Taylor Swift fans looking for a streaming fix from the singer after she removed her music from Spotify might be turning to YouTube this week. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is finally launching its long-anticipated YouTube subscription music streaming service, YouTube Music Key, and it has several of Swift's albums (but not the new one).
YouTube is already the most popular music streaming service in the world, with 440 million users viewing a music video at least once a month and 70 million streaming music daily. Now, YouTube has partnered with all the major labels and hundreds of indie labels to provide even more music content for those voracious music listeners.
The free tier
Spotify, Pandora, and Music Key all have ad-supported free tiers. But while Pandora is slow to increase the sell-through of its ad inventory and increase its ad load, YouTube already generates billions in advertising revenue for Google.
Google's targeting capabilities and its robust ad supply make it an attractive platform for artists and labels to monetize their music, which will make it easier for Google to keep artists -- like Taylor Swift -- from ditching the service. It also means Google could actually make a profit from free streaming because of its advertising capabilities and a product that is already at scale.
YouTube isn't likely to take away business from Spotify, Pandora, or Beats. Music Key, while still in beta, lacks the social features of Spotify, and its recommendations are more algorithmic than the curated features in Spotify and Beats Music or the Music Genome approach of Pandora.
Additionally, its features lack the depth of Spotify and Beats Music. Google has the capabilities to improve its features, though, with in-house technology and its recent purchase of Songza.
What the free tier of Music Key does for YouTube, though, is keep people that already use YouTube as a music streaming service on the website longer. Essentially, YouTube just made a deal that adds millions of pieces of content that it knows many users will want to "watch."
The paid tier
While adding a significant amount of new content is a great way for YouTube to keep a large portion of its audience engaged, the paid tier is really where the company has an opportunity to produce incremental revenue. Billboard reports that the YouTube Music Key service is set to cost $9.99 per month when it is released publicly. Ten dollars per month will more than cover the lost ad revenue and extra music licensing fees.
According to a survey from MIDiA Research, 7% of YouTube users would pay for a service that removed ads from music videos and offered a few extras. There was no price point in the survey, and $10 per month is probably higher than most want to pay. Still, if YouTube can convert just 20% of its daily music streamers, it will have more paid subscribers than Spotify. By comparison, 25% of Spotify's monthly users pay for premium features.
Although YouTube lacks the features and curated playlists of competitors such as Spotify and Beats, it compensates with content. YouTube has a lot of exclusive content, including cover songs and remixes. It is also one of the only major competitors to offer both music videos and audio streams. This additional content is bound to attract a certain audience.
Taking share of a growing market
YouTube Music Key is certainly a competitive product despite lacking the features of Spotify, Beats, and Pandora. In the first half of 2014, on-demand streaming grew 42%, so YouTube doesn't have to convert Spotify or Pandora users to carve out significant market share.
Of course, YouTube is starting at a deficit in paid subscribers to established players like Spotify, Pandora, and even Beats Music. But Google has the perfect launching pad for a paid service in YouTube itself. Its huge audience and ad-supported nature will allow YouTube to advertise its paid tier.
Most competitors don't advertise their products, instead relying on word of mouth. Pandora, in light of slower listener growth, is considering consumer-facing promotion, but Beats Music's expensive efforts didn't translate into strong subscriber uptake. YouTube offers a low-risk platform to advertise to a targeted audience, and could help grow paid subscribers quickly for Google.
The overall number of paid music subscribers is growing almost as quickly as the free streaming market. Last year, 28 million people paid for a music subscription, and subscription revenue grew 51%. The number of subscribers could more than triple within five years, creating an industry worth more than $10 billion. That's a big opportunity, even for Google.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.