What Jay Z's Tidal Means for the Freemium vs. Premium Debate

Tidal introduced two subscription tiers — a $9.99 standard-definition tier and a $19.99 hi-fi tier — with no free options.

Jay Z’s Tidal is a lot of things: a star-studded streaming service with 17 of music’s biggest names as key stakeholders; an ambitious new player in a still-nascent but increasingly competitive marketplace that includes iTunes, Beats, Spotify, Pandora, Rdio and Deezer; and a $56.2 million bet on the future of high-definition “lossless” audio, a technology in which fellow musician Neil Young is also heavily invested.

But it’s also the latest step in moving the music industry toward its “Netflix” inflection point: converting consumers who are used to streaming content for free to pay a monthly fee. As Universal Music chairman Lucian Grainge said at the Code/Media Conference in February, “We want to accelerate paid subscriptions and raise income and compensation for everyone … Ad-funded on demand will not sustain us or the entire ecosystem."

Reached by Billboard Monday (March 30), Grainge was supportive of Tidal's launch. “As a strong supporter of innovation and entrepreneurship in the streaming and subscription space, we welcome the new launch of Tidal. Led by the incomparable Jay Z, one of the most accomplished artists and music entrepreneurs of our generation, Tidal embodies the ascendance of artists’ voice in these services. Tidal seeks to make itself a destination for music fans by offering an holistic approach — providing a broader range of artist-related information and content. The entry of a new player in this space with a business model that will help to spur innovation and better experiences for fans — in turn, grows the ecosystem, nurturing talent and building repertoire."

Just how big that ecosystem is currently presents Tidal's biggest opportunity. Industry observers estimate that streaming services have a collective 40 million paying subscribers globally — that’s not enough to match even the 57.4 million subscribers who currently pay for one video service, Netflix. That number gets considerably smaller when you look at the U.S., which finished out 2014 with 7.7 million paid subscriptions, according to the RIAA, equating to roughly $800 million in digital music revenue.

So although the phrase “RIP Spotify” became a popular phrase on Twitter within the first few hours that Tidal-affiliated artists like Kanye West, Nicki Minaj, Madonna and Rihanna began turning their avatars blue, Tidal's battle will not solely be about competing against its competitors for market share. At the time of its relaunch, Tidal introduced two subscription tiers — a $9.99 standard-definition tier and a $19.99 hi-fi tier — with no free options.

Vania Schlogel, a former principal at private equity firm KKR, has been leading the new strategy for Tidal since becoming Roc Nation’s chief investment officer in December, and tells Billboard that a share grab “is not interesting” for Tidal’s future growth. “But if I look at a nascent marketplace where it can be grown, and people can understand how easy it is to get to that place, then success will come from people falling in love with this platform and feeling the realness of it."

Schlogel argues that consumer education on the accessibility of “offline streaming” is still required to drive higher conversion rates to subscription tiers, particularly in heavy commuter markets. “I was having a conversation with a young man who said, ‘I don’t use streaming because I live in New York and I can’t take my music with me.’ I said, ‘look at your favorite artists, check their songs and watch this: two clicks, it’s on a playlist and you can listen to it on the subway.'"

Still, some streaming-music executives argue that free or “freemium” (free on-demand) tiers only help accelerate paid conversion. One executive familiar with Spotify’s numbers told Billboard in January that 80 percent of its 15 million subscribers came from the company’s free mobile service, launched in 2013 after a 2011 attempt by the record labels to limit the number of free hours listeners could consume.

“Taylor Swift said it best: free on-demand is an experiment,” says Rdio CEO Anthony Bay, who in September rolled out a free DMCA-compliant radio service to establish Rdio as a “Pandora meets Spotify” hybrid. “If enough people get it for free, then people will subscribe. But if iTunes said tomorrow, ‘You can download for free, but every three songs you’re gonna hear an ad’ — Is that going to encourage more people to pay 99-cents? No. That’s all that free on-demand is, it’s an ad-supported version of what’s already there."

And though Swift has has been advocating for releasing new music only via paid services, one executive argues, “If you want subscriptions, why on earth would you cut off the pool that you’re getting subscriptions from? If Spotify Free ended, 86 percent would go to other free services, only 6 percent would convert. There’s no reason to expect they would stick around."

Charles Caldas, CEO of indie-label consortium Merlin, counters a service like YouTube, which only has a free, ad-supported tier available widely to consumers, is driving “high-consumption, low-value” music consumption that further de-emphasizes paid content. And YouTube, in turn, is prepping a wider rollout of subscription service Music Key later this year, with the company’s head of artist and label relations Vivian Lewit telling Billboard last week, “While we continue to grow our ad-supported partner revenue 50 percent year over year, we recognize the need to augment that with additional streams for income coming from individual fans and people that consume music. It's about providing more options."

Another type of subscription service just debuted last week – Vessel, a new premium-video venture from former Hulu CEO Jason Kilar. As part of the company’s licensing agreement with Warner Music, new music videos from Blake Shelton, Hunter Hayes and Galantis will debut exclusively on the service for 72 hours before syndicating to other platforms like YouTube. Up next: working with Universal Music Group artists like Kiesza, who will debut her next music clip on Vessel in the coming days.

Artists should be able to distribute their life’s work in a way that works for them,” Kilar says, “in the same way that TV and movies have evolved. If you look at movies, they started in the 1900s with just one window, which was the movie theater. Today, it’s a very sophisticated structure where it starts in the theater then it goes onto Amazon and other streaming services, and then home entertainment and DVD then TV channels like FX. All those channels work really hard to serve filmmakers so they’re able to work on the content and able to make a very good living. The music industry should be able to have that same structure."

Martin Bandier, chairman-CEO of Sony/ATV, the world’s largest music publisher (Swift, Pharrell and John Legend number among his many songwriters), says those options can’t come fast enough. “As far as we’re concerned, we would like to do with away the free services [in the U.S.]. It’s only outside of America that we don’t have a compulsory licenses — we have free and open negotiations — so we’re hoping that the record companies take a stronger position with respect to the free services. Taylor Swift left Spotify and has had tremendous success without it; she's sold over 9 million albums globally and is rapidly approaching 5 million in the U.S."

This article first appeared on Billboard.com.