The BBC is facing an existential crisis as a result of its failure to reach younger audiences in the face of competition from commercial rivals and online services such as YouTube and Netflix, according to Ofcom.

The media regulator found that young people were increasingly turning away from the corporation’s TV and radio output and the BBC was “not currently doing enough, quickly enough” to turn this around.

The research found that 16- to 34-year-olds spend about an hour and 20 minutes a day consuming BBC content – around half the average time across all age groups.

One in eight young Britons currently consume no BBC content at all in a given week – a worrying figure given the corporation’s current funding model is based on convincing the vast majority of the public to pay £150.50 a year for a TV licence.

Ofcom said that while some of this was a result of changing viewing habits due to the internet, commercial radio stations and ITV were doing comparatively better than the BBC at attracting younger audiences.

“The decline in use among young people is a concern, not only because this audience group is less well served but because young people are critical for the future relevance and success of the BBC,” Ofcom said in its first annual report on the BBC’s performance.

The regulator also pointed out that the online-only BBC Three channel was reaching only about 8% of people in the 16-34 category each week, despite being specifically designed to appeal to younger viewers.

Young people told Ofcom they felt the BBC focused on older audiences too much. “Young people also want the BBC to take more risks and felt it was too reliant on conventional formats,” the regulator said.

It said it was working with the BBC on the issues, and the corporation was aware of the challenges it faced. The BBC director general, Tony Hall, has issued increasingly strident warnings about the threat posed to the corporation by streaming companies while floating the idea of reinstating the licence fee for over-75s.

A BBC spokesperson said: “Young people spend more time with the BBC than any other media provider including YouTube, Spotify or Netflix. But it’s an incredibly competitive market and young people have far more choice today than previous generations.

“We want to ensure that everyone gets value from the BBC, and this is why we’ve said we want to reinvent the BBC for a new generation by investing in BBC Three, children’s and young people’s services, improving BBC iPlayer and launching the BBC Sounds app.”

Ofcom said the BBC was generally delivering on its remit, and audiences rated the BBC’s news output particularly highly for providing trustworthy and reliable news and current affairs material on TV, radio and online.

The BBC was also praised for improving on its on-air diversity, although Ofcom said viewers felt older women were often typecast in certain roles while middle-class individuals were over-represented in programmes.

Ofcom said the BBC needed to become more transparent in explaining why it made certain strategic decisions and needed to focus on distinctive UK content. It also raised concerns about the BBC’s increasing use of co-production deals with companies such as Netflix and Amazon to subsidise the production of big-budget dramas, such as the forthcoming adaptation of Good Omens by Terry Pratchett and Neil Gaiman.

“This third-party funding enables the BBC to broadcast, and UK audiences to enjoy, content the BBC may not otherwise have been able to produce,” it said. “But third-party funding is typically focused on programmes with global appeal, rather than content that specifically reflects the lives and issues of UK audiences.

“It is also uncertain whether the BBC can continue to rely on such deals, given online players’ increasing focus on producing their own content.”