Why Is Payola Illegal?

Jacob Sullum | July 27, 2005

Sony BMG has settled a payola case with New York Attorney General Eliot Spitzer, agreeing to pay a $10 million fine and stop its representatives from offering cash or freebies to radio station employees in exchange for playing the company's songs. "This is not a pretty picture," Spitzer said. "What we see is that payola is pervasive. It is omnipresent. It is driving the industry, and it is wrong."

The deals to which Spitzer objected, which included bribing programmers with goodies such as a flat-screen TV, a laptop computer, and PlayStation 2 games, may seem like penny-ante stuff, but they are pretty clear violations of the Federal Communications Act, which prohibits radio and TV stations from accepting "any money, service or other valuable consideration" in exchange for broadcasting any "matter" unless the arrangement is disclosed to the public. This provision, which grew out of the payola scandals of the 1950s, seems at first blush to be aimed at a kind of fraud: Stations that violate the rule are ostensibly choosing material (in this case, songs) based on its expected value to the audience but are actually motivated by a desire for under-the-table cash or electronic goodies.

But is this the sort of deception that requires government intervention? Stations whose programming does not appeal to the public will be penalized in the marketplace, regardless of their reasons for choosing the songs they play. And if payola does not have a noticeable impact on the quality of programming (including the opportunity to hear interesting songs by newcomers whose record companies are not adept at bribing DJs), why should listeners care? Station owners might object if programmers and DJs are acting contrary to company policy (as may have been the case with recipients of Sony's freebies), but why should prosecutors get involved?

The question becomes harder to answer when you realize that the provision applies only to broadcasters, not to stations carried by cable, the Internet, or satellite (although the last arguably qualifies as "radio"). If the principle is fraud protection, why should the medium matter (blather about "the public airwaves" aside)? If anything, the argument for government action would seem to be stronger in the case of cable and satellite programming, where listeners and viewers pay directly for the content, as opposed to providing the audience that attracts the real customers, i.e., advertisers.

Maybe the real aim, as Spitzer's rhetoric implies, is to promote competitiveness by preventing collusion between stations and record companies that squeezes out labels with less clout. But in that case distinguishing between broadcast and nonbroadcast stations still doesn't make sense, while the existence of various alternatives to conventional radio undermines the antitrust argument.

Comments

|7.27.05 @ 10:31AM|#

"And if payola does not have a noticeable impact on the quality of programming (including the opportunity to hear interesting songs by newcomers whose record companies are not adept at bribing DJs)"

Why are we assuming this?

"If the principle is fraud protection, why should the medium matter (blather about "the public airwaves" aside)?" Because there are some areas in which the government is authorized to enforce its principles, and others in which it is not. I wouldn't think the concepts of "mine" and "yours" would be dismissed as "blather" by a libertarian.

|7.27.05 @ 10:35AM|#

joe, read the preceding sentence: Stations whose programming does not appeal to the public will be penalized in the marketplace, regardless of their reasons for choosing the songs they play.

Jacob isn't "assuming" anything.

|7.27.05 @ 10:42AM|#

Lawsuits over radio playlists?

How the hell did we wind up like this?
Why weren't we able to see the signs that we missed?

Sorry, the endless repetition on the radio has rendered me unable to come up with original thoughts. Here I am, once again, repeating dumb lyrics.

The disc jockeys need to stand up to the payola guys. Will they bite the hand that feeds? Do they want to change it?

|7.27.05 @ 10:52AM|#

"But is this the sort of deception that requires government intervention?"

As long as the government intervenes in who gets a radio station (by charging fees and setting programming rules, rather than simply enforcing a system that minimizes signal interference), then yes.

If we're sticking to the charade of "the public interest" then I damn sure don't want my interests represented through the process of giving out free laptops and cruises. Unless they're giving those bribes to me.

|7.27.05 @ 11:06AM|#

What's the big hoopla? These programmers are already allowed to take material offerings in exchange for broadcast time. It's been happening since the beginning of radio, and nobody's ever flinched.

