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YouTube Music Key: The New Spotify?

Last Wednesday, YouTube revealed YouTube Music Key, a “long-awaited upgrade of its music offerings that will include higher-quality audio for most songs”. At the price of $10 a month, users will not only receive higher quality music, but removal of YouTube’s numerous ads, the use of Google Play Music services, and offline viewing. Although YouTube is still offering its users a vast variety of free music, it hopes to upgrade by paying a “pittance in royalties”. By opting for paid content, YouTube endeavors to offer its artists “more opportunities to connect with fans and earn more revenues”, ultimately improving YouTube’s reputation in the music industry as a excellent site for marketing and sharing music.

Furthermore, the success of YouTube Music Key would prove highly beneficial to YouTube. In a time where the music industry is suffering a “steep decline in sales” of CDs and downloads, music industries depend heavily on their payoffs from streaming services. If YouTube charges for the subscriptions to YouTube Music Key, then there could be “greater royalties for artists and record companies”.

This new feature is available by invitation only, however, for it is still going through Google’s “beta testing”. In beta-testing, a small number of people will be allowed to use YouTube Music Key; the subscriptions will be free for the first six months and then it will cost $8 a month before it is released to the public next year at a price of $10 (same as Spotify and other streaming sites).

Essentially, the popularity of YouTube Music Key depends on an information cascade and the resulting network effects. If the small number of people rave about their experience with YouTube Music Key, more  people are inclined to purchase the subscription and use the new streaming program. As the number of subscribers accumulates and the popularity of the program soars due to potentially high reviews, this information cascade eventually affects the other people who have yet to subscribe (aka the majority of the consumers), causing them to be more open to the idea of subscribing. However, the price at which the people value YouTube Music Key needs to be greater than the price at which the program is offered ($10). That way, YouTube Music Key can surpass the first unstable equilibrium point z’ and allow a network effect to push more people to subscribe. Ideally, the fraction of people using the program will reach the second equilibrium point, where there is a high number of users. If YouTube’s streaming program is unable to pass the first unstable equilibrium point, the program will become less popular after the initial excitement of trying the program wears off. The main issue that YouTube Music Key will face is, well, the availability of free music from the original YouTube (and other sites). Because there is an large amount of free music provided for the people, some “music executives are skeptical about the number of paying customers YouTube will be able to sign up”.




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November 2014