Pay for YouTube? Challenges Ahead for Google's Next Music Subscription Service

Ever since news broke in October that YouTube was planning a subscription service, people have been asking how YouTube would get people to pay to watch music videos. It's more than a fair question. For over nine years, YouTube has conditioned people around the world to watch music videos without the expectation of payment.

It turns out people were asking the wrong question. Given the details in a recent post on the Android Police blog, the question appears to be if Google can convert YouTube viewers into subscribers to a paid, audio-only, YouTube-branded subscription service.

According to the report, Google will launch a YouTube-based, audio-only subscription service called YouTube Music Key. The service is expected to have standard features of an on-demand music service: a $9.99 per month price, offline listening and no advertisements. So it's a typical music service inside the YouTube video platform. In addition, the report says Google will rebrand Google Play Music All Access, its current music subscription service, as Google Play Music Key.

YouTube Music Key's success will depend on its ability to convert non-paying YouTube viewers into paying subscribers. What conversion rate will YouTube Music Key achieve? Let's consider the conversion rates of two of the leading music streaming services, Spotify and Pandora.

Spotify had about 8 million paying subscribers and about 40 million active users in May, giving it a conversion rate of 20 percent. (These are global figures.) In other words, Spotify has converted 20 percent of its monthly visitors into paying subscribers.

Pandora had 75.3 million active users and about 3.3 million subscribers in March, giving it a conversion rate of about 4.4 percent. (These figures cover mostly the United States. Pandora also operates in Australia and New Zealand.) The company has not updated its subscriber figure in subsequent earnings or news releases.

Streaming services calculate conversion rate the same way: subscribers divided by active users. In the case of Spotify, if you change the denominator to registered users, an unknown number that is certainly larger than 40 million, the conversion rate would be less than 20 percent. So, for example, if 100 million people have registered for Spotify, this different calculation says the conversion rate is just 8 percent. Using registered users in the denominator is a sensible approach because a number for active users excludes the people that registered but haven't become either regular users or paying customers. In other words, focusing on active users ignores many unconverted users. 

YouTube Music Key's advantage is the huge YouTube viewership of 153.3 million (in June, according to comScore). 

If we use the conversion rates of Pandora and Spotify as the two extremes, we can say YouTube Music Key could get between 6.7 million and 30.7 million subscribers in the United States. (The math: 153.3 million viewers x 4.4 percent conversion rate and 153.3 million viewers x 20 percent conversion rate.) It could take three or four years to get there (Spotify has been available in the United States for just over three years, but it has been available in its strongest markets for over 5 years).

The big question is what conversion rate to use for YouTube Music Key's estimate. Should it be the relatively low Pandora rate, or the much higher Spotify rate? Or will it fall somewhere in between?

One challenge facing YouTube Music Key is YouTube's ease of use. As an advertising-supported platform, YouTube attracts 153.3 million Americans per month. It works quite well as an advertising-supported service. People can watch videos -- without paying -- on PCs, smartphone apps, mobile apps and, via Google's Chromecast, television sets. Subscription services like Spotify limit the features available to free users. For example, the fully functional mobile app is available only to subscribers while free users must use a scaled-down version of the app. YouTube doesn't have this kind of restriction.

Another factor is Google's history with paid content. The company's music download sales have lagged behind Apple and Amazon in spite of having leading market shares in web browsers (31.8 percent, according to Adobe) and smartphone operating systems (51.9 percent, according to comSore). The broad reaches of YouTube, Android and Google Play are competitive advantages only to the extent Google can convince people to spend their money.

People often say YouTube is the new radio. That's a good rule of thumb. YouTube Music Key could have the conversion rate of Internet radio service Pandora rather than subscription service Spotify. If YouTube matches Pandora's 4.4-percent conversion rate, it will have 6.7 million subscribers paying $9.99 per month. That's $804 million in annual revenue -- in the United States alone. And that would be more than twice the 3 million subscribers Spotify currently has in the United States. A 20-percent conversion rate would be amazing, but a lower conversion rate is a safer bet.