The only distinction between what we call "advertising" and what we call "music" would be an arbitrary one, completely dependent on the subjective judgment of a given observer. In the cold eyes of the law, there should be none.

|7.27.05 @ 11:10AM|#

I am as against government intervention as the next person. In theory I totally agree that the government has no business getting ivolved with private contracts such as this. That said, if it takes a federal case to assign Jessica Simpson and Jennifer Lopez to the dust bin of history, screw ideology and logical consistency. Go get Elliot!!!

|7.27.05 @ 11:11AM|#

I am as against government intervention as the next person. In theory I totally agree that the government has no business getting ivolved with private contracts such as this. That said, if it takes a federal case to assign Jessica Simpson and Jennifer Lopez to the dust bin of history, screw ideology and logical consistency. Go get em Elliot!!!

|7.27.05 @ 11:15AM|#

OK, here's where the absolute faith in self-interest and the progressive nature of markets breaks down:

"Stations whose programming does not appeal to the public will be penalized in the marketplace, regardless of their reasons for choosing the songs they play." But you see, the program directors ARE resonding to market pressures - they're rationally maximizing their profits. The assumed convergence of interests between corporations and management often turns out to be indefensible.

|7.27.05 @ 11:22AM|#

I think this is becoming an issue for Elliot because they have lots of extortable cash and a guarantee of headlines.

|7.27.05 @ 11:25AM|#

I think it also has something to do with the evil publicity-seeking alien who has sucked on to Elliot's brain stem. It really explains pretty much everything he's done.

|7.27.05 @ 11:30AM|#

"here's where the absolute faith in self-interest and the progressive nature of markets breaks down..."

Exactly what in this scenario is "broken"?

1. Record label Albums Inc. has three new releases hitting stores.

2. Album Inc. examines its marketing options. For Record One, it opts to pay for a series of nationwide billboards. For Record Two, it opts to pay for a series of newspaper ads. For Record Three, it opts to pay for a series of spins on Radio Network Ltd.

3. A million individuals buy Record One. Half a million individuals buy Record Two. Seven-hundred thousand individuals buy Record Three.

4. Albums Inc. offered a product -- albums -- and somebody chose to buy it. Radio Network Ltd. offered a product -- airtime -- and somebody chose to buy it. Consumers offered a product -- cash -- and somebody chose to buy it.

Where did the market "break down"?

|7.27.05 @ 11:32AM|#

I suppose it could be fraudulent if the DJs accepting gifts are allowing those gifts to influence their job performance. If they're working for a station, and accepting gifts to play material that may not be in the best interest of that station, they are defrauding their employer.

It's no different than a mayor or governor accepting gifts from contractors and awarding contracts based upon that rather than the best interests of a community.

|7.27.05 @ 11:47AM|#

Stations whose programming does not appeal to the public will be penalized in the marketplace, regardless of their reasons for choosing the songs they play.

That's assuming a binary state, where songs either appeal or they don't. Rather, there's a hierarchy of preference, which is threatened by pyola. The point is that a true audience-driven system would result in the dissolution of a monolithic Top 40 culture and lead to a fragmented niche-driven musical landscape with a finetuned taste.

fyodor|7.27.05 @ 11:47AM|#

I guess you could say it's fraud because the radio stations are supposed to be objectively choosing and playing the best possible material for their listeners based on the material's own merits.


HA HA HA HO HEE HEE HAW HOO WHOOOOO HA HA HACK COUGH BLAH BRAAAAUAAGH...

Whoa, gotta take it easy on myself!

|7.27.05 @ 11:49AM|#

This whole thing is a good example of an industry not acting in its long term interests. The recording industry is slowly killing itself. The consolidation of radio station ownership means that a few people choose what the listening public hears. Most people have jobs and lives and don't have the time or interest to be music geeks always looking for the new unknown band. Most people buy what they like after hearing it on the radio. Because of payola and consolidation, it is now virtually impossible to get a new band played. Go back to the 1960s and 1970s and look at how many big bands got their big break. They got their break by a few DJs in a couple of markets liking their music and playing it. That can't happen anymore. To get a band played, you have to convince some radio exec at clear channel or payoff a DJ. That means that only a few acts that the record companies are pushing get played. The variety of music played on the radio is very small. As a result, people generally hear crap on the radio and don't buy music and many bands who could sell a lot of records if anyone ever heard them, never get heard and never sell any records. The whole system is broke and the music industry is in a death spiral because of it. But, the labels and radio people are too greedy, short sided and too anxious to blame file sharing to see why they are killing their own industry.

|7.27.05 @ 11:50AM|#

If the gov't is concerned about payola (although wiht Spitzer, it's usually more baout publicity athan anything else), they should see what networks give to media buyers. I'm talking cruises, free trips, comp meals, incredible parties, all for the purposes of sending business their way.

