Square’s Acquisition of TIDAL: Shake Your Money Maker
In Jack We Trust
At face value, a payments business (Square) buying a music streaming business (TIDAL) is odd. What value does a relatively sub-scale music streaming business have to a global fintech giant?
When Square announced back in March they were acquiring TIDAL for ~$300m, there was a fair degree of scepticism in the investor community, of which I was admittedly one.
I’ve followed and been invested in Square for the last several years. I’ve closely tracked Jack’s (and the rest of the Square team’s) wild success in innovating with payments and software to empower their customers (both merchants and consumers) and drive continued growth at massive scale.
The market has continually failed to appreciate this over the years, as shown by the change in trailing 3Y forward revenue estimates in the chart below. The market has continually underestimated Square’s performance by anywhere from 30–60% since 2018 (obviously FY21/22 remains TBD).
Given the company’s impressive track record, I thought it worth putting myself in Jack’s position and trying to figure out what wizardry they might be brewing up at Square HQ with the TIDAL acquisition.
TL:DR
In my view, the acquisition rationale comes down to two key elements.
First, the obvious motive and the narrative that both companies are leading with is that artists are another vertical of small businesses. Albeit, a vertical that has been deeply underserved and in desperate need of modern software and payments tools to better help them grow their ‘business’.
Every artist is, in and of themselves, a business. Just like any other business, particularly small business, they need to find ways to acquire new customers (or in their case, listeners), make sales and get paid. Square has deep domain expertise in all of these domains and much of the existing software and payments capabilities to readily serve their needs. Makes complete sense.
Second, what is completely different, however, with artists to your typical small business is that they (the artists) are society’s most prominent trend-setters, tastemakers and influencers.
Put yourself in Jack’s position…if you were trying to scale the dominant peer-to-peer (P2P) payments network and consumer finance application in the U.S., potentially globally — and you had the opportunity to preference a group of people to be advocates and drive the cultural zeitgeist, who would it be? Chances are artists aren’t far down that list.
As such, I think TIDAL has the opportunity to meaningfully strengthen the network effects and brand for Cash App. I think this is the really compelling move by Jack and Square and one that has been broadly underappreciated.
How could I have doubted you Jack Dorsey?
In Jack We Trust.
“I’m Not A Businessman, I’m A Business, Man.”
Artists are essentially small businesses who need to find ways to generate demand, create fans and get paid. They need many of the same products, services and payment capabilities that your average small business needs.
Square has had incredible success to-date enabling payment acceptance and software tools for small, underserved merchants who have had very little attention from traditional payment or software companies.
Starting with a simple dongle and expanding to a full suite of software and payment solutions. Most recently announcing their role as the payments provider to the new US$5bn SoFi Stadium in Los Angeles. Square has, in the process, completely changed the industry for all types and sizes of merchants across many verticals.
Over the last 2–3 years, Square has begun to transform digital payments for consumers with Cash App. Initially focused on simple P2P payments of the large underbanked population of the U.S., Square have expanded their offering to now a much wider array of consumer finance — from bitcoin, to investment, to debit cards. I think there is much more still to come, as the company has noted for many years.
Anything you do today with a bank account, you should look to Cash App to begin to emulate more of that. Sarah Friar, Sept 2018.
Weaving these two threads together — the history and mission of Square, and the reframing of artists as businesses and relatively underserved by both the music and financial industries, we can clearly see Square’s angle and opportunity, to give artists a set of payment and software tools so they can participate, and hopefully thrive, in the modern digital economy.
A basic outline of what this could look like for a new artist signing up through TIDAL:
An aspiring artist signs up for TIDAL, application is simple and frictionless, typical Square style. They can spin up an online store for merchandise within minutes. They can create a $cashtag to use across social media (Twitter, Instagram, TikTok) as a way to get paid and gift money to fans. After several months and some success, TIDAL has good visibility into the growing rate of streams and offers her a loan, secured against her streaming revenue and data. Several months later TIDAL launches a new NFT feature, the artist launches a new album and sells NFTs. TIDAL later launches the ability for artists to engage directly live with fans through the App, with the artist able to get tipped directly from their fans through Cash App.
Put ourselves in the shoes of a an aspiring artist— how hard it is to be heard, make it big and ‘break out’. Part of the difficulty is that you are a sole trader in many respects, not only creating music, but trying to acquire new fans (and retain them), sell merch, maybe book and manage gigs. If you do all of this well, and get signed by a label, you then forego ~70% of your earnings (sort of, complex mechanics).
Throw into the mix that musicians as a group have the highest number (~35%) who pursue their passion as a second job. This is more than any other creative talent, as per chart below.
It’s hard to imagine the difficulty of being an aspiring musician, managing everything that a small business does… as your second job!
Square has an opportunity, through the TIDAL acquisition of creating the ‘Shopify for Artists.’ For the emerging generation of digital-native artists there isn’t yet a comprehensive platform to easily commercialise their music. In particular, there is a real opportunity to help monetize the long-tail tail of aspiring or even hobby artists. Arguably Square could have created these tools independently of TIDAL, but by acquiring the company they buy one of, if not the, most artist-friendly platforms and gain immediate scale and cachet in the artist community.
The TIDAL COO, Lior Tibon, alluded to this recently in an interviewed when he was quoted as saying:
“…how do we make sure that Tidal is serving not only the listener but also the artist community in the best way possible? We are really reinforcing our original mission under Square of being the most artist-centric service out there. That means [we’ll add] a lot of new features later this year and next year to strengthen our focus on being artist-centric.”
However, does the opportunity in artist tools justify the ~$300m price tag?
