Channels spawned by YouTube are making a fortune but are the people making the videos missing out?

The big networks have been successful in reaching what the world of advertising calls the 'lost boys'

Ian Hecox and Anthony Padilla are a comedy duo called Smosh. Every Friday, a new Smosh show appears on YouTube, featuring rapid-fire banter and japery that most people over the age of 25 would find exhausting. You might not have heard of them, but seven million people subscribe to this show – more than any other channel on YouTube – and they've racked up more than two billion channel views. Settling down for an evening on the sofa in front of Smosh – or any other YouTube channel – might not be an automatic choice, but the numbers don't lie: YouTube is luring a generation away from television. And where eyeballs stray, advertisers and their money surely follow.

Hardly surprising, then, that a new breed of media company has emerged from this behavioural shift, positioning itself between the home-grown talent that makes the videos and the Google-owned video giant. These independent multichannel YouTube networks are like virtual umbrellas, pulling together some of YouTube's most popular channels in a quest for hit-counter supremacy. This month, Fullscreen, a company that's barely two years old, pulled ahead of its two main competitors, Maker Studios and Machinima, to become the most-viewed non-music network on YouTube – it had 31 million unique viewers during December 2012. It's a sector characterised by ravenous hunger: a hunger for viewers, a hunger for advertising revenue, and a hunger for new talent to provide the entertainment.

"YouTube is the most incredible platform for discovering new talent in the audio-visual world," says Justin Gayner, founder of ChannelFlip, one of two major UK YouTube networks. "There are 800 million users, and one million people are creating regular content. So it's easy for us to sit here in our office and find talent." But if YouTube has enabled us all to become broadcasters who can succeed on our own merits, why the need for the middleman? "One of the biggest things we do is interface between our talent and their commercial sponsors and brand partners," Gayner says. "Because they should be concentrating on making good shows – not pitching to FTSE 100 brands and negotiating deals." It's certainly working for some of ChannelFlip's artistes; one of its notable successes, Dan Howell (aka Dan Is Not on Fire), has just transcended his hugely popular YouTube channel to begin his own Sunday show on Radio 1.

What do these networks get in return? Some take a percentage of ad revenue; others pay the creator a flat fee per viewer and then attempt to turn a profit by selling adverts alongside. But the larger pot of money comes from sponsorship, where brands are more subtly integrated into the videos. "The younger generation who are embracing YouTube aren't interested in the traditional 30-second advert," Gayner says. "This way, the brands get an effective form of advertising and the creators get funding that allows them to do more exciting things."

A crucial ingredient of many popular YouTube channels is the way they speak to the viewer on the viewer's level: home-grown production values and a sense of "I'm just like you". But the relative inexperience and wide-eyed enthusiasm of this new breed of video makers has led to a situation that's ripe for exploitation. Its creators, predictably clueless about contractual matters, are coming up against a fast-growing sector keen to maximise its profits. And in the past few months, both Maker Studios and Machinima have seen themselves badmouthed online following disputes with YouTubers who suddenly became aware of the onerous terms of their contracts.

Ben Vacas, aka Braindeadly, one of Machinima's stars, realised that he'd signed himself up to machinima.com "in perpetuity, throughout the universe, in all forms of media now known or hereafter devised" and publicly stated his intention to leave the company via a YouTube video. Legal tussles followed, his video resignation was deleted, but eventually Vacas moved to a new network that presumably offered him more favourable terms. Meanwhile, Ray William Johnson, a bafflingly huge internet star who mainly comments loudly and sarcastically on video virals, found himself at loggerheads with Maker Studios when the company demanded he renegotiate his contract after eight months; Johnson claimed he was asked for 40 per cent of his advertising revenue after production costs, and 50 per cent of the intellectual property of his YouTube show, Equals Three, for perpetuity. "I hope that everyone learns from my experience of signing with a YouTube network," he said in an emotional video blog. "It's just a fucking nightmare, man."

It's an age-old problem, analogous to Jerome Siegel and Joe Shuster selling their rights to the Superman brand in 1938 for $130, or any number of budding pop stars signing on the dotted line below a screed of exploitative clauses. As Vacas said to his YouTube followers: "Always read before you sign something." While the American networks may state that their mission is to "empower creators and brands", you can see it becoming an unseemly money game, according to Justin Gayner. "Mistakes are being made through greed and too great an ambition by some big networks in the US," he says. "It's a landgrab. That's why they're writing punishing contracts and tying people in – it's because they want to get to scale really, really fast. Because that means more ads, which means more money."

One area in which the big networks have been successful is in reaching what the world of advertising calls the "lost boys": young men between the ages of 18 and 34 who no longer read magazines or watch television but do spent huge amounts of time engrossed in video games. Machinima, a network dedicated largely to showcasing movies constructed from the action taking place inside said games, has tapped into that demographic so effortlessly that it's led the company to be branded as the "future of digital entertainment" despite its very narrow cultural purview. But is it? How long until the stars of YouTube are no longer seen as a curious sideshow by the rest of the media? "It'll happen when internet-enabled smart TV becomes ubiquitous," Gayner says. "The point where my mum is watching my YouTube channel on her television, when there's no difference between us and ITV in terms of viewers' perception. That's the point where everything changes."