#261: Why Did Square Acquire TIDAL, & More

Last week, many investors wondered why Square announced a $297 million deal for a majority stake in TIDAL. In 2015, Jay-Z acquired the struggling music streaming service for $56.2 million out of frustration that “people are not respecting” music. TIDAL attracted high-profile artists to take ownership positions in the platform and market to their fans paid subscription tiers for exclusive content and high-quality streaming.  Jay-Z was not alone in his concern that technology was diluting the value of music by offering it for free. In 2014, Taylor Swift criticized music streaming in a Wall Street Journal op-ed stating, “Music is art, and art is important [and valuable]” and that “valuable things should be paid for.”

Unfortunately, TIDAL did not live up to high expectations and faced criticism focused on artist compensation and inflated user numbers. In 2019, even Jay-Z seemed to reject TIDAL’s value proposition when he offered his music catalogue to competitor Spotify. Today, the streaming service seems to serve only 1 million users,* down from 3 million in 2016 and a fraction of Spotify’s and Apple Music’s 155 million and 60 million premium subscribers, respectively.

Why did Square acquire TIDAL? In our view, the partnership is a more natural fit for Cash App than most observers might expect. Cash App’s partnerships with musicians have integrated it into urban culture, accelerating the digital wallet’s growth. Leveraging learnings from its partnership with Spotify, Cash App could enable TIDAL artists to sell merchandise powered by Square eCommerce, increasing both the engagement and reach of both platforms. Perhaps more important, Square and TIDAL together could disintermediate record labels by offering artists loans backed by the cash flows associated with their streaming revenue, much like Square underwrites business loans based on merchant cash flows. Ultimately, the partnership could reinvigorate TIDAL’s original mission, giving artists the opportunity to build relationships with fans by offering exclusive content.

Consistent with Taylor Swift’s belief that music is rare and valuable, Square’s deep crypto expertise could enable TIDAL artists to sell non-fungible tokens (NFT), a topic we discuss below.

*TIDAL’s parent company disclosed subscription revenue of $166 million in 2019. At an average subscription fee of $13 per month, therefore, TIDAL had roughly 1.6 million subscribers in 2019.

A non-fungible token, or NFT, is a cryptographic asset that represents digital uniqueness. Unlike interchangeable units like bitcoin, an NFT is a unique asset.

In August 2017, NFTs debuted on the Ethereum Network with the ERC-721 token standard. One of the first implementations of this standard was the digital collectible game, CryptoKitties, which allowed players to purchase, collect, breed, and sell virtual cats. Since then, NFTs have evolved to include digital real estate, video game items, digital art, and music.

Despite its rapid growth recently, we believe NFT use is nascent. Today, to monetize digital content, content creators can upload it to Instagram, YouTube, TikTok, Spotify, and other social networks. These centralized platforms then monetize the content with ads or subscriptions, paying content creators a percentage of the profits. By contrast, digital creators can monetize their followers directly with NFTs, selling unique digital content  without intermediaries. Last week, for example, EDM music producer 3LAU sold 33 unique tokens for more than $11.6 million, the NFTs redeemable for “special edition vinyl, unreleased music, and special experiences.”

ARK believes that NFTs will unlock more value for content creators than any platform in history.

Synthetic biology (SynBio) is a rapidly growing field of science that engineers organisms and biomolecules with novel properties not found in nature. Central to SynBio is the ability to assemble DNA from its four canonical bases (A, T, G, and C), creating oligonucleotides or ‘oligos’, for many healthcare applications. Diagnosticians use synthetic oligos, for example, to calibrate and verify the performance of both PCR and sequencing-based tests for COVID-19.

Since 1981, chemists have synthesized DNA with phosphoramidite, an efficient approach but one with several drawbacks. Oligos longer than 300 base pairs (bps), for example, tend to be error-prone. Phosphoramidite also causes hazardous byproducts. That said, because the phosphoramidite approach has been inexpensive and efficient, it has been central to SynBio for decades.

Analyzing nature, researchers  recently discovered another SynBio solution—enzymatic DNA synthesis. More specifically, by engineering an enzyme called terminal deoxynucleotidyl transferase (TdT) in immature human B- and T-cells, scientists are hoping to create oligos more cost effectively and accurately than with the phosphoramidite method, free of byproducts. Many biologists speculate that the enzymatic method could yield high-quality oligos that are much longer than those produced by phosphoramidite synthesis and could be vital to the research proliferating in cell and gene therapies.

This week, DNA Script, a company at the vanguard of enzymatic DNA synthesis, unveiled new data at the Advances in Genome Biology and Technology (AGBT) conference. Co-founder and CEO Thomas Ybert suggested that DNA Script’s enzymatic technology matched the performance of state-of-the-art phosphoramidite chemistry in the calibration of diagnostic tests for COVID-19. Later this year, DNA Script plans to launch Syntax—the world’s first benchtop DNA ‘printer’ that enables ultra-fast, enzymatic oligo synthesis. Limited initially to 60 base-pair oligos, longer term Syntax could minimize supply chain issues, guarantee the security of intellectual property, and accelerate the pace of DNA synthesis development.

In our view, enzymatic DNA synthesis is progressing beyond proof-of-concept. In the not-too-distant future, SynBio vendors are likely to embrace enzymatic synthesis as an environmentally friendly way to supply the world’s insatiable appetite for DNA.