Financial services company Square (SQ 7.00%) announced on March 4 that it had acquired a majority stake in Tidal for $297 million. If you didn't know already, Tidal is a music streaming service founded by music mogul Jay-Z and other artists to bring high-quality and exclusive content to the digital age. The service never really caught fire, but management hopes that can change under the Square umbrella.
But how does a music streaming service fit within a financial services and technology company? Let's take a look and see if we can find some answers.
What Square is getting
At first glance, it doesn't seem like Square is getting much with the Tidal acquisition. The service has sputtered along since inception, with its temporary exclusive windows and premium audio quality never really resonating with mainstream consumers. At best, analysts estimate the company has 5% of the music streaming market, putting it way behind the market shares of music streaming service leaders Spotify Technology, Apple, and Amazon.
While Tidal doesn't look like a great business on its own (it has lost money every year since it started), it is owned by artists like Jay-Z who will keep some of their shares in Tidal as it gets absorbed by Square. Jay-Z is the only artist taking an active role at Square with a seat on its board of directors.
Why the acquisition could work
Post-acquisition, Square CEO Jack Dorsey tweeted some of the reasoning behind the deal. It appears the thesis encompassed two main points.
One reason was to further artist connections with the Cash App, Square's fast-growing personal finance app. The app is huge within the hip-hop community, so having all the artist owners/partners of Tidal connecting and promoting the Cash App could help bring more users to both services.
The second reason, and the one more important for investors to consider, is what Dorsey thinks Square can do for artists within its seller ecosystem. Like what Square has built for restaurants and small businesses, Dorsey thinks it can build with "Square for Artists" or whatever it will be called. This could include an e-commerce platform, improving the payments for live shows, or even financing creators. The idea is that whatever Square and Tidal decide to build will be focused on helping artists getting paid for their work.
What could go wrong
All these ideas around a "Square for Artists" platform or further integrations with the Cash App sound great. But why does Square need to acquire Tidal in order to build any of these tools? From an outsider's perspective, it just doesn't seem like Square owning a music streaming service gives it that much of a leg up when trying to build a financial platform for artists.
Plus, Tidal is reportedly losing $55 million a year. While not huge relative to Square's financial position, it will be a consistent drag on profits unless they can do a total turnaround of the business. Don't be surprised if in a few years Square shuts down the service entirely, even if it is successful in building out its financial platform for artists.
Overall, it looks like there's more than meets the eye with this Tidal acquisition. If Square can become the financial hub for musicians around the globe, we might look back in 10 years and think this was a fantastic deal. But at only 0.3% of the stock's current market cap, even if the partnership ends up failing, it won't materially hurt Square's business over the long term. So don't sweat it if you don't like the move and are a Square shareholder -- the company has bigger fish to fry.