Although this is an interesting and admirable area for Square to explore, in the scheme of things it’s not a huge opportunity. There are ~200k musicians in the U.S. If we assume the average artists earns $30k a year (guestimate), at a 1.1% net take rate Square receives $330 in payments revenue. Assuming an additional $50/month in software/subscription revenue, it’s roughly $930 per annum, per artist.
Even assuming 100% market share in U.S. musicians, the market is ~$190m of adjusted revenue, about 4% of the current year’s expected total adjusted revenue. It would be a great win for the team down at Square, but it’s arguably not going to drive a step-change the long-term trajectory of the business.
So what‘s the play? We think the real motivation is not driven by the artists as Sellers, but rather how TIDAL can influence the future potential of Cash App.
Networks: Not All Nodes Are Created Equal
The narrative the two companies aren’t as public about, but which we believe is likely the most compelling rationale for Square acquiring TIDAL — is that the benefits of TIDAL to Square are likely rooted in Cash App.
Square understands the power of Network Effects and Brand better than anybody else. We believe TIDAL is a unique opportunity for Square to materially strengthen the network effects and brand for Cash App, but also for TIDAL to strengthen its own user aggregation through leveraging Cash App’s user base — massively strengthening the value proposition for artists on TIDAL.
The success of Cash App’s business model is ultimately driven by two things, CAC and LTV. Anything they can do to decrease the former and raise the latter is hugely valuable.
We can parse out how the drivers of TIDAL are accretive to Cash App into new customer acquisition, retention and engagement;
Customer Acquisition: Culture & Brand
Jack and the Cash App team have a deep respect for the importance of culture and brand in driving adoption and engagement.
Cash App has had huge success with driving new customer acquisition through leveraging existing engaged communities — Bitcoin, Twitter, Rap, etc. Jack has been aware of and focused on this for many years:
“I talked about this on the call, maybe on the stage before, but the number of hip-hop songs that include the phrase Cash App or even named Cash App is pretty incredible. I think it’s over 1,000 or 2,000 right now. So we’ve tapped into some of the most influential people in the world, and they’re using us in their song lyrics, they’re using us too on Twitter and Instagram to give money away to people. They’re just talking about us nonstop. And that has been a huge, huge boom for our growth and our usage.”
- May 2020“….another big reason we looked at TIDAL in the first place is because we see such an intersection between our customer base in Cash App and general culture and music and what we find in TIDAL, obviously. So we think there’s a ton of connection points between Cash App and TIDAL.”
- May 2021
Some of their recent advertising — not your typical “bank”:
All of this has resulted in Cash App having an average CAC of ~$5 vs. ~$500 for some of its banking peers.
By acquiring TIDAL, Cash App will be able to leverage the social reach of it’s owners — the artists. The artist-owners of TIDAL are some of the most-connected and influential people on the planet. In addition to increasing the exposure of Cash App, it will help legitimatise the app in the eyes of many people. This is hugely important to driving top-of-wallet usage of Cash App.
Customer Acquisition: Influencing the Influencers
Those who’ve been following the business would have noted they’ve had a lot of success partnering with artists, in particular for Twitter giveaways such as the one above by Travis Scott and following by Cardi B in celebration of her record song, WAP.
I’m not privy to the economics behind the promotions above, but working through some high-level numbers.
They have 11.1m and 18.9m followers on Twitter.
Let’s assume they paid Travis Scott $300k and Cardi-B $500k because she has ~70% more followers on Twitter to run the promotion.
All-up, they paid ~$0.007 per follower for Travis and ~$0.008 for Cardi-B.
The quick summary table below shows the potential reach of the owners of TIDAL — not including the long-tail of smaller artists which is likely to drive more of the engagement from leveraging Cash App — anyway:
If these artists can drive Cash App as the preferred method of payment acceptance and economic engagement between artists and fans, the $300m pays for itself pretty quickly.
Unfair advantage in LTV: Engagement and Retention
If Cash App, through TIDAL, is successful in becoming the preferred method of fan monetization and interaction (i.e. giveaways, promotions around new album releases, etc.) this should drive overall increased engagement within the app by existing users as well as acquisition of new users.
Cash App has noted they have 35m MAUs, but have engaged with a cumulative ~80m U.S. consumers at some point. Cash App’s core customer demographic is underbanked, urban and in the South East of the U.S. By having many thousands of artists who use their $cashtag as the means of getting paid or ‘tipped’ will be further incentivised to use their $cashtag through Twitter, Instagram, Linktree, etc. This should drive engagement re-engagement with their user base.
Effectively, these artists will be driving stronger two-sided network effects for Cash App…NOT ALL NODES ARE CREATED EQUAL!!!
By encouraging adoption amongst society’s taste makers and influencers — Cash App is able to drive stronger network effects and engagement amongst its core user base.
Some high-level maths on this sensitivity shows it can easily pay for the acquisition value.
Let’s say it helps drive re-engagement with 10% of the 40m users who have previously churned off the platform, ~4m users. To be conservative, if each of these users then monetises at half the ARPU (~$30 p.a.) of your average user today then we have an uplift of $120m to revenue. Square is trading today at ~20x revenue so a rough valuation uplift of $2.4bn. For a business they acquired for ~$300m. A cheeky 8x uplift, nice.
This maths is obviously nose-bleedingly high level and doesn’t account for the benefits from increasing engagement from existing users, the strengthening of the network effects from the increasing number and engagement of users, as well as the potential benefit for when Cash App expands to new geographies.
All-in-all, a pretty interesting move and feels like a great bet to make for $300m.
Conclusion
Interested to see how this plays out.
Let us know your feedback.
Jack — if you’re reading this, let me know.
