Tidal's Sprint Deal: The Good, The Bad, The Unknown
After months of rumors about a possible acquisition, Tidal announced this morning it sold a 33 percent stake in the company to Sprint for $200 million, giving it access to the telecom company's 45 million customers. It's a bold move for a streaming service that, with its estimated (and disputed) 1 million paying subscribers, had fallen even further behind the sector's leaders Spotify and Apple Music in number of paid subscribers (40 million and 20 million, respectively) in 2016, its first full year of operation since its March 2015 U.S. launch.
It's the first major move in a year that is shaping up to be a pivotal one for the streaming industry, with increased on-demand competition from Amazon, Pandora and iHeart and the prospects of consolidation, acquisition and public offerings hovering over those already in the space. Tidal, with nearly two dozen artist-owners including Beyoncé, J. Cole, Nicki Minaj and Kanye West, was in the latter category.
"It needed an adrenaline shot to get back moving," says Mark Mulligan, co-founder at MiDia Research. "What Tidal is great at is U.S. urban music, which doesn't quite have the same global appeal as, for example, EDM. That makes it much easier to grow more quickly in the U.S. and U.K. than internationally. All those pieces together, this makes sense for Tidal in making itself successful in the U.S. and using that as a platform to either getting more money for an international rollout or getting fully acquired."
As details continue to become clearer, Billboard takes a look at the good, the bad and the unknown from today's Tidal-Sprint deal.
Right away, the deal looks like a good move for both sides. Tidal, which had been slipping in subscribers and had an estimated 1 million at the beginning of the year, gets a huge potential audience injection and infrastructure support, while Sprint picks up a music service that it had both been courting for over a year and that, regardless of the size of its user base, is a fully functional and artist-friendly company that has strong relationships with the music industry and 20 artist-owners to mine for exclusive content. In a press release announcing the partnership, exclusives seem to be the central theme; the creation of a dedicated marketing fund to the tune of $75 million a year set aside for exclusive content and experiences gives Tidal the financial backing to invest in those exclusives too.
From Tidal's point of view, it's a huge valuation affirmation -- just two years after Jay Z bought the company for $56 million, this $200 million injection of cash means Sprint, at least, now values it around $600 million. It also presumably ameliorates whatever concerns its artist-owners may have had about segmenting their work exclusively to such a relatively small base of listeners instead of to the widest audience possible, and the financial hit that comes with it. It seems to render Tidal's recent subscriber count issues moot, too, at least in the short term.
For Sprint, the potential marketing benefits are clear and large, and following a year in which its stock price doubled, Monday morning's news helped boost its stock 3.5 percent as of press time to its highest point in two and a half years. Tidal's dedication to exclusives, even as the rest of the industry has moved away from them (or at least from full album exclusives), has given it a slight edge in content. At the end of 2016, it touted 32 albums, 45 music videos, 90 behind-the-scenes videos, 39 live streams and 150 artist- and celebrity-curated playlists exclusively on its platform, which Sprint can now put in front of tens of millions of people.
While Sprint CEO Marcelo Claure will be joining Tidal's board of directors, he's still got his own company to run, and Tidal still has the same leadership that hasn't been able to capitalize on its celebrity names or exclusive access and turn it into a streaming force. While it's certainly added users over the past year and a half, banking so heavily on exclusives hasn't led to many of them sticking around beyond the free trial periods and becoming paying customers, and this deal sees Tidal essentially doubling down on the exclusive strategy. Will Claure help solve that fundamental issue, or will this represent more of the same?
One also has to wonder how Tidal's artist-owners feel about having their music and creativity packaged and marketed as a way to help a billion-dollar company pull in more customers. Investing in a streaming service that promises higher royalty rates and support for artists and artist ownership is one thing; being a minority owner whose job just shifted to selling cell phone access is another. If there was one positive that came from Tidal's much-maligned unveiling in March 2015 it was a sense that it was an altruistic experiment, meant to shift the balance of power in the favor of creators rather than the industry's billionaire gatekeepers. This takes a bit of shine off that purity.
Sprint, for its part, just purchased a one-third stake in a company that posted a $28 million loss on $47 million in revenue in 2015 in its most recent financial filing, and operates in a business that has yet to see a company turn a profit. It'll be hoping the benefits outweigh the losses, and that their value assessment isn't way out of line with what Tidal is actually worth. Spotify's last round of funding, raising $526 million in June 2015, valued the company at $8.5 billion at a time when it had 20 million subscribers, or $425/paid subscriber; at $600 million for 1 million subscribers, Sprint values Tidal's subscribers at $600/person.
"We know where the costs are for streaming music, we know that a telco is going to lose money on the bottom line. Could Sprint get $600 million worth of value in terms of increased customer base, increased lifetime value, increased ARPU?" Mulligan asks. "That's not impossible. [But] based upon where the market is, based upon the fact that Tidal is at just one percent of the global market -- admittedly with superstar cache that the other services don't have -- it seems like quite a high price to pay for, essentially, a third of a percent of the market."
Will this make people actually use Tidal? It's unclear whether Sprint's 45 million customers will have access to Tidal for free or will be offered a discounted rate, and either way it's impossible to tell how many of those millions already subscribe to another service or would switch allegiances to Tidal due to convenience or ease of use. In 2014, Sprint partnered with Spotify for a bundle offering within its "Framily plans" that gave access to Spotify's catalog for free for six months, then a discounted $7.99/month for the ensuing year and a half, and it's possible that some similar offering could be at play here, particularly if Tidal sees differentiated price points as necessary to compete against the lower tiers on offer from Pandora, iHeart and Amazon, not to mention Spotify's free version.
Will this be enough to close to gap with Spotify and Apple? Probably not. But is that even the goal? In one fell swoop, Jay seems to have delivered on his promise and taken Tidal from high-profile under-performer to specialized, high-end service with a new lease on life. The clout of being a market leader would be nice, but isn't really necessary for Jay to realize the dream of an artist-friendly, artist-run boutique shop for a particular type of fan that gives musicians a bigger piece of the pie within a business model that pays out fractions of cents per stream.
But it does raise the question of whether this is the end game for the service, or if it's a stepping stone that could lead to a full acquisition or give them breathing room to raise more money to pour into a strong international marketing push.
"There's undoubtedly a huge amount more interest in the streaming music business from investors than there was six months ago, but most of that interest is, at the moment, strategic due diligence to make sure that this is a market that's worth investing in if Spotify's IPO is successful," says Mulligan, referencing Spotify's widely expected public offering later this year. "It would be a case of if Tidal could weather the storm until the Spotify IPO and then go raise more money on the back of that. That might still be what they're planning to do and that this investment is intended to get them to that place, and hopefully boost some numbers to a sufficient stage to where Tidal can go and raise more money."