Over the air radio couldn't possibly suck any worse than it does now, so don't see how payola has hurt or helped it, really.

|7.27.05 @ 11:52AM|#

But in that case distinguishing between broadcast and nonbroadcast stations still doesn't make sense, while the existence of various alternatives to conventional radio undermines the antitrust argument.

Only if you are overly-cavalier about antitrust law. yes, I understand that you can always define the market broadly enough so that you look like a small fish. Antitrust laws has ways of dealing with that little gambit, as I think we will see when Spitzer finally becomes USAG.

Adam|7.27.05 @ 11:59AM|#

And to think, just this morning, I characterized Spitzer as, "an out-of-control, power-hungry, useless bureaucrat who gets his kicks by seeing his self-righteous face in the news and on television when he's trying to wreck the lives of successful businessmen and women, smearing them without bringing charges, or imposing his 'superior' wisdom on all kinds of markets."

Admittedly, he's imposing the superior wisdom of All Mighty, Hailed and Revered Congress to dick around where they don't belong. Irrelevant: laws that violate liberty without damn good reason should not be made, and when made, should not be enforced. Did we learn nothing from the civil rights movement?

fyodor|7.27.05 @ 12:00PM|#

If they're working for a station, and accepting gifts to play material that may not be in the best interest of that station, they are defrauding their employer.

I admittedly haven't RTFA, but I greatly doubt the employers in this case give a whit.

daksya,

Maybe you're right, maybe you're not. But to try to ban advertising (which is what payola is, albeit a relatively surreptitious form) in order to improve the quality of a product is speculative reasoning at best and reaks of social engineering. Laissez faire!!! (If you'll excuse my French!)

|7.27.05 @ 12:01PM|#

I don't fault Spitzer for enforcing the law, but I do think it is a rather stupid thing for the government to worry about, particularly now that we are on the brink of the complete death of radio. I'm not one of those that thinks radio stations would be awesome but for the evil influence of payola. The truth is Britney Spears doesn't exist because of payola. She exists because most people have horrendous taste. But the future is golden. I'm sure that within the next 2 years all automobiles will come with a slot to inserrt your Ipod and and optional factory installed satilite radio.

|7.27.05 @ 12:05PM|#

SP, I'm not claiming that the market for airtime broke down.

I'm claiming that the market for music broke down, because the means of distribution of music (one of them, anyway) was not responding to the market pressure of music consumers, but to the non-market pressure of paid-off program directors with an interest in bypassing the consumer pressure.

|7.27.05 @ 12:15PM|#

Oh, and by the way, the fact that the oligops of radio are dying *so* quickly in the face of new, external competition tells us a lot about the state of competition in radio for the last 20 years or so. Crappy. Not a real market. Not a market Adam Smith would characterize as a market. Too consolidated on supply side. Stopped paying attention to customers a long time ago.

Regulating weed is not be regulation of interstate commerce, but antitrust law is.

|7.27.05 @ 12:17PM|#

joe,

You're making the mistake of assuming that broadcast radio stations have an obligation to listeners.

Listeners are not customers, they don't pay for anything. Advertisers are customers, and they're paying for listeners.

Whether advertisers pay the station to play a 30 second commercial or a 5 minute musical recording, it amounts to the same thing... paying to be heard.

I'd argue that playing music on the radio amounts to advertising to drive sales in the music industry's revenue channels (CDs, concerts, licensing, etc...)

|7.27.05 @ 12:18PM|#

sorry joe, that last one should have been addressed to Dave W.

|7.27.05 @ 12:35PM|#

"I'm claiming that the market for music broke down, because the means of distribution of music (one of them, anyway) was not responding to the market pressure of music consumers, but to the non-market pressure of paid-off program directors with an interest in bypassing the consumer pressure."

