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Storm Clouds Loom Over Jay Z’s Tidal Music

March 1, 2016, 7:18 PM UTC
Tidal Launch Event NYC #TIDALforALL
NEW YORK, NY - MARCH 30: Rihanna, Nicki Minaj, Madonna, Deadmau5 and Kanye West attend the Tidal launch event #TIDALforALL at Skylight at Moynihan Station on March 30, 2015 in New York City. (Photo by Kevin Mazur/Getty Images For Roc Nation)
Photograph by Kevin Mazur — Getty Images

The online music business has been a shark-infested pool almost from the moment the Internet hit the popular consciousness, so it’s not surprising that a new player like Tidal is suffering from growing pains. But at least some of what the service is going through raises questions not just about its core value—namely, that it’s run by musicians for musicians—but also about its long-term prospects as a competitive streaming business.

In the latest development, Tidal was hit earlier this week by a $5 million lawsuit filed by a group that claims the service hasn’t paid them the royalties they are owed. Yesh Music Publishing and John Emanuele of the group American Dollar say Tidal and Shawn Carter Enterprises (Tidal co-founder Jay Z’s given name is Shawn Carter) owe them unpaid royalties and are also guilty of copyright infringement.

This looks particularly bad for Tidal because, from the moment it debuted, the promise made by its founders—a group that includes Kanye West and Carter’s wife Beyonce—was that Tidal would be different from other services because it was run by artists. At one point, Jay Z promised that musicians would get 75% of the revenue from their music, much higher than what artists get from other streaming services. But the lawsuit claims that this isn’t the case at all:

Ironically, when Defendant Carter purchased the TIDAL Music Service in 2015, it claimed it would be the first streaming service to pay the artists. Different owner, same game.

Tidal released a statement on Monday in response to the lawsuit, saying it has paid all of the applicable royalties to Yesh Music and Emanuele. “TIDAL is up to date on all royalties for the rights to the music stated in [the claim] and they are misinformed as to who, if anyone, owes royalty payments to them,” the statement says. “TIDAL has the rights to the Master Recordings through its distributor Tunecore and have paid Tunecore in full for such exploitations.”

The Tidal statement suggests that some portion of the dispute may be a result of confusion over who has been paid for what. This isn’t uncommon in the music business, given the often arcane system of paying some fees to publishers, some to artists, some to distributors and some to owners of a “mechanical license” or limited right to reproduce—all of whom can be different entities. The Emanuele claim appears to be over the mechanical licenses, Tidal says, “which we are also up to date on payments [for] via Harry Fox Agency.”

Apple pulls the plug on Beats Music

The lawsuit isn’t the only storm cloud Tidal is facing, however. The company also confirmed on Tuesday that it has let go both its chief operating officer and its chief financial officer. According to Tidal, this is because the business is relocating its accounting and some of its back-office operations to New York from Oslo, Norway. But other senior executives have also departed recently, including the CEO and the marketing manager, and a senior VP in charge of artist relations.

It’s not uncommon for music services to have a high turnover rate, especially among front line staff. And some of the senior level departures aren’t surprising either, given the fact that Tidal has effectively changed hands and is no longer a Swedish startup but a New York-based business. But regardless, the sheer volume of people leaving doesn’t inspire confidence. The young service has already had three chief executive officers since its launch.

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As a backdrop to all of the turmoil, there are also rumors that Samsung is considering a bid to acquire Tidal as a way of competing with Apple. According to a recent report in the New York Post, Samsung has re-started talks with Tidal about an acquisition, something the two companies have reportedly discussed before. Samsung has also partnered with the music service in a variety of ways including the $28-million sponsorship of singer Rihanna’s new album and tour (she is a partner in Tidal).

In the long run, an acquisition might be in the cards for Tidal regardless of whether it’s Samsung or Google or another that wants to beef up its streaming business. As the bankruptcy of Rdio and the ongoing financial weakness at Pandora have shown, the online-music industry has become a place where only those with deep pockets are likely to survive.