AOL, Real, Yahoo must pay millions in outstanding music royalties

The artists' rights organization ASCAP will be receiving tens of millions in back royalties from 2006, from the leading Web radio broadcasters. But it's much less than what it had proposed, and way less than what royalties groups wanted last year.

A long-standing dispute over how much Internet streaming radio services owe in composers' royalties dating back to 2006 was settled yesterday in US District Court in New York. There, Judge William C. Conner issued a decision whose intricate formulas had their data, sadly, redacted from the public copy of the decision (PDF available here, black marks and all), although the end result is that AOL Radio, RealNetworks, and Yahoo will probably find themselves collectively owing more several million in back royalties.

There still remains some question as to the amount, however. While the performers' royalties organization ASCAP claims the total bill for each of the three services could collectively come up to over $100 million, non-redacted data from the decision itself shows AOL Radio would owe $5.95 million in back royalties for 2006, and Yahoo would owe $6.76 million.

The formula Judge Conner chose to adopt is relatively simple, and structurally closer to what ASCAP had proposed, although the coefficients were reduced somewhat to favor the defendants. ASCAP proposed a formula for each service based on its net revenues, multiplied by an adjustment factor that would take into account the ratio of each user's time spent listening to music from that service, versus total time spent on the service's Web site, including not listening to music. The result would be a rough slice of revenue, equivalent to the fraction of time users actually spend listening. Once revenues were multiplied by that fraction, the result would then be multiplied by 3% to attain the annual fee; Judge Conner preferred 2.5% instead.

The defendants had argued in favor of a much more complex formula, first on the basis that it charges advertisers different fees for appearing alongside its various services. The royalties a service owes for streaming music, they proposed, should derive from the relative percentage that streaming music contributes to companies' net royalties. This would result in the creation of what the defendants literally termed "buckets," divided according to how streaming music was being used (for instance, as a user-requested song as opposed to a song the Web site put forth as a suggestion).

But the judge saw the loophole in that logic: Services would be inclined to steer sponsors away from radio and toward other media, such as typical display advertising alongside Web pages, in order to avoid paying royalties for anything that fell into one of these buckets. He opted instead for a system that estimates hours spent online versus hours listening to music.

It's here where analytics services ended up throwing him for a loop: As the decision itself revealed, comScore's metrics for the amount of time listeners spend listening to music online is based on cookie data saved by the services' front-end consoles. That data is only being recorded as long as the console is visible; once it's minimized (for instance, reduced to the system tray), listeners still hear music though analytics isn't active to track it.

That fact alone could lead to a startling conclusion: The actual amount of time that Internet users partake in streaming music may be severely underestimated.

So the judge ruled that only the most reliable, most basic comScore estimates should be used in each year's formula, which accounts for listener time spent in a very old-fashioned way. In the absence of more reliable metrics, no more intricate formula should be written into law, Judge Conner reasoned.

Despite ASCAP's touting the value of its victory ranging into the triple digits in millions of dollars, the estimates provided in Judge Connor's decision yesterday are far, far less than what the royalties collection industry (PROs) proposed in early 2007. At that time, PROs proposed a system that could have forced Internet broadcasters to pay over a hundred million each by 2010; a ballpark estimate applicable to the judge's ruling yesterday looks like annual royalties for the major Internet broadcasters could instead range in the low tens of millions per year.

Yesterday's ruling applies only to the artists' royalties group ASCAP. Another such group, BMI, represents a separate group of artists, and its royalties are based on 1.75% of "music-use-adjusted" net royalties. The judge recommended that the ASCAP formula be applied to all other applicants for ASCAP's streaming music licenses.