Music fan Paul Carloss was unhappy. At the start of the week, YouTube had begun to take down thousands of his favourite music videos in a row with songwriters over royalty payments. Because anyone can do anything they like on YouTube, where 15 hours of video is posted every minute, he uploaded his own musings on the turn of events.

The fallout with the Performing Rights Society (PRS) For Music, which has 60,000 members, including songwriters such as Duffy and Kate Nash, reminded him of the demise of Napster, an early music-sharing web service “from the days when the internet really was free” that was successfully prosecuted by music labels and turned into a paid-for website. “It looks like the same is going to happen to YouTube,” said Carloss, a founder member of the paranormal club Birmingham Investigators of the Unknown. “Very sad, really.”

Google-owned YouTube, which shows the weird and wonderful alongside the latest and most-watched television clips, would argue that such reports of its demise are greatly exaggerated.

Yet behind its undeniable show of strength against the PRS is a central weakness common to many internet companies that have come from nowhere in the space of five years: they haven’t worked out how to cash in on their soaring popularity.

YouTube accounted for 73% of all the time the British spent on video websites last month — or 899m minutes. The BBC’s iPlayer, in contrast, held only 6% of viewing, according to Nielsen Online. So it was no surprise two years ago that the PRS was ecstatic to strike a deal that delivered a lump sum to its members for the licensing of their songs. That agreement, which delivered roughly £5m a year in royalties, expired at the end of 2008 and was in the process of being renegotiated.

The PRS argued that the flat fee was outdated and should be replaced with a minimum per-stream charge, citing a rise in music-video views from 75m in the first quarter to 300m in the fourth. “That is a massive, massive increase,” said PRS boss Steve Porter, who thinks PRS is being made an example of before Google cuts more deals around the world. “We think this a global play, not a UK one.”

UK Music, the umbrella organisation for the industry, thinks Google is being “cynical and exploitative”. YouTube is willing to pay more but not prepared to lose money on every video shown.

“Getting to the right decision is about finding the right model so everyone can make money,” said Nikesh Arora, Google’s European president. “I can’t show content if a deal isn’t in place.” However, the company also has its supporters, who think both sides must work together.

“Unless you do that, all you are proving is that you can’t make money from legal digital services,” said Steve Purdham, chief executive of online music service We7.

However, the plight of the PRS, which has come under fire for demanding broadcast fees from hairdressers and mechanics who let their customers listen to the radio, may win favour elsewhere from a core of media companies that are worried that their copyright is repeatedly infringed.

A class action is crawling through the American courts headed by the English Football Premier League and involving a long list of music publishers. Viacom, producer of MTV and South Park, has another case outstanding. Warner Music’s videos were withdrawn from YouTube in December. “Once they accept you have got to pay for everything on there, you could bankrupt them,” said Simon Levine, a senior media lawyer at DLA Piper.

Arora is more upbeat. “As people see more revenue coming out, some of those disputes will go away,” he said.

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