Apple / Tidal Acquisition - Not As Absurd As It Originally Sounds
Per recent news articles, it appears that Apple may be on the verge of acquiring Tidal, the unique music streaming service owned by Jay-Z. The WSJ article highlights all that is known about the rumor as of now: http://www.wsj.com/articles/apple-in-talks-to-acquire-jay-zs-tidal-music-service-1467325314.
To say the least the initial reactions to the news were of outrage, ridicule, and hilarity. Below are a couple responses of investors on Twitter:
While the acquisition may seem ridiculous at first glance, I believe it is worth taking some time to think about why it may make sense. Apple is fairly careful about its M&A opportunities and their corp dev/strategy groups are filled with very skilled individuals. So I think it’s worth it to not jump to conclusions to quickly.
In every tech acquisition, there are multiple components involved. There are product acquisitions where the acquirer believes it cannot build a product as well as the target company and as such needs to acquire it. Microsoft/LinkedIn would fit well as a product acquisition. There are financial acquisitions where the acquirer believes that there are cost synergies to a combination and that eventual profits of the combined will be worth more than the whole. Finally, there are acquisition hires “acqui-hires” where the acquirer is buying a team of skilled employees that would otherwise be hard to hire individually.
In my view, Beats Music and a potential Tidal acquisition are both product acquisitions with a slight twist. With respect to Beats Music, Apple acquired a decent hardware business along with a streaming service with a set of users. Shortly, after the acquisition, Apple shut down the streaming service causing many to question the reason for the $2B price tag. However, this was also an acqui-hire with Apple having Dr. Dre and Jimmy Iovine join the Apple Music team who have significant industry experience and contacts with key artists.
So now let’s take a look at Tidal. Tidal is a music streaming business that has experienced significant management turnover on its quest for user growth. One thing that it does have, however, is exclusive albums from top-grossing artists such as Beyonce and Kanye West. Tidal was purchased by Jay-Z for $56mm in early 2015 and has struggled to gain traction with users. Releases by Kanye West and Beyonce among others have exhibited short-lived success, topping the billboards for a few weeks before rapidly falling down. The user acquisition that happens during this period is fleeting and generates a temporary bump that isn’t sustainable.
So why does Apple want to buy this business. For one thing, if Apple even pays $100 or $200mm, it barely makes a dent in the company’s $200B cash pile. Sure, the acquisition is dilutive but again it would barely affect the company’s earnings per share as the company generated $10.5B in net income alone in 1Q16. I view it as a product acquisition. They get to acquire a company owned by several artists who produce exclusive content on Tidal. Imagine if instead of Coldplay, Apple released a Beyonce exclusive album on Apple Music. How many people from Apple’s installed user base would pay for an Apple Music subscription to get access to that? Could one imagine the subscription revenue generated from exclusive releases from top artists eventually paying multiples of the acquisition price? I certainly can. Furthermore, Apple could negotiate deals with the other artist owners of the business as part of the acquisition to secure more exclusive content. In this age where content is king and companies like Netflix are spending billions to acquire good content, it makes sense for Apple to buy Tidal for the artist relationships. Execution of this strategy remains to be seen, but perhaps we should think twice before jumping to ridicule.
