We noted last week in our report on the first music industry profit in more than a decade that Google Inc. (NASDAQ: GOOG) was believed to be negotiating with music industry players to license rights to a streaming music service. The negotiations must be going well.

Fortune magazine reports exclusively today that it has been briefed on Google’s streaming music service by “sources in the record industry and at Google.” The streaming service, which would follow the subscription model used by privately held Spotify, would come under Google’s YouTube division and supplement the company’s digital music locker service currently available on Google Play. The subscription service is expected to launch later this year.

It was probably only a matter of time until this happened. YouTube now streams ad-supported music videos under agreements with the music industry and shares the revenue with the record companies. Privately held Warner Music Group now generates about 25% of its digital revenues from streaming according to Fortune.

Last year, digital revenues accounted for $5.6 billion of the music industry’s total revenue of $16.5 billion. Licensed subscription services such as Spotify and Rhapsody accounted for about 10% of digital revenues.

YouTube’s clout could have a major impact on subscriber streaming services and may have an impact on the so-called freemium radio services of Pandora Media Inc. (NYSE: P), which recently capped its free, ad-supported listening hours at 40 a month. Spotify offers subscribers the capability to listen to any of the millions of songs on thousands of albums and CDs in its catalog by adding it to a playlist. The company also offers a streaming radio service similar to Pandora’s.

Spotify’s problem, one it shares with Pandora, is the high licensing fees which can eat up 80% or more of revenues. Google has much deeper pockets than either of these competitors, plus it already has proven that its YouTube service can make money for record companies. Figuring out new ways to monetize listeners’ appetite for music and how to pay for it is Google’s biggest advantage here. Remember, the music industry’s first concern is money. Music ranks no higher than second.

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