Taking No Chances, Yahoo! Links Up With Recording-Industry Arm

Music has been a free lunch on the Internet for some time now, but Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) is cutting to the front of the line to pay up.

The Web's most popular destination said Wednesday it had reached an agreement with the Recording Industry Association of America that establishes how much Yahoo! pays for music it broadcasts over the Internet.

The deal, the terms of which were not disclosed, makes Yahoo! the biggest Web site by far to reach an agreement over the terms and conditions governing transmission of both Internet-only radio stations and conventional radio stations simulcast over the Web.

Most other Internet broadcasters -- notably America Online (AOL Quote - Cramer on AOL - Stock Picks), operator of the Spinner Web site -- are waiting for an arbitration proceeding that will determine how much they'll be paying for the privilege of transmitting musical performances, or individual recordings, said Steven Marks, senior vice president of business and legal affairs for the RIAA.

The stakes could be high. As a result of a similar arbitration, companies that deliver radio stations via satellite or over cable TV systems have to pay 6.5% of revenue for recordings, according to Marks. (The money is split between the performer of the specific recording and the music copyright holder, usually a record company.) Companies paying the music performance fees for such broadcasts include DMX Music, a subsidiary of Liberty Digital (LDIG Quote - Cramer on LDIG - Stock Picks), and Music Choice, a partnership of Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks), Motorola (MOT Quote - Cramer on MOT - Stock Picks) and several other firms.

As further evidence of how important it is for Internet companies to get on the good side of the music industry, a judge ruled Wednesday in a separate proceeding that MP3 (MPPP Quote - Cramer on MPPP - Stock Picks) had willfully violated copyright law, a decision that could cost the company $250 million -- and its financial health.

The agreement between Yahoo! and the RIAA doesn't cover customized, personalized programming. Nor does it cover songwriters' copyright fees traditionally paid to organizations, including Ascap and BMI.

Matt Rightmire, Yahoo!'s vice president and general manager of media and entertainment, says Yahoo! has reached agreements with the publishers, and that the company is in discussions with various parties over individualized, personalized music.

Rightmire says Yahoo! negotiated a separate agreement with the RIAA rather than wait for arbitration, because its interests diverge from those of most of the other companies likely to be involved in the process, including Spinner. That's because at least 80% of the relevant audio that Yahoo! streams is rebroadcasts of conventional radio stations, not programming created especially for the Internet. In arbitration, Rightmire says, "You don't end up with the best solution for everybody. You end up with something that's acceptable to all."

Another advantage that a deal now has over arbitration later, says Rightmire, is that the certainty Yahoo! has over the costs of the music enables it to make decisions it couldn't when it wasn't sure of these particular costs. "Simply knowing what the economics of this license are is a step forward," he said.