YouTube has to move fast to prove it has a future

The challenge is to keep both the users and content providers happy

With 35 million regular users and a reputation at the cutting- edge of cool, the video-sharing site YouTube.com was the happening new media company of 2006. It won Time magazine's award for Invention of the Year. Savvy media commentators joked: "The revolution will not be televised. It will be YouTubed."

Established giants of the digital era seemed to agree. Google paid $1.76bn (£840m) last September to buy YouTube from its founders, the former PayPal employees Jawed Karim, Chad Hurley and Steve Chen. Then trouble started. Old media companies, whose content make it a compelling online destination, began to demand payback.

Before Google, YouTube's image as a democratic, non-commercial entity shielded it from lawsuits. But once in the behemoth's embrace, music, television and film companies asserted their copyright. YouTube signed short-term licensing deals with the likes of CBS, Vivendi, Warner, Sony-BMG and Universal Music, but the daddy of all new media questions is hanging over it: how to monetise an anarchic user-uploaded business model.

Google's strategy for YouTube took a heavy knock this month when Viacom, owner of MTV, Nickelodeon and Comedy Central, demanded all its clips be removed from the site. There are more than 100,000 of them and they have generated 1.2 billion hits. Viacom wants a share of the resulting advertising revenue.

"It's unfortunate that Viacom will no longer be able to benefit from YouTube's passionate audience, which has helped to promote many of Viacom's shows," says a spokesman for YouTube. "We will continue to work with content partners large and small to provide them with a platform to promote their content and engage and grow their audiences." There is no mention of actual revenue.

It is the problem of the digital era. "New media is never going to generate as much money as old media," explains Professor Justin Lewis of Cardiff University. "The level of advertising exposure it generates is never going to compete with television. It is no accident that Britain's most successful media websites are all heavily subsidised. The numbers are not there."

YouTube's founder Hurley is more optimistic. Speaking at the World Economic Forum in Davos last month, he promised: "We are getting audiences large enough to foster creativity through sharing revenue with our users. So in the coming months we are going to be opening that up."

The issue is reaching crisis point because so many clips posted on YouTube and other social networking and user-generated sites such as MySpace come from copyrighted work appropriated without permission.

A YouTube source points out that channels including CBS, NBC Entertainment and Playboy have partnership channels on the site. So do smaller companies such as the music label We Put Out Records. Their presence proves traditional media groups are keen to expose their wares via YouTube. But what, in the long term, is the point if exposure comes without financial return and with the risk that video will be reused in brand-damaging ways?

Who wants to place a two-minute promotional clip online only to see larger chunks uploaded without consent? Where is the financial model that can deliver direct payments to the copyright owners without vastly reducing YouTube's audience?

Google bought YouTube because traditional media companies balked at the price and believed a new-media firm would be more adept at monetising online traffic. If Google cannot do that - fast - the City will conclude that it overpaid for a flash-in-the-pan phenomenon.

Professor Lewis says the problem may be insurmountable. "The beauty of YouTube was its cheapness. But that is not compatible with making a lot of dosh. As soon as you try to make it profitable, you are combining two incompatible models. I am not convinced it has a commercial future."

Hurley needs to be convinced. He and his YouTube co-founders received £375m in Google shares in return for their stake. Their wealth relies on the new parent company's success. That is contingent on how willing traditional media companies are to trade copyright for exposure and the indirect profits it generates.