Crackling down the phone line from his Los Angeles home, Tyler Ward sounds like a nice guy. In fact, he sounds rather like he looks in the photos that decorate his website. He is polite and courteous in a very clean-cut, square-jawed, all-American way; I get the feeling that, were I female, he might address me as "ma'am". What he doesn't sound like is an artist at the vanguard of an insurrectionary musical revolution that at least one industry figure I've spoken to has compared, unironically, to both punk and the early days of rock'n'roll.

Tyler Ward is, to borrow Ron Burgundy's phrase, kind of a big deal. He tours the world, can claim to have millions of fans, owns three recording studios and has grand plans to launch his own entertainment network. Other artists flock to work with him in the hope that a little of his star power will rub off on them (most recently Jason Derulo, singer-songwriter Jason Mraz, and the Plain White T's, of Hey There Delilah fame). But I'd never heard of him until a few days ago, and it seems highly unlikely that you would have either, unless you're one of the 1.5 million people – largely female and aged between 12 and 18 – who subscribe to his YouTube channel. He has virtually no profile in the mainstream media. He laughingly describes his success, and that of a plethora of artists like him, as "like the world's best kept secret".

"When a person discovers you, they're like: 'How come I didn't hear of this person? How come millions of people have heard of him?'" he observes. "My channel has, like, 4m views. But at the same time, I go to these mainstream events and it's 'Tyler Ward? Who's Tyler Ward?'"

His career as a singer-songwriter, peddling mainstream acoustic pop-rock, was going nowhere until four years ago: he was "playing venues to 10 people and half of those were my family members". Then he posted a video of himself and a bunch of other equally unknown artists singing We Are the World, which had just been remade in order to benefit victims of the Haiti earthquake. "We put it up the night before the official video launched. At the time, that was the most searched-for video in YouTube history and my video was the second one on the searches. I got people from all over the world. So I went: 'OK, I can do this for other songs,' and then started putting out other covers for six or seven months, and then putting my original music out, and fans really loved that, too. In December 2010, I played the same venue where I'd played to 10 people and it was sold out. I was like: 'This is amazing, this is working.'"

Meridith Valiando was a major-label A&R and manager when she discovered that there were dozens of other artists like Ward, pop stars whose fame exists almost entirely outside the traditional music industry. Researching the world of social media to see how her artists could better use it, she came across "all these guys who had built up million-plus audiences on YouTube, who went direct to their fans and had their full attention. One in particular, Dave Days, had more subscribers on YouTube than Justin Bieber, Taylor Swift and Lady Gaga. He was the No 1 most subscribed musician on YouTube. My A&R background was like: 'Here's this guy who has all of these engaged fans, and he's totally independent … This is insane.'"

With her partner, record producer Chris Rojas, Valiando went on to immerse herself in the YouTube world, founding Digitour, the self-styled "world's first YouTube tour and music festival"; the first Digifest UK, an eight-hour event that Valiando describes as "Coachella for teens" takes place at the Hammersmith Apollo in May. But her initial assessment seems a fair one. From the outside, the world of the YouTube pop star does indeed look insane, a bizarre, confounding alternate universe packed with stars of whom no one over the age of 18 has any knowledge – Tyler Ward, Dave Days, Tiffany Alvord, Kurt Hugo Schneider, Madilyn Bailey – where artists apparently make impressively vast sums of money without actually selling any records; where a boyband called Boyce Avenue who were dropped by their major label three years ago are regarded as a pioneering musical force; where the quickest route to stardom is not to come up with anything original but to knock off a quick cover version of a hit the minute it's released; where a certain lack of star quality is considered an asset, and where the makers of entirely inoffensive, utterly mainstream pop-rock talk about selling out and guarding their artistic independence with a zeal that would startle an early 80s anarcho-punk band.

If you think all that sounds improbable, then rest assured, it's nothing compared to some of the stuff that's going on elsewhere in the world of YouTube entertainment. Some of the biggest YouTube stars of all aren't singers or musicians, but vloggers, who don't appear to do anything other than one-way chats to camera, and answering viewers' questions in a self-consciously wacky way.

'There's a select group of YouTube entertainers at the very top of the top who I know make millions a year. There are some that make hundreds of thousands, below that tens of thousands'

Vlogger or pop artist, YouTube stardom is, in its own cottage-industry way, very big business. Valiando says the subject of how much money the artists make is "kind of taboo", but reckons "they're making a very good living, more than six figures annually". Alan Van, editor-in-chief of a website called NewMediaRockStars, puts it even higher: "There's a select group of YouTube entertainers at the very top of the top who I know make millions a year. There are some that make hundreds of thousands, below that tens of thousands."

Exactly when the phenomenon of the YouTube pop star began is a matter of some debate, but everyone seems to agree Boyce Avenue were among the pioneers. A Puerto Rican-American trio from Florida, their record sales were never going to give One Direction sleepless nights – second album All We Have Left briefly made the top 10 of Billboard's Heatseekers Chart in 2010 and Universal Records dropped them a year later – but their videos, frequently featuring acoustic covers of recent hits, became a sensation: nearly 15 million people have watched their version of Gotye's Somebody That I Used To Know. When that many people visit your YouTube videos, selling records becomes a little beside the point. You start making money anyway.

