He set out to save the music industry from the economics of streaming, and make himself a fortune in the process. So far, Jay Z is doing neither
May 28, 2015
by Devin Leonard
Like many rappers, Jay Z writes songs that have a paranoid streak. He lashes out against conservative cable news anchors, overzealous cops, lazy music critics, and less talented lyricists, all of whom, he insists, are out to get him because he’s famous. On May 16, Jay Z uncorked one of these bilious anthems, Say Hello, from his 10th studio album, American Gangster, at an exclusive performance for people who’ve signed up for Tidal, his subscription-only streaming-music service. Stalking the stage at New York’s Terminal 5, Jay Z addressed critics of his new venture, who have savaged it as tone-deaf, unimpressive, and—perhaps most wounding for a celebrity who famously boasted “I’m a business, man”—a lousy investment.
In a black baseball cap cocked to the side, several large gold chains, and a dark tunic with white stripes that looked like something a fashion-conscious crossing guard might wear, the mogul complained about how he’d been mischaracterized by his detractors. “They say I’m a bad guy,” he rapped. “That’s the picture they paint. They say a lot about me. Let me tell you what I ain’t.”
Jay Z unveiled Tidal at a press conference in late March, flanked by 15 of the biggest acts in the music business, including his wife, Beyoncé, Madonna, Nicki Minaj, Rihanna, Jack White, and Kanye West, all of whom were introduced as equity shareholders. Many seemed awkward and unprepared. Another owner, Alicia Keys, quoted Nietzsche and gushed about Tidal’s cultural significance: “We’re gathered … with one voice, in unity, in the hopes that today will be another one of those moments in time, a moment that will forever change the course of music history.” There was a lot of utopian rhetoric about restoring the value of music in the digital age. Less time was spent on new features, technology, or other reasons for listeners to try—and pay for—a Tidal subscription.
The backlash was immediate. Tidal’s detractors weren’t just the predictably vexatious music bloggers, who described the service as little more than a vehicle for musical plutocrats to line their pockets. The haters also included some of Jay Z’s peers. “They totally blew it by bringing out a bunch of millionaires and billionaires and propping them up onstage and then having them all complain about not being paid,” said Ben Gibbard, lead singer of the indie rock group Death Cab for Cutie. The habitually caustic Noel Gallagher of Oasis told Rolling Stone, “Do these people think they are the f---in’ Avengers? They are going to save the f---in’ [world]?” In late May Tidal hovered at No. 9 on the iTunes list of top-grossing music apps, trailing Slacker Radio.
At Terminal 5, Jay Z’s backup band halted in the middle of Say Hello to let him freestyle. He laid out the case for Tidal and skewered his competitors in verse: “So I’m the bad guy now, I hear, because I won’t go with the flow?” He said Apple executive Jimmy Iovine had offered him “a safety net,” presumably in the form of a payment for endorsing the company’s forthcoming streaming-music service, and that Google had “dangled around a crazy check.” (Apple and Google declined to comment.) Jay Z dissed “middlemen,” griping that YouTube paid him “a tenth” of what he deserved. “You know n----s died for equal pay, right? You know when I work, I ain’t your slave, right?” Jay Z even drew parallels between his situation and the police killings of young black men such as Michael Brown and Freddie Gray.
Until now, Jay Z, whose real name is Shawn Carter, has had an almost unbroken record of success. A hip-hop Horatio Alger character, he rose from the bleak poverty of Brooklyn’s Marcy public housing projects to become one of the world’s most successful musical artists. He’s sold 34 million albums in the U.S. alone, according to Nielsen Music. Billboard estimates he made $22 million last year from musical activities. Apart from his artistic talent, Jay Z also aspires to be one of the world’s great businessmen. “I affiliate with Billy Gates, that’s my peer,” he once rapped. And: “You looking at the black Warren Buffett.”
