Square and Tidal and knowing your audience
Making sense of odd couple acquisitions
Payments companies acquiring music subscription businesses seems like the type of news that makes one question what it is they’ve just read. And while the initial reaction may be disbelief or thoughts of a bubble, Jack Dorsey’s Square buying Jay-Z’s subscription music service Tidal presents an interesting set of opportunities and possibilities for the creator economy – while borrowing concepts that will resonate with advertisers and publishers/media owners alike.
We think this deal makes sense in the context of three trends that are converging. The first is all too familiar: The pandemic is driving new consumer behaviors. We all know that over the past year, everyone has spent more time at home, in fewer social situations, which drives entirely different personal preferences. While stuck at home, we’re spending less money on travel, dining, and going out. But some of that money is still flowing somewhere, reallocated to technology and media content to stay connected and entertained. As a result we’ve become very comfortable with electronic and contactless payments and transferring money directly to friends, family, and others via Venmo and similar apps. In the months after the pandemic began, US downloads for Venmo grew 16.5%, Square’s Cash App increased 20.1%, and PayPal rose 32.3%. Seventy percent of US adults used a peer-to-peer payment app in 2020, up from 57% in 2017.
A second historic trend: Current monetization methods aren’t creator-friendly. There’s always been some sort of intermediary that oversees monetization on behalf of the creator, such as a book publisher or a record label, in exchange for a healthy cut of the proceeds. In media, we’re shifting from a monolithic ads-only or ads-heavy to a mix of subscription and ad-supported services. As consumers increasingly devour media via digital channels, the shift is challenging legacy distribution networks and deals. For a glimpse into how digital has shattered longstanding distribution traditions, look no further than the behind-the-scenes wonkiness of Oprah Winfrey’s recent interview with Meghan Markle and Harry Windsor. Historically, producers would negotiate with a specific network, such as CBS, and the rights holders and owners in other territories to share their content. For the high-profile interview, Oprah’s Harpo Productions sold airing rights to CBS for between $7 million and $9 million, which also allowed ViacomCBS to broker the interview’s distribution internationally on Harpo’s behalf. But the special won’t be available on a streaming platform beyond the next 30 days, when it will be available on CBS apps, because Harpo didn’t try to sell the streaming rights to obvious outlets like Netflix or Paramount+ (which is owned by ViacomCBS). There were too many entanglements, including Oprah’s AppleTV+ deal, which includes an interview series, and Harry’s and Meghan’s $100 million production deal with Netflix. The confusing web of media alliances doesn’t end there: The royal couple and Oprah also partnered in 2019 for their own mental health documentary series for AppleTV+. And the CBS deal surprised some because of Oprah’s long history with Discovery Communications and her interview series on the newly launched Discovery+.
The shift to digital distribution exposes gaps in how creators are compensated today: Even the biggest stars on YouTube or Twitch monetize mainly through advertising. While on-demand media services are easier (and more cost-effective) for consumers, the same can’t be said for artists and creators. In the United States, record stores, download stores, and streaming services paid record labels and artists 67.3% of recorded music revenue, 1.1% less than in 2016. In the United Kingdom, subscription music streaming services paid record labels and artists 56.4% of streaming revenue in 2018, down 2.5% from 2016. The math is different on unit sales, too: If you sell more than 100 million albums (the US threshold for certified platinum), you can expect to keep 18%-20% if you’re a superstar, or a more modest ~15% if you’re well-known but not *that* well-known. In streaming, the per-stream fees are fractions of a cent ($0.006 and $0.0084 to be more precise) and a platinum certification requires a billion streams.
The third trend: Entertainment is going DTC. The traditional model of creator -> producer -> distributor -> consumer is getting upended. Creators can choose their own distribution platform(s) and frequently go directly to consumer. During the pandemic and its restrictions on physical gatherings, an on-demand, asynchronous world has emerged that has changed how we view and consume entertainment. In response, creators and distributors have reshuffled the entertainment delivery stack to got directly to consumers, which can create better revenue splits in favor of content owners. Livestream concerts are becoming the norm across all music genres, while increasingly popular podcasts about TV shows have materialized as an inexpensive, lockdown-resistant alternative to TV production shutdowns. Movie studios such as Disney and Universal are, of course, rolling out productions through video on-demand channels rather than theaters, which has been a boon for subscriptions and rentals. In its first 19 days, for example, rental fees for Universal's Troll World Tour topped $95 million – and because it didn't have to share revenue with theaters 50/50 or 60/40, Universal enjoyed a roughly 80% margin.
Combine these three trends and boom: We’re going to see many more Jack Dorsey and Jay-Z hangouts.
