The two parties wildly disagree over how much money the record companies should receive from the music webcasters every time they play one of their songs.
The webcasters, broadcast songs over the internet in a similar format to traditional radio stations, have proposed royalty rates 27 times less than the record companies want.
Both sides submitted royalty rates to the American copyright office ahead of arbitration hearings to decide the matter.
The webcasters include MTVi Group - the interactive arm of the MTV music television stations - plus Launch Media and MusicMatch.
There are currently over 4,000 webcasters according to the Digital Media Association (DiMA), most of whom currently provide streamed music for free. But only 15 are directly involved in this arbitration process.
Some webcasters, including Yahoo!, have already signed deals with the Recording Industry Association of America (RIAA), while others are waiting to see the outcome of the arbitration.
The arbitration hearings are set to begin in July.
'Ludicrous'
The RIAA wants record companies to be paid $0.004 every time a song is played on the internet.
But webcasters have dismissed this as "ludicrous" and have suggested a rate of $0.00015 per song - 27 times less than the RIAA's demand.
"Obviously, they're going to ask for something ludicrous," said one webcasting official. "That rate is what only the largest companies could pay and they're going to try to squeeze as much money as they can from the industry."
The DiMA says it has taken into consideration investments made to stream music in its payment model.
Uncertainties
"We employed experts to develop an appropriate model to compensate payments for copyrights," Ken Steinthal, one of the DiMA's legal team said.
Traditional radio broadcasters in America pay royalties to artists and composers rather than record companies. But 1998 legislation said online broadcasters must pay the record companies.
Several American traditional radio stations have put plans for internet streaming on hold because of the legal and financial uncertainties.
The RIAA has also been locked in battle with online song-swapping service Napster, which had let users access copyrighted songs for free.
But Napster has recently been told by a judge to block access to all copyrighted songs, paving the way for new, legitimate services run by the record companies themselves.