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How YouTube's Subscription Service Will Benefit Record Labels

Brand power and user numbers will affect the industry's move to the video giant

YouTube being used on a computer.
Tomohiro Ohsumi/Bloomberg via Getty Images
October 25, 2013 12:25 PM ET

YouTube's music-subscription service, which could launch as early as December, is about two things: big user numbers and monthly revenue. Spotify has 6 million paying customers, but a billion people view YouTube videos every month. "If YouTube has an opportunity to even get one-half or one-fourth or even one-sixteenth of the conversion rates that Spotify has, that's a tremendous business," says a source at a major record label. "Spotify doesn't have the marketing clout or user base that YouTube has, by not even a long shot."

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The service is likely to grow out of YouTube's mobile app, and will add, for a monthly fee, ad-free music, off-line listening, a Pandora-like service for customizing radio stations and the ability to hear music while texting or using apps. YouTube reps wouldn't give specifics: "We’re always working on new and better ways for people to enjoy YouTube content across all screens, and on giving partners more opportunities to reach their fans. However, we have nothing to announce at this time," a spokesperson said in a statement. But a source familiar with the service clarifies what the service will not be. "It's not putting a paywall in front of music. That would just not be cool on many levels," the source says. "And it's not Spotify-plus-video."

Record executives hope the new service improves on YouTube's listening experience. Although the online-video giant's ad revenue has grown lately into more regular royalty payments for pop stars, songwriters and labels, it's hard for YouTube fans to do simple things like listen to a full album or find an official video. Compared to Spotify, a label source says, "It takes a lot of effort by the user to organize the [YouTube] experience."

YouTube has been contemplating a subscription service for months -- to the point that its executives made content deals more than a year ago with major labels. It could work in tandem with Google Play Music All Access, owned by YouTube's parent company, thus giving Google a formidable download-and-streaming hybrid.

"The YouTube brand is more powerful in people's minds than Google Play at the moment," says Jeremie Varengo, a former Universal Music digital-music manager. "Maybe the YouTube brand will eat Google Play and build a massive service that would compete with iTunes and iTunes Radio, with a brand that would be as powerful as iTunes/Apple." The source familiar with the new service says: "It would be very, very silly to ask you to pay for one service and ask you to pay again for a second service. You can essentially bet that one will be the same as the other."

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Record executives have for years predicted subscription services would take over the business from iTunes-style downloads. That transition would make label employees happy -- they spent the last 10 years downsizing from highly profitable $15-18 CD sales to 99-cent track sales, and $10-a-month subscriptions are far more reliable income streams by comparison. "Recurring revenue is a phenomenal business model for everybody, if you can scale it wide enough," says a major-label source. "YouTube is a great opportunity to do it."

Streaming music has kicked in over the last year or two. For the first time since 1999, global recorded-music revenues have gone up, albeit at just 0.3 percent, according to the International Federation of the Phonographic Industry. And in the U.S., online track sales have been consistently down by 4 percent, according to Nielsen SoundScan -- a drop many attribute to the rise in free streaming. With YouTube's service likely on the way, and Beats by Dre's long-awaited "Project Daisy" service coming out possibly by early 2014, the market stands to get stronger. "Focusing on download numbers is focusing on a sliver of the pie," says the source. "Recurring revenue is a much healthier business. It's predictable. People are much more willing to invest."

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