How Square & Tidal Can Revolutionize the Music Business
In May 2021, Block (known as Square at the time) closed a deal to purchase Jay-Z's Tidal music streaming business for $302M. While many found it puzzling that this company would get into the music business, I believe this sets the stage for a major revolution in the music industry.
Even though its reach today isn't anywhere near its top competitors in the music streaming space, with the right strategy, Tidal can emerge as a clear winner. Below is a thought exercise on how it may be possible for Block-Tidal to come out on top in the future.
Recent changes have made life more difficult for artists
Streaming is Dominant
Streaming services now account for over 83% of the music industry revenue in the US; up from 1% in 2005. The industry's market share is dominated by Spotify (31%), Apple (15%), Amazon (13%) and Tencent (13%); collectively they control 72% of the marketshare. Tidal, which is the focus of this article, only has 2% of the market.
It may not be surprising that musicians don't make a lot of money. However, the revenue they recieve may be lower than what many people think. On average, artists only receive about 12% of total streaming revenue. Artists gain about $0.00173 per stream; meaning a song would need to be played 578 times before they earn $1! The majority of the revenue, about 66%, goes to the streaming platform and the music label.
Pandemic has Hindered Live Performances
The music industry has no doubt been one of the hardest hit by the pandemic. In 2017, for example, PWC reported that approximately 43% of the music industry revenue comes from concerts. With the pandemic, almost all of that revenue has been impacted. While we will definitely see the return of larger scale performances in the near future, this has caused the artists to be more engaged in how they receive revenue.
About Block
Block was initially a financial services and digital payments company. It was co-founded by Jack Dorsey in 2009 as Square. Most people will know them from their innovative POS terminals that could be plugged into a mobile phone which opened the door for small businesses, vendors, and taxis to process digtial payments with minimal hardware besides their phone.
Today, Block is more than that. They support two major ecosystems, the Seller and Cash App ecosystem. (Source: Investor Presentation)
In December 2021, the corporate name officially changed to Block to signal to the market that it has moved well beyond its payment system product. The most notable additions to their two main ecosystems are its bitcoin focused TBD54566975 (yes, that is the name) business and the music streaming business Tidal.
New Possibilities
The new organizational entities open up several potential opportunities for the company. One of which I think could transform the music industry to give artists more control over their intellectual property.
By combining all their businesses, Block has the ability to leverage existing and leading edge technology to enact change. As you will read below, the value isn't from the simple sum of the individual companies within Block, but rather from combining the various capabilities to create new business models.
Non-Fungible Tokens (NFTs) and Smart Contracts
Two relatively new technologies will be at the heart of the potential for Block to transform the music industry: Non-Fungible Tokens (NFTs) and Smart Contracts
Non-Fungible Tokens (NFTs)
NFTs are fairly new to the cryptocurrency/blockchain lexicon. However, the concept has been around for a long time. "Fungible" simply means that one piece can be substituted for another indistinguishable item. For example, a $10 bill can be traded like-for-like for another $10 bill; similarly, one stamped gold bar can be substituted for another of equal weight.
On the other hand, non-fungible items are those that are unique or one of a kind. For example, a painting by Picasso and a painting by Van Gogh are both unique creations and cannot be interchanged. Other examples are houses; while they may be similar, no two houses are identical since they sit on different lots, have unique titles, etc.
Thus, in the digital world, an NFT is simply a digital asset that cannot be substituted for a similar item. It could be digital artwork, an item in the metaverse, or even represent a physical asset (e.g. a digital version of land titles).
Smart Contracts
Smart Contracts are like any contract in that they exist between two or more parties. Unlike traditional contracts, however, Smart Contracts have their terms executed automatically through code running on a blockchain-- for example, on Ethereum or another protocol. The main benefit of a Smart Contract over a traditional contract is that there is no need for a trusted intermediary. For example, when purchasing or selling a house, many individuals employ the use of lawyers to hold in escrow any deposits until the keys and title are transferred to the new owner. Similarly, the title doesn't change ownership until funds are received by the seller. A use case for Smart Contracts could be to transfer the money and title for the house when the contract is signed by both parties and the closing date has arrived. Thus eliminating the need for an intermediary.
