Jay-Z’s Tidal: hacking growth, exclusivity marketing and exit strategies. A case study. (part 2)
doesn’t apply to Jay-Z though: Following Dr Dre’s lead, he looks to have made an exit his initial (not final) soluton and to have planned its execution in details, engineering the mother of all growth hacks by carefully selecting his key partners (the artists) and his target (a phone maker), satisfying a specific need (not the customer base, which would pale in comparison with Samsung’s, but the ecosystem and the data that might theoretically level the competition with Apple).
A calculated exit is about creating costly marketing magnets and selling them as golden loss leaders to huge pockted buyers happy to monetize elsewhere. An exit is also about a buy-over-make decision made to instantly access products, service, customers and data. Therefore regardless of big, almost nonsense money involved, context is key to understanding and evaluating each part’s rationale.
Comparables – a double sided blade
Apple notoriously paid $3 billion for Beats. People screamed in awe and shame. Put into context, that huge pile of money
amounted to about 2% of their available cash or to less than 0,5% of their net worth and it bought both Beats Electronics, a $1.5-2 billion/year revenue headphones company and a fledgling streaming platform, Beats Music, which came with 250,000 subscribers, a whole technical, legal and editorial infrastructure and two heavy weight executives complete with their priceless know-how and their industry clout. So clearly the user base was an irrelevant motivation if compared to the iPhone maker’s 800 million customer base; but it can be worth noticing how Apple Music grew streaming customers 44 times in one year, recently declaring a customer base of 11 milliion - about a third of Spotify’s base – and thus getting ready to replace the plummeting pay-per download model.
Jay-Z appears to have purchased a 510,000 subcsriber base for $ 56 million – or $110 per subscriber. Enter comparables. Spotify’s current valuation is around $425-per-subscriber, Deezer should be looking forward to a $330 per revenue-generating subscriber if its IPO gets through, Apple would have paid the theoretically crazy stupid $2,000 price per Beats Music’s subscriber (assuming $ 500 million were spent on the platform out of the whole $ 3 billion Beats takeover). On these terms, Tidal’s purchase by Jay-Z can hardly be called a bad deal. It’s an absolute bargain on the “comparables” game board, and it could get much much better after having scaled to the recently talked about numbers (and, like with Beats, it should never be forgotten that the $56 price tag included a pretty complex infrastructure with a legally licensed ingestion and transaction engine working on multiple territories). Would pricing Tidal in the region of $ 100 million make sense? Not much: not only it would be a shame in comparison to what Dr Dre's Beats achieved with Apple, but it would be both out of proportion in relation to current comparables (Spotify and Deezer might be accidentally instrumental in rising those parameters, as their IPOs will be strongely backed by investors eager to exit) and inconsistent with the alleged Softbank-driven $ 250 evaluation.
Who’s going to smile, then?
1. Jay-Z and his posse, of course.
2. Many record label executives often busy hindering the free and freemium business models. Tidal and Apple Music paid-only business model contrasts with Spotify’s and Deezer’s “freemium” model. Record labels love the former, and since both Dre and Jay-Z know their chickens well their platforms were engineered to second that. But rooting for this model at all costs might as well prove as a bit shortsighted for two reasons: it only works when it is subsidized by a larger eco-system where monetization happens elsewhere through different products (and when the differentiation factor starts fading, usually loss leaders get cut) and – maybe even worse? – megastars aren’t but showing labels how well they can do it by themselves, de facto disintermediating them.
3. If the alleged Tidal exit-sale goes through also Samsung detractors are going to cheer, sure as they are that the South Korean giant will have a problem shifting to a content oriented offer and the idea will bomb in a sad Nokia Music-like epilogue.