need to be incentivized to leave competing products just or add TIDAL to the array of music streaming services that they pay for. And the competition is strong. We have Apple Music and Spotify at the top of the list of competitors.
Square however is hoping to leverage its experience solving similar friction with sellers. Jack said, “making the economy work for artists is similar to what Square has done for sellers.”
We can only wait for the passage of time to confirm that statement. Especially since the deal has happened, one should not be pessimistic but optimistic that it would provide a net positive synergy for all stakeholders.
What if it doesn’t work?
Square paid approximately $300 million for the deal. From the last quarter report, it has more than $3 billion on its balance sheet. The purchase price for TIDAL would represent 10% of that if it was all paid for in cash. But it was paid for in part cash, part stock. Meaning the cash paid is less than 10%. In our opinion, this is fair for an experiment that would create a massive asymmetric opportunity benefiting all stakeholders if it works. So we aren’t so worried about it if it doesn’t work. We would be more worried if Square stops innovating.