Federal appeals court tosses out method for calculating music streaming royalties

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

The case involves a dispute over how much Yahoo Inc. and RealNetworks Inc. 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 on behalf of songwriters from radio stations and other businesses that play music and then distributes the payments to the artists.

Though the case directly concerns Yahoo and RealNetworks, its outcome could affect how much numerous sites and online services -- including AOL, YouTube, Pandora, Slacker Radio and MOG -- pay for the right to stream music, 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 companies streaming any type of media with a musical component, including videos and games,” Potter said.

At issue is a district court’s decision in 2008 to set a 2.5% royalty rate for millions of songs owned by the 390,000 songwriters represented by ASCAP. RealNetworks and, in particular, Yahoo argued that the calculation was excessive.

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

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 revenue stream different from that of music that plays in the background of a video.

The ruling directed the lower court to come up with a new and fairer method for determining royalty payments.

Though Yahoo exited the music streaming business in 2008 when it handed that function of its site to CBS Radio, the case involves tens of millions of dollars in potential back royalty payments from Yahoo, Potter said. Overall, ASCAP stands to collect hundreds of millions of dollars more, depending on the outcome on 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 shared Yahoo’s sentiment, saying in a statement, ‘We believe the guidelines set forth in this decision will help establish more fair and reasonable royalty rates for Internet music providers.’

ASCAP issued the following statement: ‘We anticipate that in the end, the proceeding will result in a fair and favorable license fee to be paid by commercial online services for the valuable intellectual property they use to sustain their businesses -- the music created and owned by the songwriters, composers and music publishers ASCAP represents.’

-- Alex Pham