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Web3, NFTs and Cryptocurrencies are ready to solve real problems
One of the critiques many people have of NFTs, Web3, smart contracts and cryptocurrencies in general is that they lack real life use cases. Below is a view on how Block is in the best position to leverage their current assets and build new Web3 enabled capabilities that will:
In my view, Block is in the best position to drive this disruption due to their unique collection of assets (Cash App, Tidal, etc) and capabilities (crypto experience).
NFTs PLUS Smart Contracts PLUS Tidal PLUS Cash App
A digital master for a recording from an artist can be stored as an NFT; this means that the owner of the asset can share, sell, or profit from it as they wish. A Smart Contract can then be embedded in the NFT and written such that the use of that asset can follow agreeable terms. For example, in the case of music files, the owner may set in their Smart Contract that they get paid equivalent to $0.005 every time someone plays their song.
Block could potentially set up a process whereby new and existing artists can leverage their platforms and technologies to create, own, distribute, and profit from their music.
Here is a potential scenario in how it all could work:
Step 1: Create a Platform for New and Existing Artists to Own their Music
As discussed above, life is getting harder for artists to earn money as streaming dominates and there is currently almost nonexistent concert revenue. Block can provide a platform that enables new and existing artists to transform their digital masters into NFTs. These NFTs can be fractionalized, much like shares of a publicly listed company, to help provide artists upfront revenue and to provide Block (through its Tidal company) its share of the revenue without directly charging the musicians. For example, the NFT can be fractioned out by 1,000 shares. Let's say Tidal takes 20% share of the fractional NFTs for using their platform (without any additional fees paid).
To ensure copyright integrity, Tidal can create their own network of independent recording studios and sound engineers. In order for the artists to pay for the studio recording and post-production, they either pay out of pocket, or, raise money through the fractional NFTs they own.
Step 2: Create a marketplace for Tidal Music NFTs & Tap into Cash App's massive user base
If the artist wants to get paid up front, they could sell a portion of their fractional NFTs directly to die-hard fans by leveraging Block's Cash App, which has about 40 million users. In this scenario, let's say the band wants to sell 20% of their NFTs (200 fractional NFTs in this case) to fans for $200 each. This would mean that the artist would receive about $40,000 up front to pay for the recording, editing, mixing and mastering the song.
The dollar amount the fractional NFTs sell for and how many fractions are created can vary based on:
Fans would use their Cash App to bid on/pay for and store their fractional NFT of the music, which enables them to own a piece of the song and receive (in their Cash App) a portion of the revenue generated when the song is played on the air, on streaming services, or used for commercial purposes (e.g. in movies, TV ads, etc).
Step 3: Enable Smart Contracts and ensure platform interoperability
Tidal, as mentioned above, only owns 2% of the streaming market. The creation of NFTs and a Cash App enabled marketplace could be considered nothing more than an interesting industry concept. To make it an industry changing proposition, the music needs to be made available across multiple streaming services, such as Spotify, Apple, YouTube Music, etc, and across radio broadcasting software.
Tidal can provide these services with connections to the blockchain on which the Tidal NFTs reside. Think of it similar to open APIs that exist for many webservices you use today. Essentially, the other streaming services become nodes on the blockchain that runs the NFTs and Smart Contracts.
Smart Contracts would be created for each streaming service based upon negotiated terms, so that the same track can be played across music streaming services and the royalties will be managed automatically, possibly reducing the need for legal battles in music.
Each owner of the fractional NFT: the artist, Tidal, and their early fans would then receive residual revenue through the Cash App.
Setting Up for Success: Tidal NFTs as the Industry Standard
The base platform can then be used, not only as described above, but enable the creation, sale, and trading of adjacent digital assets, such as NFT artworks by the band, digital album covers, unique photographs of the artists, and even selling of concert tickets through the platform.
As musicians see the benefits of having more control over their music without giving up on reaching their fans and managing their revenue streams; more and more of them will likely choose Tidal as a means to own, manage, and distribute their music.
The above is one possible scenario on how the recent asset purchases by Block could be leveraged to transform the music industry. It will definitely be interesting to see what Jack Dorsey, Jay-Z, and their team come up with.