Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Cryptocurrency Analyst
Summary: The day before releasing our Outrageous Predictions 2022, Jack Dorsey’s Square announced that its parent company will be renamed Block to arguably highlight its commitment to Bitcoin. The renaming aligns with our Outrageous Prediction on music streaming platforms and record labels which are disrupted due to non-fungible token (NFT) technology. However, there are multiple challenges ahead for Block’s Tidal to pursue this strategy.
All ten Outrageous Predictions for 2022 may be found here.
Jack Dorsey, co-founder and recently CEO of Twitter, has for years been an advocate for particularly Bitcoin (BTCUSD). In 2009, Dorsey founded the payment company Square, which bought Bitcoins for its balance sheet in 2021, while having offered brokerage of Bitcoin through its consumer-oriented app known as Cash App for several years. Likewise, NYSE-listed Square has announced its intention to develop a Bitcoin hardware wallet.
On December 1st, Square arguably doubled down on its commitment to Bitcoin by announcing that its parent company is changing its name from Square Inc to Block Inc (SQ:NYSE) similar to Google’s Alphabet and Facebook’s Meta. According to the company, the name has many associated meanings: “building blocks, neighborhood blocks and their local businesses, communities coming together at block parties full of music, a blockchain, a section of code, and obstacles to overcome”. While changing its corporate entity, Block renamed its fully Bitcoin-focused entity from Square Crypto to Spiral, which develops the companies’ Bitcoin products. The renaming from Square to Block looks from the outside like a tribute to Bitcoin and an in-depth focus on the latter going forward, without the company explicitly having said this.
Some days prior to the renaming announcement on December 1st, Twitter announced on November 29th that Jack Dorsey was stepping down as CEO, which ultimately frees up more of his time to fully focus on his role as CEO of Block.
Block owns music streaming platform Tidal
In May 2021, Block acquired a majority stake in music streaming platform Tidal, formerly majority-owned by famous artist Jay-Z, for around $300mn. Tidal is a minor company in the music streaming industry compared to the titans of particular Spotify (SPOT:NYSE) and Apple Music (AAPL:NASDAQ), which the company has historically had trouble competing against.
In terms of our Outrageous Predictions 2022, it is quite so respecting Tidal that the renaming of Square becomes interesting. On December 2nd, we published our 10 Outrageous Predictions of 2022 with one about the music streaming industry. In brief, it revolves around artists in the future distributing music directly to listeners through non-fungible tokens (NFTs) technology without intermediaries such as record labels and Spotify or Apple Music taking a cut. As the artists receive a 5% - 25% stake of the revenue from music streaming, the present industry model seemingly favors the intermediaries more than the ones composing the content, why the industry may be ready for a transformation towards a fairer revenue distribution.
Will Tidal adopt decentralization?
With a parent company deeply focused on Bitcoin, the question is whether Block eventually wants Tidal to adapt a more decentralized framework, something in line with our Outrageous Prediction, where it settles artists directly in real-time on-chain without the need of other intermediaries such as labels. While this is purely speculation, though, there are some factors speaking for decentralizing Tidal.
Tidal has for years struggled to compete against Spotify and Apple Music. While Spotify and Apple Music continue to grow, Tidal seems to stagnate. However, some of the largest artists have publicly expressed their dissatisfaction with the revenue distribution of music streaming. For instance, most of Taylor Swift’s music was not to be found on Spotify between 2014 to 2017 due to her dissatisfaction with her earnings from Spotify.
By leveraging NFT technology to pay significantly more to artists, Tidal might be able to create renewed dissatisfaction with the legacy music streaming platforms to an extent, where well-known artists pull their music off the other platforms, demanding to be paid more fairly. This will arguably put the other streaming platforms under severe pressure, since consumers will move to the platform having the best music library. As Tidal is still minority-owned by great names such as Beyoncé, Calvin Harris, Kanye West, Rihanna, and JAY-Z, Tidal might have the required support from well-known artists to follow such as plan.
Although Tidal might have the support of great artists, the latter is presumably tied up in record labels contracts in many years to come, meaning they cannot release music on-chain directly to a streaming platform without the contracts expiring first, which will make the transformation significantly more protracted.
Bitcoin is questionable
It is not only the contracts, which are a drawback for Tidal to perchance embrace decentralization. The next drawback relates to Jack Dorsey’s belief. Dorsey is an extreme Bitcoin advocate to the degree, that some would reasonably call him a Bitcoin maximalist. Primarily because of Dorsey, Block focuses on no other cryptocurrency including Ethereum (ETHUSD) than Bitcoin.
The challenge with the strict focus on Bitcoin is that Bitcoin lacks the option for developers to make tokens and smart contracts on its network, such as Ethereum, used in decentralized applications and NFTs. Hence, with Bitcoin’s current technological capacity, it is not possible to make the aforesaid decentralized framework for music streaming. If Tidal de facto wants to execute on decentralization, they either need to embrace another cryptocurrency such as Ethereum or wait until Bitcoin perchance broadly supports tokens and smart contracts on its network. Although Jack Dorsey has released a white paper for a decentralized exchange on Bitcoin, it will presumably take numerous years before Bitcoin supports a proper technological framework for music NFTs to materialize on Bitcoin, if at all. Meantime, Ethereum and other cryptocurrencies are enhancing their lead in smart contracts, NFTs, and scalability, effectively making it tougher for Bitcoin to possibly catch up. As it is extremely unlikely for Tidal to embrace a distinct cryptocurrency such as Ethereum, it is questionable for the foreseeable future whether Tidal is to adapt a decentralized framework, but it is interesting to keep an eye on it.