A missing link
We’ve written before about Square’s opportunity to provide a currently missing direct payments layer for creators on Twitter. How does Tidal fit in? This calculation will be familiar to brand marketers or publishers who’ve segmented customer cohorts by lifetime value.
First, a little history. The Norwegian company Aspiro launched Tidal in October 2014 as a subscription-based music streaming service in the United Kingdom, United States, and Canada before expanding into other European countries. Project Panther Bidco Ltd., which is controlled by Jay-Z, bought Aspiro just a few months later in January 2015 for $56 million, and it began selling downloads in late 2015. Mobile carrier Sprint bought a 33% stake in Tidal in 2017, the year that Tidal partnered with British company Master Quality Authenticated to provide the highest possible audio resolution to HiFi subscribers. Tidal is still one of only a handful of streaming services to offer master-quality recordings. Its library includes exclusive albums and singles from Universal Music Group, Warner Music Group, and Sony Music from a slate of artists that also co-own the service, including Jay-Z’s wife Beyoncé, Rihanna, Kanye West, Nicki Minaj, Jack White, Madonna, Alicia Keys, and others; artists will remain shareholders following Square’s acquisition.
Celebrity owner aside, Tidal smartly focused on two key value propositions: audio quality and creator monetization in its go-to-market strategy.
For the first proposition, Tidal identified its most valuable audience to target. Audiophiles are an interesting demographic: They’re in many ways the best kind of sizable yet niche, loyal, hobbyist audience. They have healthy amounts of spending money. A “budget” audiophile setup, which may include a basic sound system, speakers, and vinyl collection, runs in the thousands of dollars, so they likely wouldn’t bat an eye at Tidal’s $19.99 per-month subscription. The streaming era hasn’t been a friend to people whose primary consideration is sound quality. Spotify, the leading audio subscription platform, only recently started offering CD-quality sound; Tidal took pride in master-quality streaming, which is a differentiator (although not one without competition – as of late, Amazon and QoBuz, another specialized high-end streaming service, both offer the highest, master-level sound quality).
Tidal’s streaming quality options
Audiophiles may be forgiving of a smaller artist catalog in favor of sound quality. By virtue of spending more on audio overall, we suspect they are also more likely to be aware of musician/creator compensation and wish to support a smaller number of artists more directly. This brings us to Tidal’s second core value proposition.
For many artists, streaming upended their ability to monetize their content. They are stuck between legacy record company contracts that restrict exclusivity and streaming platforms that provide exposure to listeners but not necessarily monetary compensation on par with, say, CDs. As a result, artists of various musical genres have been figuring out the best mix of merch, ancillary content, tour proceeds, and just about everything in between to eek out a living. Wealth among creators is concentrated in the hands of the few at the top, while the vast majority are barely making minimum wage – if they're lucky. Just 2% of the creators on Patreon, for example, made the $1,160 federal monthly minimum wage in 2017. To achieve the $15,080 annual full-time minimum wage, artists on Spotify need to hit 3.5 million streams. The top 1.4% of artists on Spotify, or 43,000, account for 90% of royalties, which breaks down to about $22,400 per quarter on average. The other 3 million creators – or 98.6% – pull in only about $36 per quarter.
Tidal’s interface is a fairly generic audio app; the emphasis is on audio quality
Square’s reasoning here appears to be that Tidal’s core audiophile audience is closer to wanting a direct relationship with artists, and that an underlying payments layer could provide that connective tissue that’s currently missing (and the domain of various intermediaries). Square + Tidal could be the creator stack that unifies:
Streaming revenue from the number of streams played
Regular direct subscriptions to an artist’s exclusive content, Patreon style
One-off payments to artists, tip-jar style
Merch sales and auctions
Brand and artist endorser/sponsorship partnerships
In much of media, we’re somewhere along the shift from one monetization model into multiple new ones, and the payments layer will be critical. Creators want and need more options than advertising. Chinese platforms such as WeChat get it, and they enable payments for almost anything from content to household bills. We have seen the beginning of similar opportunities emerge on US platforms, including YouTube's Super Chat feature, which gives creators a new revenue stream by allowing users to pay to highlight their comments. Entirely new platforms like Patreon have cropped up to fill the gap, but payments aren’t native to Patreon in the same way as Square. In many ways marrying payments with media seems like the logical next step. It remains to be seen if it’s easier for a media company to build the payments layer or for a payments company like Square to branch out into individual verticals.
Square isn’t the only payments platform that can make this play: Most notably, Apple has Apple Pay and Apple Music, and it could perhaps model a similar setup like in the app store. What will create the moat for creators to select one platform over others? Will we see a replay of the current streaming era where music is rarely exclusive to a platform?
Thanks for reading,
Ana & Maja
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