At the time, the company was planning to launch the new service later this year. Without major label support, a streaming service can not offer proper content to keep users interested.
Universal, Sony and independent rights group Merlin are believed to be in discussions with YouTube but are yet to sign an agreement.
Google's worldwide music boss Lyor Cohen has previously spoken of the possibilities of bringing together Google Play Music's paid service with elements of YouTube.
According to a Bloomberg report, it appears that YouTube will be the surviving brand, with "much of the staff for Google Play Music" folded into the YouTube Music team earlier this year. YouTube has reached out to artists to seek their help in promoting the new service, one of the people said.
According to Bloomberg, the new service is planned to arrive in March and is now being referred to internally as Remix.
YouTube must overcome several hurdles to meet a March target. Vevo, owned by Universal and Sony, distributes music videos for their acts.
The one major advantage YouTube could have over its rivals is a huge catalog of video content to complement its music library.
YouTube hired former Warner Music executive Lyor Cohen a year ago to help oversee its music operations and serve as a liaison to the record business.
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