Madonna, James Blunt and Estelle began disappearing from YouTube yesterday in a row that raises uncomfortable questions about the viability of the video-sharing website’s business.

YouTube is the world’s third-most visited website, after Yahoo! and its parent company Google, attracting more than 100 million American visitors in October, but it has struggled to convert its vast audience into cash.

Warner Music, the Material Girl’s record company in her career to date, asked for its content to be removed as it demands better royalty and advertising rates – but its most telling blow was the revelation that it generated significantly less than 1 per cent of its annual digital revenue from YouTube.

That puts the figure Warner Music earned at well below $6 million (£4 million) in the year to September 30. The modest total is doubly significant because so much of YouTube’s most popular content is music-related, reflecting its newfound status as the replacement to MTV.

Six out of the ten most popular clips on YouTube are music videos. Five out of the ten most popular YouTube “channels” are music-related. Its most successful content partner is Universal Music, whose videos have been viewed more than three billion times.

Warner Music’s complaint is that YouTube was not paying enough. “We simply cannot accept terms that fail to appropriately and fairly compensate recording artists, songwriters, labels and publishers for the value they provide,” a spokesman said.

Negotiations between the two were characterised as tortuous, in part because YouTube cited the costs of hosting and streaming video as reasons why it could not pay more, hinting, again, at a lack of income.

Adding to the significance of the row is the fact that Warner Music was the first music major to sign a deal with YouTube, ahead of its acquisition by Google and at a time when the video-sharing website was at risk of being sued for copyright violation.

YouTube was bought for $1.65 billion and Warner, which had taken a share-holding, received a small percentage. Google refuses to release YouTube figures, fuelling the speculation that it is not proud of them.

This year GigaOm, a technology blog, estimated that YouTube would generate $100 million this year. Chris Albrecht, who writes GigaOm’s New-TeeVee blog, estimates that YouTube will turn over about $200 million this year. “It may be significant that Warner’s figure covers the year to September, before YouTube really began introducing more advertising. YouTube has been experimenting with preroll [adverts before a clip], which at one stage it was absolutely opposed to.”

YouTube believes that it is being judged harshly. A spokesman said: “YouTube is only three years old but we’ve come a long way.” He added that the company was having some success introducing its InVideo adverts, which appear transparently across the bottom of a clip.

Warner Music’s case is also weakened by some of its competitors, two of which, Universal and Sony, are thought to be generating considerably more cash. Universal indicates that its revenues run into the tens of millions, as it expects to make about $100 million from various video websites, much of it from YouTube.

One source familiar with the negotiations said: “Warner did this to themselves. They did an early deal and got a lower royalty rate; we heard that YouTube were prepared to give them a higher rate but not the advance they wanted, so the talks broke down.”

In response, Warner Music would indicate only that it was unhappy with the “overall economics” of the deal on offer from YouTube.

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