Royalty formula for music-streaming sites is flawed, court rules

In a ruling that has the potential to affect many websites that stream music, a federal appeals court on Tuesday said a lower court’s method for calculating music royalties were flawed.

The case involves a dispute over how much Yahoo and RealNetworks should have to pay the American Society of Composers, Authors and Publishers in royalties for the ability to stream music on their websites. ASCAP collects performance royalties from radio stations and other businesses that play music on behalf of songwriters and then distributes the payments to the artists.

While the case is restricted to Yahoo and Real, its outcome could affect how much numerous sites and online services pay for the right to stream music, including AOL, YouTube, Pandora, Slacker Radio and MOG, said Jon Potter, a principal at RPG Strategies, a digital media consulting firm in Bethesda, Md.

“This will absolutely impact the royalty rates for all Internet radio companies and music-streaming companies, as well as any company streaming any type of media with a musical component, including videos and games,” Potter said.

At issue is a lower district court’s decision in 2008 to set a 2.5% royalty rate for millions of songs owned by songwriters who are represented by ASCAP. Real and, in particular, Yahoo argued that the calculation was excessive.

The three-judge panel of the U.S. 2nd Circuit Court of Appeals sided with Yahoo, concluding that the lower court’s method for setting royalties was “unreasonable” and “imprecise” because it overstated how much the sites benefitted from having streaming music in various areas of their site.

The appeals court faulted the lower court’s “inclination to lump all of Yahoo’s varying musical uses together, instead of looking into the nature and scope of Yahoo’s different types of uses.” On-demand music streaming, the court noted as an example, would have a different revenue stream than music that plays in the background of a video.

The ruling directed the lower district court to come up with a new and more fair method for calculating royalty payments. While Yahoo exited the music-streaming business in 2008, handing that function of its site over to CBS Radio, the case involves tens of millions in potential back royalty payments from Yahoo, Potter said. Overall, ASCAP stands to collect hundreds of millions more depending on the outcome of the case.

Yahoo, in a statement, said it was “pleased with the court’s decision and looks forward to the establishment of a truly reasonable royalty-license rate that properly accounts for music use on its services.”

RealNetworks and ASCAP did not immediately respond to emails requesting comments.

alex.pham@latimes.com