YouTube Music on Wear OS now works the way you'd expect. As The Verge notes, Google's music service now streams directly from its Wear OS app, whether you're on LTE or WiFi. You'll need to pair with an Android phone for full functionality (cellular streaming isn't an option for iPhone users), and a Premium subscription is necessary regardless of platform. If you meet those criteria, though, you can leave your phone at home knowing you'll still have access to all your tunes.
The upgrade also lets you add a YouTube Music tile for quick access to the browse section or your most recently played playlist. If you do need offline listening, Smart Downloads will automatically refresh your on-watch library whenever you're connected to WiFi. The streaming upgrade should finish rolling out this week.
First-party music streaming on Wear OS has been problematic, to put it mildly. Google Play Music was available on the platform, but the app didn't carry over when the company shut down the service in 2020 and transitioned to the YouTube offering. YouTube Music came to Wear OS (with offline-only playback) in summer 2021, but it was initially restricted to the Galaxy Watch 4 and didn't come to Wear OS 2 devices until September that year. You've had to turn to Spotify and other third-party services for streaming, and in some cases it wasn't an option at all.
There's plenty of pressure to add streaming, though. Google is releasing the Pixel Watch this fall with optional LTE, and it wouldn't look good if you couldn't stream the company's music service on its official smartwatch. The improved YouTube Music app should ensure a consistent experience when the Pixel wristwear arrives, at least if you're determined to use an all-Google setup.