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Alphabet's YouTube Defends Ad-Supported Music

Image source: YouTube.

For the longest time, the music industry hated streaming services. That was largely due to the prevalence of ad-supported services. Not only is ad revenue relatively modest in terms of what an average artist actually receives, but granting free access to consumers cheapens the value perception of music as a content category. It's a dangerous mentality and the expectation of free music if you endure a few ads does not bode well for the industry's economics.

As the market leader, Spotify has borne the brunt of these criticisms, and the music streamer often must defend itself when artists complain every few months about paltry payouts. The good news is that Spotify has done well at converting free subscribers to paid subscribers. As of September 2016, Spotify had 40 million paid subscribers out of over 100 million active users. Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube is now taking a stance in the debate.

Two ways to play

The dominant video streaming platform has now announced that it has paid out over $1 billion to the music industry over the past 12 months purely from advertising revenue. YouTube notes that the music industry is finally growing again, thanks mostly to the growth of music streaming services and paid subscriptions. Google hopes to participate there, too, with YouTube Red, a $10-per-month service that includes music, ad-free videos, and original content. The search giant has never disclosed official subscriber figures for YouTube Red.

But YouTube's underlying goal in sharing this data point is to emphasize that ad revenue can be a meaningful path to monetization that complements paid subscriptions. Shocker: World's largest advertising business thinks advertising revenue is just swell. YouTube believes that there's more to come, as online ad spending continues shifting away from outdated platforms like broadcast TV, radio, and print toward online services. The company even compares the music industry's future to the status quo of TV, where the industry is supported by both subscriptions and advertising (split about evenly).

Forget the bigger picture

However, sharing an aggregate number doesn't tell us a whole lot. For instance, Spotify says that it has paid out a cumulative total of $5 billion in royalties to content owners to date, but that hasn't stopped criticisms on an individual level. It's the details that will help determine viability from an artist's perspective, not the bigger-picture number.

Spotify's average payout per stream is in the range of $0.006 to $0.0084, depending on a wide range of factors.

Apple to the rescue?

In contrast, Apple (NASDAQ: AAPL) is eschewing an ad-supported model and only offers paid subscriptions for Apple Music. This represents enormous opportunity for the music industry, which highly prefers paid subscriptions over ad-supported services due to more sustainable economics. It's worth noting that paid subscriptions are precisely what's driving industry growth right now as ad-supported models fester, according to the RIAA.

Both models will coexist for the foreseeable future, but in no uncertain terms it's clear which model the music industry prefers. While the industry's ability to influence consumer preferences is limited, you can sure bet that it will do everything in its power to support the current shift toward paid subscriptions despite Google's data point.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.