A masterful extender of his own brand, Jay Z, whose net worth has been estimated at $520 million by Forbes, has co-founded a successful record company (Roc-A-Fella), clothing line (Rocawear), nightclub chain (the 40/40 Club), and management company (Roc Nation). He sprinkles his verses with boasts about products he’s designed (Hublot watches and Reebok S. Carter sneakers) and acquired (Armand de Brignac Champagne). “He’s taken the equity that he built as Jay Z and successfully abstracted it to a lifestyle brand,” says Jeff Kempler, a former senior vice president at the Island Def Jam label group and a member of Roc-A-Fella’s board in the early 2000s.
Tidal is Jay Z’s most ambitious venture yet—an effort to profit in an arena that’s thwarted not only other musicians but startups and venture capitalists, too. Many artists are unhappy with the economics of streaming, notably Taylor Swift, who pulled her albums from Spotify last November. Jay Z wants to do better on two levels. Tidal pays record labels and music publishers a higher royalty—75 percent of revenue, vs. Spotify’s 70 percent, boosting the value of music on the Internet, including his own. And as a large shareholder, he could sell off his stake at a profit if outside investors give Tidal a valuation approaching those of other digital-music platforms such as Pandora and Spotify.
Another possibility is that Jay Z, who declined to speak to Bloomberg Businessweek, will lose his entire investment in Aspiro, Tidal’s Norwegian parent company, which he purchased in March for $56 million. In streaming, he has formidable rivals. Spotify, the 9-year-old market leader, is valued at $8 billion, and it loses money. Three-quarters of its more than 60 million members use its free, ad-supported service rather than paying $9.99 for a monthly subscription. Smaller players such as Deezer and Rhapsody also lose money but have managed to stay afloat. Apple is expected to introduce its own product using Beats technology later this month at the same $9.99 subscription price—but the $757 billion company can afford to break even or even lose money on music as long as it sells more iPhones, iPads, and watches.
So what is Jay Z thinking? He turned 45 in December. The onetime street hustler is now a husband and a father and hobnobs with world leaders such as President Obama and Nicolas Sarkozy, the former president of France. Some say he has grander ambitions in middle age. “He’d like to be a billionaire,” says Rob Stone, co-founder of the Fader, a magazine that extensively covers the rap world. “He’s talked openly about that. But I think in his mind, it’s no longer just about how much money he’s making. It’s about his legacy and what the name Shawn Carter will mean after he’s gone.” He wants to save the music industry from the brutal economics of streaming—and make himself a fortune in the process. So far he’s doing neither.
The origin of Jay Z’s capitalist overdrive is hip-hop legend. He didn’t make his first record until he was 26 years old. Instead, he wrote in his 2010 book, Decoded, he became part of a successful drug-dealing crew when he was 13. Such tales aren’t just marketing. “Other guys in this rap world may have sold drugs, but they weren’t doing it nowhere near on the level of what Jay Z was doing,” says Irv “Gotti” Lorenzo, one of his early music industry colleagues. “So his entrepreneurial skills and business skills were rooted from him being a drug dealer.”
A talented lyricist on the side, Jay Z spurned producers who tried to lure him into the studio until the terms were to his liking. “There was a stipulation early on,” says a friend from that time, DJ Clark Kent (whose real name is Rodolfo Franklin). “He wasn’t paying for studio time. He wasn’t paying for anything.” Kent finally managed to record Jay Z and whet his appetite for fame.
Jay Z and two budding entrepreneurs, Damon Dash and Kareem “Biggs” Burke, formed Roc-A-Fella Records in 1995, and put out his first album, Reasonable Doubt, the next year. “When I made my first album, it was my intention to make it my last,” Jay Z wrote in Decoded. “I threw everything I had into Reasonable Doubt, but then the plan was to move in to the corner office and run our label.”
His plan went awry when Reasonable Doubt became a hit, going on to sell 1.6 million copies in the U.S. Jay Z and his partners at Roc-A-Fella negotiated a lucrative joint-venture deal with Def Jam Recordings. Several of his subsequent albums disappointed hip-hop purists, but Jay Z offered no apology. “I dumb down for my audience and double my dollars,” he scoffed on a song. Jay Z kept close track of his income. “When his albums came out, he wanted to know how many records he sold in Guam,” says Bobby Israeli, a former manager of international marketing at Island Def Jam. “Usually artists just want to know about their big-ticket stuff. But his team wanted to know everything about everything.”
