• by Wendy Davis  @wendyndavis, May 2, 2008

Web companies AOL, Yahoo and RealNetworks owe a songwriters group multimillions in royalties for music streamed online, a federal court has ruled. 

Federal District Court Judge William Connor in White Plains, N.Y. decided this week that the American Society of Composers, Authors and Publishers (ASCAP), which represents more than 320,000 members, is entitled to 2.5% of all music-related revenue from 2002 through 2009. The court still has to determine the precise amount owed, but ASCAP estimates the total could reach $100 million.

AOL, Yahoo and Real Music have been streaming music without a definitive royalty agreement for years because a consent decree with the U.S. Department of Justice dating back to 1941 requires ASCAP to grant a license to any company that requests one. That order provides that if ASCAP and companies can't come to terms, a judge will set a reasonable rate.

ASCAP had sought 3% of music-related revenue, while the Web companies proposed a significantly smaller amount. For the year 2006 alone, AOL proposed paying $872,000, while Yahoo proposed $1.13 million. Instead, the court ordered AOL to pay $5.95 million and Yahoo to pay $6.76 million for that year. (The opinion does not specify the amount owed for other years.)

To calculate music-related revenue, Connor adopted a formula based on figuring out what percent of time users spend listening to music at AOL and Yahoo and then multiplying that figure by the companies' total revenue, excluding ad commissions.

ASCAP CEO John LoFrumento praised the ruling. "We're very satisfied with the judge's ruling because, although he reduced our request from 3% to 2.5%, the amount that he had proposed is significantly greater, by a wide stretch--greater than that proposed by the companies," he said.

The Digital Media Association said in a statement that it's studying the decision. "The court's complex rate formula will require several weeks of additional consideration, including perhaps additional court hearings," the group stated. It also said it was disappointed that the court "ruled that online services' royalties should be based in part on service-wide revenue, not simply on revenue directly attributable to music usage."

Terrestrial radio stations pay only 1.615% of their gross revenue as royalties to ASCAP, but Connor set out several reasons why AOL, Yahoo and RealNetworks should pay more. Each company "can offer its customers the ability to stream virtually any selected song, music video or individually designed playlist, at any time on-demand," Connor wrote. "Terrestrial radio stations cannot offer the audiovisual programs with feature, theme and background music ... Nor can they offer customizable radio broadcasting, the ability to skip songs, or the ability to stream entire CDs on demand without commercial interruption."

Currently, ASCAP is in negotiations with other online companies, including YouTube owner Google and social networking site Facebook. ASCAP's LoFrumento said he hopes the ruling will help pave the way for those companies to reach agreements with ASCAP. "The standards and formula that the judge has set will go a long way to avoiding future rate court hearings," he said.

Some Web companies have long offered free streams of music as part of their strategy to grow an audience. At AOL, for instance, in addition to streams available elsewhere, the company also offers exclusive live performances via AOL Sessions.

It's not clear whether AOL and Yahoo will cut back on the streams they offer as a result of the decision. Both companies declined to discuss the decision, other than to refer calls to the Digital Media Association. RealNetworks did not respond to a request for comment.