Quick Take: YouTube’s Music Streaming Service Is A Defensive Hedge

YouTube has announced it is launching a paid subscription music service ­­‒ a move that many perceive as the service putting itself in direct competition with Apple, Spotify and Amazon.

However, despite YouTube being the largest streaming service by reach, this actually appears more of hedge against the real incoming threat for its ad-supported model: Facebook’s music offering. Having signed deals with all major labels and Merlin, Facebook is ready to launch a direct competitor to YouTube in monetising ad-supported music and music video. By sheer scale, Facebook will be a worthy adversary and this will no doubt have concerned those at YouTube. A subscription service is therefore a potential hedge against an impending challenge from Facebook for ad-dollars.

YouTube initially reacted by front-loading ads. As discussed earlier this year, front-loading ads is a dicey tactic. Frustrating consumers into upgrading to paid tiers typically only works when you are the only game in town, but consumers in 2018 have other options. MIDiA’s surveys indicate that around 69% of paid music subscribers (Spotify, Apple Music and Deezer) watch music videos on YouTube, meaning more than two thirds of YouTube’s music consumption audience have the option to stream directly from their core music account. This is especially problematic when you consider it is happening in regions (US, UK) with the strongest digital ad markets: for example, a video watched in the US generates more revenue than in Turkey. Therefore, pushing users away from ad monetised music videos back to their paid service will significantly impact ad revenue and thus diminish revenue for rights holders.

If you get them right, subscriptions are a better business (more predictable revenue and, unlike ads, have limited seasonality), but the market is beginning to get crowded. Few people subscribe to multiple services, and YouTube would also have to offer meaningful video content if it is to entice users away from Spotify.