In late December, Bloomberg reported that fintech company Square (NYSE:SQ) was in talks to buy music streaming service Tidal in a "push to diversify." No potential offer price was given, but Square CEO Jack Dorsey has been seen twice in the last few months with Tidal's majority-owner Jay-Z, supposedly negotiating some sort of partnership. 

Tidal has struggled over the years to gain ground relative to other streaming services like Spotify and Apple Music, so it makes sense that it would be searching for a buyer. But why Square? On its face, this potential tie-up seems strange. However, if investors look deeper into what Square is doing with its Cash App peer-to-peer payment service, they may realize that such a combination wouldn't be so odd after all.

Woman listening to headphones on her couch looking at laptop.

Image source: Getty Images.

How Tidal would fit into Square's business

One possible reason Square is interested in owning Tidal is that it could integrate its services and use it as a marketing tool for the Cash App. The latter's success competing against PayPal's Venmo over the last few years can be partially attributed to its popularity within the music industry, and specifically the hip-hop community. For example, it is estimated that Cash App has been name-dropped in the lyrics of more than 200 hip-hop artists, and the company has done many paid giveaways with the likes of Travis Scott and Cardi B, two giants in the genre. Smart campaigns like these are a big reason why Cash App has grown from under seven million users to more than 30 million over the last few years.

Tidal has an estimated one million to five million subscribers (it rarely discloses user numbers) who are either paying $9.99 a month for its standard service or $19.99 for premium sound quality and exclusive content. Square could (for example) offer discounts on those subscriptions to people who paid via the Cash Card, the free debit card associated with Cash App. It also could offer giveaways and promotions on Tidal, using it as a marketing vehicle to attract customers to Cash App's services.

The other side of the argument

While it's an interesting exercise to come up with theories about how Square could leverage Tidal to help with its marketing, all acquisition deals come down to costs versus benefits. Without seeing the financials, it is tough to estimate what price the service's artist-owners would seek, but there are some clues. Jay-Z purchased Tidal for $56 million back in 2014, and Sprint invested $200 million into it a while later. If its subscriber numbers haven't grown much since then, the acquisition price might be in the ballpark of $250 million, which is minuscule compared to Square's $100 billion market cap.

There are also signs Tidal may be struggling as a business. In 2019, Jay-Z brought his entire catalog back onto Spotify (it used to be exclusive to Tidal), a sign that the service wasn't living up to expectations. Tidal also pays the highest royalties per-stream of any music streaming service. While that artist-centric model may be more supportive of the people who actually create the music, it likely means Tidal is losing money. Even Spotify, the largest of the streaming players with close to 150 million paying subscribers, barely makes a profit.

So investors in Square have to ask themselves: Would the marketing synergies be worth the $100 million to $250 million price tag of an enterprise that might never generate a profit? Unless Dorsey thinks he can get it at a bargain-bin price, it is tough to see why Square would be a better company after buying Tidal. This could be a reprise of the Caviar deal. That was another money-losing entity in a tough business (food delivery) that Square purchased back in 2014. It ended up selling the service to DoorDash in 2019, albeit at a higher price than it paid.

It certainly wouldn't be the end of the world if Square acquired Tidal. It could use the service to help lure more users over to Cash App, and the purchase wouldn't burden its balance sheet. But investors should not jump for joy if a formal deal gets announced.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.