(Bloomberg Opinion) -- On Thursday, Square Inc. CEO Jack Dorsey posted on his Twitter account: “Why would a music streaming company and a financial services company join forces?” That is a good question. They shouldn't.
Earlier in the morning, Square said it had agreed to buy a majority stake in Tidal for $297 million in cash and stock. That figure represents a nice financial return for music mogul Jay-Z, who acquired the struggling music streaming service for $56 million in 2015. But while the deal is good news for the rapper, it may be less so for Square.
At first blush, I have difficulty seeing any potential revenue or marketing synergies between the fintech company's offerings and the music service. Yet Square seems to be taking the acquisition seriously by announcing Jay-Z will join its board. Dorsey says he wants to make the economy work better for recording artists just as Square has helped small businesses and consumers with their finances. But that seems more like an admirable personal goal than one for the fintech company he leads.
Why risk getting distracted when things are going so well? Square has been one of the biggest winners of the pandemic, which drove more customers to its innovative online financial products as an alternative to in-person banking. Consumer use of its Cash app, which enables person-to-person payments and allows users to buy stocks and Bitcoin, has soared. Last month, Square reported fourth-quarter sales of $3.16 billion, up 141% from a year earlier. Its stock has been a pandemic winner, too: Square shares have nearly tripled in the past 12 months.
Read more: Square to Buy Music Service Tidal, Make Jay-Z a Board Member
If Square wants Tidal to become a major player, it will have to invest significant financial resources given the competitive nature of market. Spotify Technology S.A. and Apple Inc. — the two juggernauts in music streaming — have leadership positions that are likely insurmountable. Spotify said it had 155 million paying subscribers in its latest quarter, while Apple revealed its Music service had more than 60 million users in 2019. Tellingly, Tidal did not provide an update on the size of its customer base on Thursday. Further, Tidal's main differentiating feature, a premium tier that offers better sound quality streaming for $19.99 a month, is at risk. Last month, Spotify announced it will launch a similar offering named Spotify HiFi later this year.
Investors seem to agree there isn't much rationale for Square buying Tidal. Square shares fell about 5 percent in early trading Thursday, representing a decline in market value of roughly $5 billion. They are right to be concerned. The deal doesn't make sense.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.
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