The first option understandably lets you choose a photo from your computer, and it lets you then crop it to fit the thumbnail for the playlist. The background also refreshes when you change the image.
For many people, this feature is one of the most highly requested ones. It’s quite useful if you happen to not like AI-generated artwork, while the default, showing a 2×2 grid of albums in the playlist, is not very recognizable if you happen to have loads of playlists (like me, for example).
For now, it’s not clear whether this option will be available for the Liked Music playlist, as the AI generator also doesn’t work for that one. Also, the feature is not widely rolled out yet and we don’t have a timeframe for when it will be publicly available.
I personally believe that this feature is pretty much a must for any platform that lets you create your own playlists. I happen to listen to lots of different types of music and I probably have 20+ playlists, just for different moods or with different genres.
Setting my own picture to help find the playlist I want easily in the list of playlists is a Spotify feature I love, and that’s one of the reasons so far I’ve been sticking with Spotify as my music-streaming service. Maybe YouTube Music will get me to switch soon.