A recent Kanye West tweet has reignited discussions surrounding whether or not Apple (NASDAQ:AAPL) should buy exclusive streaming platform Tidal. We think such a buyout would just be a waste of cash for Apple. We believe the company should focus on growing Apple Music organically as opposed to paying a premium for a niche streaming platform.
Some of the arguments for a buyout go as follows:
- Tidal is "cool", and an acquisition could make Apple, specifically Apple Music, cool again.
- Tidal is supported by big names in the music industry, and a deal could improve Apple's relationships with artists and, ultimately, give the platform access to more exclusive content.
- Apple Music has stumbled out of the gate and needs a catalyst to catch up with Spotify (Private:MUSIC).
- Tidal today has several parallels to Beats 2 years ago.
While these arguments might ostensibly seem rational, they lack contextual support. After breaking down these pro-buyout arguments, we see little reason for Apple to buy Tidal.
While Tidal is "cool" because it is backed by Jay-Z and other prominent artists, that "coolness" really isn't turning into sales. It only has 4.2 million paid subs, versus Apple Music's 15 million subs and Spotify's 30 million subs. Granted, Tidal is newer than Spotify, but Tidal has been around since 2014 and has been owned by Jay-Z since the first quarter of 2015, so 4.2 million subs in about a year isn't that impressive. In the same time frame, Apple Music added 15 million paying subs and Spotify added 10 million paying subs (the second year in a row it has done that). The numbers say Tidal really isn't that "cool", and especially not "cool" enough to warrant buying only for its coolness.
The exclusive content aspect is intriguing, as it appears to be what is almost entirely driving Tidal user growth. An exclusive Kanye West album more than doubled Tidal's user base from 1 million to 2.5 million, while an exclusive Beyonce album added another 1.2 million users in a week. But those net adds include free trials, and it is pretty easy to imagine churn following that first week spike. Apple Music could benefit from these exclusives, but by the same token, Apple Music could also squeeze Tidal out of the picture with its own exclusives. The platform has already made big splashes with its own exclusives, and has more to come. If it comes down to a bidding war for content, Apple will inevitably win due to its significantly larger resources.
Apple Music also isn't struggling to a degree that warrants an acquisition to save it. The platform did have some user retention troubles early on, but a year later, the company ultimately added 15 million paid subs. There has since been a major revamp to the UI, and management commented that Music played a significant role in Services' 19% revenue growth in the June quarter. While an acquisition might certainly help, we do not think it is necessary for Apple Music and believe, instead, that the company should track user growth in response to the recent redesign. More exclusives should also help user growth, so it will be interesting for the company to track user response to those launches as well.
Finally, Tidal isn't the Beats of today. By the time Apple acquired Beats in 2014 for around $3 billion, Beats was already the leader in the premium headphone market with $1.5 billion in estimated annual sales. Its headphones had transformed into a must-have product for certain audiences. By contrast, Tidal isn't a leader in the streaming market, has nowhere near a billion in sales, isn't the fastest-growing streaming platform (actually growing much slower than Spotify and Apple Music), and is far from a must-have in the streaming music space.
We simply think it would be a waste of time and capital for Apple to buy Tidal. The platform is growing more slowly than Apple Music and really hasn't shown much traction outside of two exclusive content launches. The company should instead track user growth in response to an Apple Music overhaul and new exclusives coming online. We think those two catalysts will be enough to add ~5 million subs by year end.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.