YouTube's Music Key: How Much Could Its New Paid Service Pay Out?

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Will YouTube Music Key transform streaming revenues and take subscriptions into the mainstream? Or will it fail to capitalize on YouTube massive global footprint? It all depends on YouTube's ability to entice people to pay.

With YouTube's announcement on Wednesday (Nov. 12) of Music Key, a premium service for YouTube users, comes the usual questions about its prospects. Given the immense popularity of the ad-supported, free version of YouTube, high expectations are to be expected. If YouTube will convert free listeners into paying customers at a decent rate, the number of premium-level royalties could be astounding. At the very least, YouTube has a good opportunity to better monetize its billions of streams of music content.

The billion-dollar question is whether people will pay for a video streaming service they have for years enjoyed for free. When it comes to music streaming in the U.K., one of three countries where Music Key will be available, an April survey by Ipsos MORI found free users outnumbered paying users by a six-to-one margin.

What conversion rate can be expected from YouTube? Forecasting an outcome for such a unique service is difficult. But using conversion rates of comparable services is a sensible method, and Pandora is the best parallel. Like YouTube, Pandora is a mainstream Internet product with a large audience. At the end of September, Pandora had 76.5 million active users and 3.53 million subscribers, according to the company's latest earnings release, a conversion rate of 4.6 percent.

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A less flattering way to calculate the user-to-subscriber conversion rate is to consider the number of people that have ever used a service. This metric approximates the number of people that ever have listened to music on Pandora and those who chose to become subscribers. Pandora has about 250 million registered users, according to an August investor presentation, giving it an alternate conversion rate of just 1.4 percent.

Looking at Spotify vs. YouTube is a bit more apple-to-orange, but for the sake of example, let's take a look. Spotify has 12.5 million subscribers and 50 million active users, a 25 percent conversion rate. Since the company doesn't reveal how many users have registered, the conversion rate based on registered users cannot be calculated.

Data from Midia Research suggests Pandora's low conversion is more likely than Spotify's (much) higher conversion rate. A survey of 1,000 consumers in the U.K. revealed that 7 percent of respondents would pay for a YouTube subscription service. But the ad-supported version works fine for many people. A quarter of respondents said they will never pay for a subscription service because YouTube provides all they music they need.

Now let's look at revenue. Based on Pandora's conversion rates, YouTube could reasonably be expected to convert between 1.4 percent and 4.6 percent of its users into paying customers. Applying this rage of outcomes, and assuming 138 million people age 12 and over stream YouTube music videos every month (an estimate based on Statistica and US Census figures), YouTube would convert between 1.6 million and 5.2 million of its U.S. viewers. (Exactly how long it would take Music Key to attain that subscription numbers is debatable.) At $9.99 per month, and a 70/30 split between rights owners and YouTube, rights owners would get between $133 million and $436 million annually (those are gross figures that don't account for the resulting loss in advertising revenue). Again, these are U.S. numbers, so global users and revenue would naturally be higher.

In the (far) less likely Spotify scenario, with a 25-percent conversion rate, YouTube would convert 28.1 million of its U.S. users and generate $2.36 billion in annual revenue for U.S. rights holders (again, a gross figure). It should be stressed that a 25-percent conversion rate is the high end of possible outcomes for Music Key. Given its mainstream appeal and high number of infrequent users -- 53 percent of users stream a song a few times a month or less, according to Midia -- Music Key's conversion rate is likely to be closer that of Pandora.

Revenue figures are purposely straightforward and ignore some pricing nuances. For example, YouTube is offering early Music Key subscribers a free, 6-month trial followed by a promotional price of $7.99 per month. The standard $9.99-per-month price could be effectively lowered in the future if YouTube introduced the sort of family pricing plans offered by some of its competitors. In the end, the average monthly price paid by a subscriber will be less than $9.99.

To be sure, Music Key has tons of potential. YouTube's strength is its global popularity and ease of use. The trick is creating enough extra value -- above and beyond what YouTube already provides -- to entice people to subscribe. Music Key allows subscribers to listen offline, listen with the mobile app in the background and use Google Play Music, Google's audio-based subscription service (Play Music subscribers get access to Music Key).


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