On Monday, Sprint announced it had bought a 33% stake in Jay Z’s embattled music-streaming service Tidal — for a whopping $200 million, according to Billboard.
That would value Tidal at $600 million.
This is a huge win for Tidal, which Jay Z bought for $56 million in 2015. While Billboard says he and “each of the company’s two dozen artist-owners [like Rihanna] will remain part owners,” it seems he’s planning an exit from the music-streaming game, with an eventual sale to Sprint.
Sprint buying Tidal would be a best-case scenario for Jay Z.
Since Jay Z bought Tidal, it has faced accusations that it inflated subscriber numbers (3 million at last count, according to the company), a musical chairs of exec departures, as well as reports that it is haemorrhaging cash. Apple and Samsung had both been tossed around as potential Tidal buyers in the last year, but neither seemed to bite. And the service remains much smaller than competitors like Spotify and Apple Music.
All this is not necessarily Jay Z’s fault. No one is the music-streaming business appears to be making real profits, even heavyweights like Spotify, Pandora, and presumably Apple. It’s a tough business.
But the question is, then, why is Sprint buying a big stake in Tidal at such a hefty valuation?
How exclusive is exclusive?
The best possible answer lies in one word: exclusives. From the start of Jay Z’s tenure as owner, Tidal has relied on high-profile exclusives to juice its subscriber numbers.
Here’s the playbook.
First, you get big-name artists to agree to give Tidal an exclusive window for their new album. (It helps that they are likely part owners of the service.) Then you use that to sign up new users and then hope they don’t cancel when the free-trial month is up.
Tidal employed this strategy with three high-profile artists in 2016: Rihanna, Kanye West, and Beyoncé. All three made an enormous impact on new downloads for Tidal. You can see just how big that impact was in US data from SurveyMonkey Intelligence, the app analytics platform:
And though that strategy seems to have been effective in the short-term, there is some evidence that Tidal saw a large drop-off in the following months.
But still, the exclusives moved the needle, and seem to be the only likely explanation of why Sprint could think Tidal is worth $600 million. Maybe Sprint is betting that exclusives could not only get someone to sign up for a free trial of Tidal, but actually contribute to someone’s decision to switch wireless carriers. In the press release, Sprint said its customers would get “unlimited access to exclusive artist content not available anywhere else.”
But it’s unclear how Sprint could leverage this without destroying value.
Rihanna isn’t likely to want her next album to be only available on the Sprint network for any period of time — not without some sort of huge deal on top of her presumed Tidal ownership. So when Sprint says that “Tidal and its artists will make exclusive content that will only be available to current and new Sprint customers,” it’s hard to know how much that could encompass. Will it be a few promo interviews and bonus songs, or conversely, an actual album.
The zero-rating question
Sprint could also go the route of “zero-rating,” that is, letting Sprint customers listen to Tidal on the network free of any data charges.
This would be a boon for Tidal users, particularly for those who use the high-quality streaming option. T-Mobile already lets you stream all major streaming services free through its “binge-on” program, so it’s hardly a revolutionary program, and Sprint has done some video zero-rating as well.
But it does fit into an emerging tactic by wireless companies to wring money out of media assets they own.
The clearest example so far is AT&T with DirecTV Now, its streaming TV service that competes with cable and satellite. If you are an AT&T customer, you can stream DirecTV Now all you want without it counting toward your data cap. Critics say this practice is anti-competitive, but AT&T’s argument is that it allows any service to be “zero-rated”: they just have to pay for it.
The problem with that logic is that when DirecTV is paying AT&T, the company is basically moving money from one pocket to another, while if a service like Netflix were paying the fee, that would be money lost.
Sprint could employ a similar strategy with Tidal. It could set a fee for services like Spotify and Apple Music to pay to be exempted from data caps on its plans. Tidal would have to pay too, but again, that money would just be going from one Sprint entity to another (provided Sprint ended up buying Tidal).
Even so, it’s hard to imagine that Tidal, which has fallen well behind its competitors in terms of subscriber numbers, could be worth 10 times what Jay Z paid for it, at a time when even the marquee names in the business are losing money.