I found this so strange that I had to post something about it. It’s really easy to change the site logo for a Modern Communication site. The menus are very straight forward to change the logo, you can see in the video below.
However when working on a Modern Team site if you use the same menu it does not allow you to change the site logo the same way. I’ve tried this on two different tenants and have two different results. I believe both are on standard release.
The error is just a lie, it will never work. I put in a ticket with Microsoft on this and they said that it won’t work that way. For a Modern Team Site you have to go to the Site Assets folder and upload the site logo there. It must be name ‘__siteIcon__.jpg’ and must be a jpg for it to work.
Upload your new file and overwrite the existing file. Wait a few seconds and hit CTRL-F5 to clear the cache and there you have it.