Sprint's $200 Million Investment in Tidal Is Bizarre and Probably a Waste of Money

By Evan Niu, CFA Markets Fool.com

Image source: Sprint.

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Not one to be left out of the content party, wireless carrier Sprint (NYSE: S) announced yesterday that it had invested in Tidal, the music and music video streaming platform owned by Jay Z. Sprint will now own a third of the company, a stake that it reportedly paid a hefty $200 million for, and CEO Marcelo Claure will also join Tidal's board of directors. The idea is to provide Sprint customers with exclusive content that's only available on Tidal. In early 2015, Sprint had discussions with Tidal about a potential partnership, but did not make an investment at that time.

This deal is bizarre for a number of reasons.

More questions than answers

The announcement raises some immediate questions that Sprint and Tidal have yet to answer.

Will Tidal be bundled with Sprint service plans? It sounds as if customers still have to subscribe to Tidal separately (from the press release: "The formidable pairing of Sprint and Tidal will grow customers on both platforms by offering exclusive access for customers who subscribe to Tidal."). If customers have to subscribe to Tidal separately anyway, which they can do regardless of being a Sprint customer or not, that's asking customers to pay extra at best, or switch from a competing music service they already subscribe to at worst.

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Will Tidal streaming count against data caps? Rival carriers have implemented controversial ways for streaming content to be exempt from data caps. For T-Mobile, that includes its Binge On and Music Freedom program, where participating video and music streaming services stream and don't count against data caps (video is downscaled). For AT&T, that includes its zero-rated DIRECTV Now service, and the company will presumably pursue a similar strategy if its acquisition of Time Warner goes through. Not that music is particularly bandwidth intensive, but zero-rating Tidal for Sprint customers would be a selling point.

Will Sprint eventually buy the rest? There have been numerous reports over the past year or so that Jay Z has been trying to unload Tidal, which he paid a little over $50 million for back in 2015. Tidal has been struggling financially, losing an estimated $28 million in 2015. Pure-play streaming businesses face intense competition and often hemorrhage cash due to the nature of the business, so those reports of Jay Z wanting out are unsurprising.

Did Sprint overpay? Based on the reported $200 million figure, that pegs Tidal's value at $600 million. That's a huge jump for a company that was worth just $50 million in 2015. Furthermore, the news comes just days after reports that Tidal may have been padding its subscriber numbers. The company said in March 2016 that it had 3 million subscribers, but leaked internal documents suggested it had only 1.2 million activated accounts and 850,000 paid subscribers.

Sprint says it will provide more details regarding "exclusive offers and upcoming promotions" in the near future, which should presumably answer some of these questions. But fundamentally, owning all or part of a streaming music service is unlikely to serve as a meaningful differentiator for the wireless business. Ma Bell is betting an absurd amount of money that video streaming can do the trick, which remains to be seen.

Ultimately, pushing into music streaming seems misguided and will likely prove to be a financial mistake, given the limited benefits and substantial costs combined with the distinct possibility that Sprint is overpaying and/or may end up investing even more into Tidal.

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Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool recommends Time Warner and T-Mobile US. The Motley Fool has a disclosure policy.