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Jay Z’s Streaming Music Service Makes No Economic Sense

James McCarthy/Getty Images

Jay Z thinks he has found a solution to a problem that’s vexed artists lately: How to make money off their songs. On Monday, the music tycoon unveiled a new streaming service, Tidal, which he recently purchased for $56 million. Flanked by a cadre of other stars, including his wife Beyonce, Kanye West, and Jack White, Jay Z announced that the majority of Tidal will be artist-owned.

Think of it as a worker co-operative—with one key caveat.

Monday’s announcement did not specify exactly how the streaming service would work, but it did provide a basic overview. Tidal has two subscription levels: $9.99 per month for standard music quality, one at $19.99 per month for higher quality. Unlike other music streaming services like Spotify, Rdio, and Google Play, Tidal will not offer an ad-supported free subscription. Artists on Tidal will offer “windows” of limited exclusivity to their new music, an incentive for fans to purchase subscriptions and hear their favorite artist’s music before it’s available elswhere. The 16 artists who have inked exclusive deals—most of whom were on hand for the announcement—have each been given 3 percent equity in the company, according to Billboard.

There are a number of problems with this approach. First, Tidal must convince consumers to purchase the subscriptions. As of Monday, Tidal had 540,000 subscribers, compared to Spotify’s 60 million active users and 15 million paid subscribers. It will be a major battle to convince consumers using a free streaming service to fork over $10 a month to Tidal. Additionally, it’s hard to imagine there’s much of a market for Tidal’s $20, high quality subscription. That may attract certain music lovers but the rest of us are satisfied with the standard quality. For consumers who want to use their device on mobile, high quality music—and especially HD music videos—will burn through data very quickly.1

The second problem is that artists often don’t have control over their music. The record label does. This is the big caveat about thinking of Tidal as a worker co-op. If the artist wants to provide an exclusive “window” to Tidal, the label must sign off on that plan. There’s no reason to think that most labels will do that. Jay Z, with his record label Roc Nation, has an advantage here. He can give artists permission in advance to launch their new music exclusively on Tidal, which is why it’s no surprise that some of the artists—Calvin Harris and Rihanna—who have initially signed on are Roc Nation clients. But as Tidal tries to expand and must attract artists from other record labels, Jay Z will face a big question: Will those labels agree to launch music exclusively on Tidal? I’m skeptical, especially when other streaming services have more than 100 times as many active users. In the end, the record labels remain in control.

Finally, it’s not clear how far this worker-ownership will extend. If the original 16 artists each received a 3 percent stake in Tidal, that’s nearly half the company already disbursed. Presumably, Jay Z intends to keep a large chunk as well. If Jay Z intends to allow all artists an ownership stake in Tidal, how much will less famous artists receive? I don’t expect those details to become public, at least not anytime soon. But it’s an important consideration. If Tidal ends up mostly owned by global music icons and leaves behind thousands of other artists, then it will not ensure artists are fairly compensated for their work. It’ll just be a way for the richest artists to get even richer.

Still, if the main problem with Tidal is that it unequally distributes profits, it will have succeeded. In that situation, the company would have both accumulated a big subscription base and made significant profits from those users. The latter point is far harder than it sounds. Streaming music services like Spotify are struggling to improve their profits even as the number of users grows rapidly. The real profits are instead flowing to the record labels.

Ultimately, Jay Z has set his sights on the wrong target. It’s not companies like Spotify that are preventing music artists from receiving their just rewards. It’s the record labels—and there’s nothing inherent about Tidal that will break the record labels’ stranglehold on the industry. Why does Jay Z think he’ll be able to succeed in doing what Spotify and other streaming services have failed to do? There’s no question that he has shown great savvy and success in the music business, but perhaps it’s going to his head.

  1. Tidal says it is coming out with an offline option soon so that customers can download music in advance (so they can still listen if they are riding the subway, for instance, on the way to work). That will help allow customers to use tons of data but users will invariably want to switch songs while they are not on WiFi. With high quality music and videos, that problem is largely unavoidable.

This piece originally listed Jay Z’s wife as Rihanna. His wife is Beyonce.