Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube is the top streaming video site in the world. Yet its streaming music service, YouTube Music, is tiny relative to market leaders Spotify and Apple (NASDAQ:AAPL) Music.
YouTube believes that it can gain new subscribers by playing more ads for free listeners. Speaking to Bloomberg at South by Southwest, YouTube music chief Lyor Cohen declared that the service would "frustrate and seduce" users with more ads and exclusive features like videos and playlists. Cohen also declared that users weren't "going to be happy" if they got ads right after "jamming 'Stairway to Heaven'."
That's a confident statement for a market underdog to make. Let's examine Alphabet's music streaming efforts to see why Cohen might be overestimating YouTube's clout in the subscription market.
Alphabet's confusing music strategy
Alphabet's Google introduced Google Play Music in 2011. The free service lets users store their own digital tracks in the cloud and buy digital songs. It subsequently added curated streaming radio stations sponsored by ads. Free users could skip up to six songs per hour.
Google then added paid subscriptions at $10 per month, which gave users on-demand streaming for over 40 million songs, ad-free streams, unlimited skips, and offline music playback on mobile devices. Google Play Music initially looked like the company's main play against Spotify.
However, YouTube introduced YouTube Music, a separate playlist streaming app, in 2015. The app was designed to only stream the audio of music videos on YouTube. The free version is supported by ads.
YouTube launched YouTube Music alongside YouTube Red, a $10 per month version of YouTube which removed ads and added premium content and offline viewing options. A YouTube Red subscription also upgrades YouTube Music to the premium version, which removes ads and adds offline listening and background streaming options.
Google bundled Google Play Music, YouTube Music, and YouTube Red together in a $10 per month package last year. That simplified the pricing, but the brands and apps remain separate. Cohen reportedly plans to unify all the services onto a single platform later this year.
Google can't afford to confuse users
Google doesn't disclose how many users listen to music across its platforms. However, Billboard estimated that YouTube Red and Google Play Music had a combined user base of just seven million last July.
For comparison, Spotify Premium and Apple Music have 71 million and 36 million paid subscribers, respectively. Both services also cost $10 per month. Considering that both Spotify and Apple Music are available across multiple platforms, Google faces a tough uphill battle in "frustrating and seducing" its free listeners into upgrading to paid subscriptions.
Paid subscriptions can more easily offset high record company royalties and hosting expenses than an ad-based model, which generates lower revenues per user. That's why Pandora Media, which has nearly 75 million listeners but only 5.5 million paid subscribers, remains deeply unprofitable.
Bloomberg also notes that ad-supported services generated less than 10% of all recorded music revenues in the US during the first half of 2017. Yet Cohen claims that ad revenues will remain a major pillar of growth for YouTube Music, and that "everyone is drunk on the growth of subscription" numbers.
Cohen likely believes that displaying more ads to YouTube users is a win-win situation for the company. More ads generate more revenues, and might convert "frustrated" listeners into paid subscribers. But there's another option -- frustrated users might simply sign up for Spotify and Apple Music instead.
Symptoms of larger problems
YouTube Music won't be a "make or break" service for Google. But the fragmentation of its music ecosystem is similar to the confusing way it approaches other high-growth markets, like social media, e-commerce, and mobile payments.
Google tends to launch new services, fail to promote them, then introduce similar services which partly overlap the previous services. That impatient strategy compares poorly to Apple's focused shots at the music market -- first with iTunes in 2001 and then Apple Music in 2015. There's far less confusion between those two platforms.
I'm not saying Cohen can't turn YouTube Music into a viable competitor for Apple Music or Spotify. But Google often trips over its own feet, and the promotion of subscription-based services is still a relatively new concept for a company that generates most of its revenues from free ad-supported services.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.