The music business is a tough place for most artists to make money. This struggle was thrown into sharp relief last week when the UK industry revealed that artists earned more from vinyl sales in 2016 than they did from YouTube payments for viewings of music videos.

The BPI, the record labels’ association that promotes British music, says this is the latest example of YouTube exploiting the “value gap” between what it makes from online advertising shown around music videos and what finds its way to the artists’ pockets.

As if to add insult to injury, news of the paltry level of payouts came a day after figures showed that Google, and subsidiary YouTube, took home the lion’s share of the £10bn spent on internet advertising in the UK last year. BPI figures show UK vinyl sales growing for the ninth consecutive year in 2016, to a 25-year high of 3.2m units – driven by Blackstar, the final album by the late David Bowie – and making £41.7m for record labels and artists. By contrast, music video streaming, which is dominated by YouTube, funnelled just £25.5m to the industry.

“YouTube’s holding company [Google] can’t really have a motto ‘Do The Right Thing’ then pay one-seventh of the rates other streaming services pay,” said Allen Kovac, who has managed bands including the Bee Gees, Mötley Crüe and Blondie. “Moreover, Google drives audiences to YouTube, which devalues artists’ music. That’s a win-win for them, but a colossal loser for artists.”

In December, YouTube said it had paid more than $1bn globally last year to the music industry from advertising that runs around videos. It claims it is generating money from “light” users who would never subscribe to a paid-for music service, so this is money labels and artists would not otherwise see. It also says it is capturing money from identifying and putting ads around fan uploads, which now account for half of the industry’s YouTube revenue, and is a bonus.

Spotify paid record lables about $2bn in 2015, twice as much as YouTube, which is eight times its size. Photograph: Christian Hartmann/Reuters

“YouTube is working with the music industry to bring more money to artists, labels and publishers,” said a spokeswoman. “YouTube is contributing a meaningful and growing revenue stream for the industry.”

However the IFPI, the global recording industry body, claims that with 800 million music users, YouTube is paying little more than $1 per user for the entire year: “This pales in comparison with the revenue generated by other services, from Apple to Deezer to Spotify.”

Spotify is a fraction of YouTube’s size – it has some 100 million users, half of whom pay for a premium service – but paid record labels about $2bn globally in 2015. Income from the UK operations of streaming services, mainly Spotify, rose more than 60% year on year in 2016 to £238.6m, according to the BPI.

Revenues from streaming are forecast to overtake physical sales this year to become UK labels’ biggest revenue generator. Physical album sales fell 2.6% to £284.7m in 2016. The streaming boom pushed UK record companies’ total trade income – which includes music sales, performance rights and music licensed for use in films, TV, ads and games – up 5.6% last year to £926m. But the BPI says that figure, a five-year high, would be well over £1bn if the industry got the revenue it believes it deserves from video streaming.

“These figures suggest a corner is being turned as more people choose premium subscription services, but are hugely frustrating given that they could be more positive still were video-streaming platforms to pay fairly for the music they benefit so much from,” said Geoff Taylor, chief executive of the BPI.

The battle is set to come to a head in Europe later this year. The industry believes YouTube unfairly takes advantage of “safe harbour” laws, which protect it from liability for the massive amount of copyrighted material illegally uploaded by its users, so long as it is removed on request.

The labels believe that YouTube’s ability to make money from videos without a licence puts it in a position of power. Services such as Spotify need a licence before they can make music available.

Last year, the European commission proposed to make YouTube and other such services subject to the same copyright rules as other streaming services. The European parliament will vote on the reform this summer, although YouTube is lobbying heavily against it.

“The biggest problem facing music creators is that the most significant source of online music, video streaming services, pay them insignificant royalties,” said Gadi Oron, chief executive of Cisac, the international confederation of societies of authors and composers. “This is a huge global flaw in the music landscape: it is unfair, and it is alarming. That is why the EU reforms currently under discussion are so important.”