What's Wrong With Jay Z's Streaming Model for Tidal?
The Roc-A-Fella trio used their profits to start Rocawear, the hip-hop clothing company, in 1999. Their partners at Def Jam wanted a piece of it, but Jay Z didn’t want to share. When Rocawear soared, the bet paid off. “We were never able to penetrate the Chinese wall that he erected between the music business and all the other business,” Kempler says. “We would say, ‘Give us 10 percent of Rocawear,’ and we couldn’t get at it. He was absolutely brilliant in getting us to take on all of the venture capital risk on the music side. Then he built an incredibly robust [clothing] brand that was immune from the risks of the music business.”
Jay Z’s Roc-A-Fella partner Dash didn’t fare as well when he got into the digital-music business—foreshadowing today’s trouble. Seeing the success of Apple’s iPod, in 2004 he unveiled his own MP3 player called the Rocbox. “It was similar to Tidal,” says Shae Hong, who oversaw the venture as president of Roc Digital, a consumer electronics company connected to Roc-A-Fella. “The idea was to bring our artists to this device. The first version we launched had unique new tracks from Cam’ron and Beanie Sigel.” Hong says Jay Z supported the Rocbox but didn’t get involved. That turned out to be smart, because the iPod obliterated the Rocbox and the rest of its competitors.
A reluctant rapper in the first place, Jay Z started to show more interest in doing deals than making records. He announced plans for a final studio album, The Black Album, and turned its release in 2003 into a branding orgy. He urged his fans to buy black S. Carter Reebok sneakers and a special Nokia handset called the Black Phone that came with a card enabling users to download the album. Jay Z also treated his fans to a “final” tour that began with a celebratory Madison Square Garden concert that benefited his charity. The message was clear: The former drug dealer turned hip-hop star was going corporate. “He wanted to retire that moniker of just being known as a rapper,” says Que Gaskins, Reebok’s former global vice president for lifestyle marketing. “He wanted to reposition himself and have people see him as an entrepreneur, a mogul, and a real business leader.”
In 2004 he invested $50,000 in the Spotted Pig, a Manhattan restaurant he helped imbue with rakish glamour, hanging out there with Bono and Bill Clinton. Around the same time he bought a small piece of the New Jersey Nets, further establishing himself as a high-profile entrepreneur—not just another celebrity cashing endorsement checks, but a risk taker who could create value. Nets Chief Executive Officer Brett Yormark says Jay Z was instrumental in the team’s successful move to Brooklyn: “He really provided us with this hip, cool factor that we certainly needed, coming from New Jersey.” Both Warner Music and Universal competed to hire him as a label head, a beauty contest that he bragged about in the song Operation Corporate Takeover. He accepted the latter company’s offer, becoming CEO of Universal’s Def Jam.
Jay Z has acknowledged with some amusement that not everyone was sure he’d actually grace Def Jam’s offices with his presence when his contract began in January 2005. He surprised them. “He showed up every day,” says Jay Brown, who was then the label’s executive vice president. “When he’s in, he’s all in. He was involved in all the artist signings and the budgets.” Still, the new executive showed signs of restlessness. He interrupted his retirement to record Kingdom Come, a 2006 comeback album that even he concedes was one of his weakest efforts. Why did he bother? “Jay Z makes money being a businessman,” DJ Kent says. “But if Jay Z decides to stop making records, his influence is going to start to wane.”
Jay Z also must have watched enviously as two of his peers at Universal—Iovine, chairman of its Interscope Geffen A&M Records, and Dr. Dre, one of Iovine’s label heads—started a headphone company in 2006 with the parent company’s financial support. They called it Beats By Dr. Dre. Jay Z wanted to do something similar, but he hadn’t had their longevity with the company or their track records. He later complained to Rolling Stone that his bosses were shortsighted: “I told them, ‘How about this idea—instead of