We pointed out the other day that AOL Time Warner’s merger was failing because of a total failure of the company to actually exploit the much-vaunted synergies inherent in such a merger. Rather, we said, turf wars were the order of the day.

The Wall Street Journal now has a story about royalties to be paid by online ‘broadcasters’ of music, pointing out much of the same stuff. (Paid subscription required: it’s well worth it.)

Publicly, America Online has left the issue in the hands of the Digital Media Association, a three-person outfit in Washington, D.C., that is the leading advocate for the Webcasters fighting the royalty proposal.

“I consult with AOL regularly,” says Jonathan Potter, executive director of the association. America Online is on the board of directors of DiMA. He says the royalties for small broadcasters should be based on a percentage of their revenue, and that eventually online and offline radio should be treated equally.

Meanwhile, Warner Music Group has aligned itself with the powerful RIAA and its SoundExchange, a 22-person division that is leading the battle to support the proposed royalty rates. “Warner has been very supportive of our efforts,” says Mr. Simson of SoundExchange. SoundExchange had originally sought higher royalties but now says the Copyright Office’s recommendation should be respected.

The question is, will AOLTW make more money by squeezing their customers (and by killing off a nascent industry that publicizes their product), or will they make more money by letting go, and taking advantage of greater revenue streams and greater margins that might be the result of taking advantage of new technologies?

Our view is that they’d make more money by taking advantage of the technology. More to the point, nearly every opinion I’ve seen on the matter — every opinion from someone who doesn’t have some personal vested interest in the continued dominance of the music industry as we know it today — sems to be in agreement.

Now, if you’re Vivendi, or News Corp., or some other large music-industry player without a significant stake in the online world, you would naturally want to kill off online music; you don’t have much to gain from the alternative.

But AOL Time Warner has more to gain from a shift to online music (and TV, and movies, and so on) than they have to lose. Steve Case & Co. know this; that’s why AOL bought Time Warner in the first place.

Unfortunately, Steve Case & Co. are not being allowed to call the shots there any more; instead, people whose reputations are based on the continued success of the old-fashioned media properties are in charge, and they’re sacrificing the company’s future for their own egos. The shareholders are, as they should be, up in arms. We’ll see in the coming weeks and months whether they’re smart enough to see through the idiocy of the management-originated rumors that the company is considering spinning off the AOL online services.