Jay Z sees Tidal as leading artists’ fight against the techies

Hip-hop musician and a string of stars sing the same tune against the streaming incumbents
Rihanna, Nicki Minaj, Madonna, Deadmau5 and Kanye West at the Tidal launch on March 30, 2015

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Jay Z: aiming to tilt the balance of power in the music industry

The gathering of some of the world’s top musical talent by hip-hop star Jay Z this week was on a scale unseen since 1985, when Michael Jackson and Lionel Richie assembled a starry cast of singers to record We are the World.

But rather than recording a single to raise funds for famine-hit Ethiopia, Madonna, Kanye West, Nicki Minaj, Alicia Keys and the other stars who took to the stage were relaunching Tidal, a digital streaming service that they hope will tilt the balance of power in the music industry.

Each of the 12 artists represented on stage has been given equity in Tidal, which will compete with established streaming services such as Spotify, video site YouTube and Apple, the world’s largest online music retailer, which hopes to launch a service this summer.

Tidal stresses that it will be more musician-friendly than rivals, saying in a promotional video it “puts the power back into the artists’ hands”.

The structure of the company emulates the model established by Charlie Chaplin, Mary Pickford and other actors when they set up the United Artists studio in 1919.

Jay Z, whose real name is Shawn Carter, had a veiled dig at Spotify and Apple, hailing Tidal’s artist-first approach as “what sets us aside from a tech company selling advertising, or one selling hardware”.

But can it make money in an increasingly crowded market? “The theoretical net operating margin for ‘all you can eat’ subscription services is 3 per cent but that assumes only negligible marketing spend,” says Mark Mulligan, a music analyst at MIDiA Consulting.

He suspects the strategy will be to emulate the success of Beats, which was founded by the hip-hop star Dr Dre and Jimmy Iovine, the music producer, and acquired last year by Apple for $3bn. “The business model is going to be like all the others: make money on an exit,” says Mr Mulligan.

The launch of Tidal comes as the industry moves away from a digital download model to subscription-based music streaming. Spotify is the market leader, with 15m paying subscribers and 60m users of its free tier. It appears to be heading towards an initial public offering, having recently hired Goldman Sachs to raise $500m, which would value it at about $8bn.

But cracks have appeared in Spotify’s relations with the music labels that supply the content for its free, advertisement-supported tier. Taylor Swift, one of the best-selling acts of 2014, pulled her catalogue from streaming in November after the company refused to take her music off the free service.

Universal Music Group, the world’s largest music company, is also in a dispute with Spotify, pressing it to amend the free tier in order to speed up the conversion of customers to the paid service. The Swedish company has refused — for now.

Apple’s arrival on the music streaming scene this summer, when it plans to launch a new service led by Mr Iovine, could reshape the industry once more. But its plans have attracted the attention of European regulators, who are probing the company’s dealings with music labels over concerns that it could use its market power to squash free, advertising-supported services such as Spotify.

Tidal does not have a free tier but will offer its customers as much music as they want for a fixed monthly sum: $9.99 for the standard service and $19.99 for higher definition quality.

The company was recently acquired by Mr Carter via his SKr464m ($56m) purchase of Aspiro, a Sweden-based music group. He has not taken any third party funding, according to Vania Schlogel, chief investment officer with Mr Carter’s RocNation group, and a former executive with private equity firm KKR and Goldman Sachs. “It was his own, personal money,” she says. “This is a testament to how much he believes in this and how much he wants it to work.”

Several people familiar with the matter told the Financial Times that Mr Carter held discussions to sell a stake in Tidal to SoftBank, the Japanese group founded by Masayoshi Son, the acquisitive entrepreneur. The two sides came close to a deal but negotiations broke down, say people familiar with the situation.

However, Tidal has agreed a partnership with Sprint, the US mobile carrier owned by SoftBank, to distribute the streaming service. But it will not be exclusive: Tidal will be able to license the service to other mobile carriers. “We’ve been talking about how to make the service available to their customers,” Ms Schlogel says.

Music labels will be lining up alongside artists as Tidal shareholders. UMG and Warner Music Group, two of the three major music companies, have negotiated minority stakes in the business. They have also struck licensing deals that will ensure their music is available on the service.

Sony Music, the world’s second-largest music group, has not finalised a licensing deal with the service. The labels declined to comment.

Mr Carter is known to have had discussions with a number of technology companies before he acquired Aspiro, say several people familiar with the matter. He also had talks with Spotify about an exclusive partnership but the two sides were unable to agree financial terms, say two people familiar with the situation.

Spotify declined to comment.

Tidal is making waves in the industry and its exclusive deals with top artists could put a brake on Apple’s plans to bring musicians into its fold. At the time it acquired Beats, Tim Cook, Apple’s chief executive, stressed the role of artists over algorithms, such as those used by Pandora, the streaming radio service, and Spotify to programme or recommend new music.

“We believe it’s the first subscription service to get it right,” Mr Cook said of Beats, elements of which are now being incorporated into the forthcoming iTunes reboot. “They had the insight that human curation was really important to the experience, that technology by itself wouldn’t produce the deep feeling that people need in music.”

Apple’s pitch to the music industry had been that it is its closest friend in Silicon Valley. But its negotiations with labels have dragged on, forcing it to delay its planned launch in March to later this year.

“Unlike other tech companies, there hasn’t been this Berlin Wall between us and the people who are creating content,” Mr Cook told the Financial Times in May, when the Beats deal made Dr Dre an Apple employee — and a billionaire.

The new rivalry between California’s Dr Dre and Apple and New York-based Jay Z echoes a 1990s feud between hip-hop acts from the east and west coasts of the US. This time, though, the high-stakes battle is over the future of digital music.

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