Music is protected by copyright and reproduction of a musical work without authority will be an infringement … most of the time. Fair use of copyright material is permitted in many common law countries. Fair use permits use of a copyright work without authority for a limited number of purposes, such as review and comment, news reporting, teaching, research and parody (but the scope of those is different in each country). The categories are narrow and sometimes determining what is fair may be a little counter intuitive.
YouTube could review each video and have different rules depending on factors such as the country in which the copyright was created, the country in which the video was made, where it’s being viewed, where it’s stored, the countries in which YouTube undertakes business, the countries in which YouTube wants to undertake business, etc, etc. Obviously with the number of videos available on YouTube, while possible, it’s just not practical. So at some point YouTube needs to make a decision on how it balances the risk of being sued by a copyright holder with providing a compelling service consistent with end-user expectations. Achieving that balance in a volume oriented, user content driven service is a really difficult task.
With the example at the top of this post YouTube seems to be on fairly safe ground. But as one forum post pointed out, one of YouTube’s most popular videos “Evolution of Dance” (with over 110 million views) contains many popular commercial music tracks spliced into one 6 minute video.
It doesn’t really have the same impact without sound…