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Protocol | Fintech

Jack Dorsey is so money: What Tidal and banking do for Square

Teaming up with Jay-Z's music streaming service may seem like a move done for flash, but it's ultimately all about the money (and Cash).

​Jay-Z performs at the Tidal-X concert at the Barclays Center in Brooklyn in 2017.

Jay-Z performs at the Tidal-X concert at the Barclays Center in Brooklyn in 2017.

Photo: Theo Wargo/Getty Images

It was a big week for Jack Dorsey, who started by turning heads in Wall Street, and then went Hollywood with an unexpected music-streaming deal.

Dorsey's payments company, Square, announced Monday that it now has an actual bank, Square Financial Services, which just got a charter approved. On Thursday, Dorsey announced Square was taking a majority stake in Tidal, the music-streaming service backed by Jay-Z, for $297 million.

If there's a theme around the moves, it's control. Having its own bank gives Square more purchase in the financial world. And if Square does something with Tidal, which promised to give artists a bigger cut of the money produced by streaming, it will likely be about giving musicians more control over the revenue streams they create.

It also suggests Dorsey wants to diversify Square far beyond its original smartphone-swipe business. Already, he talks about Register and Cash App as two distinct businesses within Square. (Caviar was another, until Square sold it to DoorDash.) Now Tidal joins the portfolio.

"Dorsey is flexing his muscles and expanding his tentacles into banking, crypto, and now the Jay-Z Tidal deal," Wedbush analyst Daniel Ives told Protocol. Ives compared Dorsey to Tesla's Elon Musk in the boldness of his ambitions.

Some disagreed: There was chatter that the deal was about Dorsey's habit of hobnobbing with celebrities. He was famously photographed with Beyoncé, who is married to Jay-Z, last year. Square plans to name Jay-Z, a.k.a. Shawn Carter, to its board.

But Square's push into banking is not about "white pillars in front of buildings and marble," as Matt Harris, partner at Bain Capital Ventures, put it. Financial services are becoming a "lifestyle choice" for a new generation of consumers, he said.

It helps, then, that Cash App is part of the cultural lexicon of hip-hop. "One of the things Square has captured is the consumer business for a long time," Harris said. "Their customer acquisition strategy for a long time has been urban. And Tidal is just a further step. A somewhat radical further step."

Veteran tech analyst Michael Dortch of DortchOnIT saw the deal as more straightforward: Square can offer valuable services to musicians and artists in what has become a more complex entertainment market, and let them avoid "exploitation and bad treatment" from the major labels, he said.

Artists often don't get paid for three to six months after a song is streamed, because they have to wait for their label to get paid first. Square has experience, but it's not the only one that could address this problem.

"Maybe there's an argument that Square will get in the middle of that to simplify payments so creators get paid more quickly," said David Pakman, partner at Venrock. "That's interesting and a bunch of people have tried to do that. But Spotify could do that on their own."

Square's bet on Tidal is unlikely to shake up the streaming world in the short term. Tidal has not released any subscriber numbers for some time, but data shared by digital music wholesaler CD Baby suggests that the service is little more than an also-ran. CD Baby, which distributed the music of 800,000 independent artists, received 40% of its digital revenue from Spotify, with Apple Music accounting for 18%. Tidal, Deezer, Napster and other third-tier services together made up just 8% of CD Baby's digital revenue.

Dorsey and Jay-Z both said Thursday that the Tidal link-up went well beyond streaming.

"Square created ecosystems of tools for sellers and individuals, and we'll do the same for artists," Dorsey wrote in a tweet thread. "We'll work on entirely new listening experiences to bring fans closer together, simple integrations for merch sales, modern collaboration tools, and new complementary revenue streams."

"I said from the beginning that Tidal was about more than just streaming music … Artists deserve better tools to assist them in their creative journey," Jay-Z tweeted.

Focusing on services over streams is a smart bet, music industry analyst Mark Mulligan from MIDiA Research said. "Streaming is fundamentally a terrible margin business," he said.

Water & Music author Cherie Hu agreed. "The business of music streaming is not sustainable in and of itself," Hu said, pointing to the fact that Tidal lost $52 million on subscription revenues of just $166 million in 2019. "Tidal is not a profitable business," she said.

A bigger focus on creator services could change that. "It is the only big bet at the moment," Mulligan said. And while pundits have focused on Tidal's star power, creator services could actually help Tidal and Square monetize the long tail of music: part-time creators looking to make a few extra bucks, musicians who haven't given up on their day job. "It monetizes hobbies," Mulligan said.

Square could build out credit or other products or tools for artists. "Even though Tidal has been declining as a streaming service, they have a strong brand and access to artists," said Laura Chau, partner at Canaan. "With Square buying Tidal, they essentially are buying access to those artists and circumventing the creator acquisition challenge that many emerging companies will have."

The flip side is that there are already a plethora of creator services companies out there, helping bands with everything from playlist sharing to merchandise sales. Those companies include Spotify, which has been looking to offer musicians more tools after acquiring artistry services startups SoundBetter and Soundtrap. "It's super crowded right now," Hu said.

The one major differentiator for Square could be its financial services business, freshly strengthened with its own chartered bank. "That is one of the growth areas," Mulligan said. The company could offer artists advances, royalty processing and more, effectively taking over some of the roles traditionally held by record labels.

It's a space that is long overdue for change. In the age of TikTok, artists can see huge streaming spikes practically overnight when one of their songs goes viral. Most of them won't see the resulting royalties for months, Hu said: "The financial innovation has not caught up to general technological innovation."

If the Tidal bet pays off, Dorsey's reputation as a daring strategic thinker will only grow.

"He deserves a lot of credit for long-term vision," Eric Sager, Plaid's chief operating officer who was once head of sales at Square, told Protocol in January. "A lot of the things that have made Square the amazing company it is today are things that he was talking about years and years and years ago when it wasn't clear at all that those things would be successful."

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