"No 1 is through ad revenue on YouTube," says Valiando. "Then No 2 is branded content: beverage companies, apparel companies, film companies, all sorts of companies will pay a very healthy figure just to be part of one or more than one video. On top of that, they can then go and sell a very good amount of merchandise. Then they can go on tour; that's another revenue stream. If they know how to kind of navigate this new world order, they can actually make a very sustainable, healthy living, and they don't need to give a good portion of their rights away to a major company."

If the economics of the YouTube pop star are relatively straightforward, the reasons for their success seem a little more mysterious. One industry figure I speak to compares the popularity of cover versions among fans to the early 60s, before the Beatles et al started writing their own material, when scores of bands played the same R&B and rock'n'roll covers.

On the face of it, the YouTube stars actually doing the covers seem pretty unremarkable. When the internet first took off as a source of music, there was an oft-stated belief that it would give keen-eared kids the opportunity to break free of the stifling conformity of the music industry and alight on new sounds too groundbreaking, confrontational and futuristic for cautious record companies to countenance. But the YouTube stars' music certainly isn't wildly different from the kind of thing that already gets in the charts. And there's something oddly ordinary about the artists themselves: boy- or girl-next-door good looks are more in evidence than captivating glamour or the magnetic, ineffable charisma of the born star.

Well, exactly, says Tiffany Alvord, an LA-based 21-year-old whose vaguely Taylor Swift-ish music has made her one of the biggest YouTube stars of all: she's even performed at the Times Square New Year's Eve celebration, sharing the stage with Carly Rae Jepsen, Psy and Taylor Swift, presumably to the bafflement of much of the television audience. "We're just normal, everyday people like them. We're relatable and reachable. They think: 'Well, they did it, there's hope. They just started in their room, they started never expecting this to happen.' I think it helps people dream and it inspires people that anything is possible."

"I think the biggest appeal is that their fans feel directly connected to these artists," says Alan Van. "They have social media outlets, they interact a lot with their fans, so the fans feel like they know them, whereas Lady Gaga or Rihanna, these people are kind of untouchable. You never think you're going to run into them, you're kind of a peon compared to them. But when you watch Tyler Ward or Dave Days, you know, they're talking to you, you feel like they're one of you. Young people demand a lot more these days. They don't want somebody to just gawk at; they want somebody who's on their level, who appeals directly to them and is one of them."

'Fans want to be able to have discovered something on their own. They want to have the ownership, to say: Hey, I'm the reason this is so successful'

Indeed, the YouTube stars' interaction with fans occasionally seems more important than the actual music they make. "As soon as that interaction drops, those hardcore fans that think they own you will turn on you," says Valiando. "Or they will just leave, they'll go and find someone else who will pay attention to them, that will do a live stream and chat with them for two hours every night. It's a lot of work that these people put in to develop that sort of rapport."

That sort of thing can undoubtedly seem a little strange and needy to anyone brought up in an era when part of pop stars' appeal was that they were remote and mysterious: even the nutcases who camped outside their homes expected nothing more than the occasional wave or snatch of conversation in return. On another level, however, the success of the YouTube pop stars seems oddly old-fashioned. Whatever you make of the music, you can't really blame what Tyler Ward calls Millennials ("the 2000 babies") for wanting something that every previous generation of teenagers took for granted: pop culture that belongs utterly to them, that their parents don't get, that hasn't been co-opted by the mainstream media from the very outset. "They want to be able to have discovered it on their own," says Ward. "They want to have the ownership, to say: 'Hey, I'm the reason this is so successful.'"

There's no guarantee, though, that YouTube success is transferrable to the traditional music industry, which may be one reason the YouTube stars seem so wary of the major-label system. Eighteen months ago, one YouTube star, Austin Mahone, signed to Lil' Wayne's label Young Money: he's maintained his online celebrity, but his two singles so far, produced by Lady Gaga collaborator RedOne, have sold unspectacularly. Tyler Ward claims to have been offered five record deals in the US, all of which he turned down; he accepted a deal with Sony in Germany because it offered him complete independence. "I wanted to maintain control of what I was doing, because it felt like my brand independently is worth more than attaching my name to a major," he says. "Because to my fans, that would be a sell out. Labels want to have control, a say in the direction of an artist's development. They want to force it through their system. And a lot of YouTubers love their independence."

Tiffany Alvord agrees: "Labels or bigger production companies want to push their songs or their sound on to you. It's really important to me to be true to myself. And also," she says, "those deals are really aggressive."

It remains to be seen whether the rise of the YouTube pop star is a temporary blip, the kind of passing phenomenon that the internet often throws up, or whether it represents a genuine revolution if not in music, then in the way audiences consume music, another step towards the obsolescence of the old-fashioned record industry. For the time being, however, the YouTube stars only look to get bigger. Even the mainstream media is starting to take an interest, after years in which, as Meridith Valiando says, "they were all scratching their heads, because the sheer volume of them is so intense, they couldn't work out which ones were real or worth putting on the cover".

A few weeks ago, Tyler Ward was sitting at home, watching the Grammys, when Justin Timberlake's nomination for best pop vocal album was announced. Instead of seeing Timberlake, he was confronted with the sight of his own face filling the screen. "They used my video of one of his songs as a way to intro Justin Timberlake!" he gasps. "I was like, 'What … just … happened?' Then my phone blew up. It was a kid I knew from second grade calling me: 'Man! I just saw you on the Grammys!' It was so crazy," he laughs in disbelief, still not sounding much like an artist at the vanguard of a musical revolution.

• This article was amended on 21 February 2014 to correct the spelling of Meridith Valiando's name.