But that pressure is STILL market pressure. You call it "paid-off", but it's no different than the record companies putting commercials on Teevee proclaiming the new Kylie Minogue to be the best thing ever. Those commercials are not an objective allegiance to the preferences of consumers any more or less than payola is.

One thing you completely ignore in the above sentence is this:

Radio functions almost entirely on the fuel of advertising revenue; advertising revenue rests on the notion of listeners actually hearing those advertisements. At the same time, the record companies want people to hear their songs, so that they will buy the albums---in effect, that is another form of advertisement. But, let's say a crappy record label paid a station to play their crappy music, and as a result, their listenership plummetted, because the music sucked. Their advertising revenue will fall, not to mention that the record companies will be less likely to bribe them next time, considering how their listener base has shrunk.

So, there is most definitely a natural market corrector in place here. Yet, by your logic, a radio station might subsist on record company bribes alone.

What you fail to acknowledge, however, is that everything, all the money, is tied back to the market pressures of consumer preference, in the end. Even the payola bribes depend on someone actually listening to the music, then going to buy the CD. If the music sucks, and listenership falls, then the payola doesn't matter in the end.

Your logic would only hold water IF consumers operated in a vacuum, and only bought the CD's they hear played on the radio, regardless of whether they like them or not. Since this is not the case, though, your logic holds no water.

fyodor|7.27.05 @ 12:37PM|#

Russ R, but I think your post does apply to joe's post as well. Who says radio stations have some obligation to promote listeners' interests? The only logic for that I can see is the "public airwaves" argument, which isn't based on markets at all.

|7.27.05 @ 12:41PM|#

fyodor:

Yes, it does apply to joe's post too, as he claims that payola is a "non-market" pressure. Hogwash. Of course it's a market pressure, just not a demand-side one.

But, you are right, there is no requirement that radio stations operate in the best interests of their listeners. The only way I could see this being an issue is if the radio stations publicly state, "we accept no payola bribes", but then they actually do. That might be considered fraudulent.

|7.27.05 @ 12:51PM|#

Listeners are not customers, they don't pay for anything. Advertisers are customers, and they're paying for listeners.

We do too pay for it. About our free radio spectrum is taxed away from us and distributed to stations. Given this rampant theft of the electromagnetic spectrum inside my car and apartment, there are really only 2 ways to have a market:

1. Give the customers back their spectrum.

or

2. regulate the market to emulate the variety and content of programming that would be demanded by customers if it were practical for them to bargain individually with the broadcasters.

This is a single payer system we got in radio. Don't confuse it with a free market. It could be regulated to behave like a free market, but one customer (gov't) and one provider (Clear Channel) do not a market make.

As far as whether radio stations should compensate the public for running ads on the public's gov't-appropriated spectrum?

Sure, that would be fair. The advertiser/station transactions seem to be lucrative. However, these side deals have little to do with the conditions under which I personally would permit crap radio signals to travel accross my precious real property. This is the market that had been unwisely allowed to morph into a trust.

|7.27.05 @ 12:53PM|#

Payola's not the problem with radio--FCC restrictions of the frequencies are. Radio stations have had minimal competition because the competitors have been restricted. Now that technology has created new competitors to radio, radio is suffering. Radio stations need to learn to be competitive again, or they will become increasingly unprofitable, and reassigned a place in the value of consumers (FM talk radio, anyone?). And payola has little to do with that.

|7.27.05 @ 2:07PM|#

Isn't it about time this Elliot Spitzer character was arrested in an intoxicated state at a public restroom after making lewd suggestions to little boys? I mean, doesn't organized crime know how to frame a troublemaker anymore?

|7.27.05 @ 3:36PM|#

First, for the most part, the DJ can't be bribed because they're told what to play. If the director of the station finds out that they didn't play what they're supposed to, they get fired.

Anyway, the thing is, the programme director picks shitty music rotations because that's what's being promoted by the labels whether it's out in the open or under the table. So it's not like their shennanigans are changing anything.

|7.27.05 @ 3:36PM|#

Why is payola illegal?

It stems from back in the day when radio stations were owned, operated, and staffed exclusively by 13-year old girls.

|7.27.05 @ 3:56PM|#

Lowdog,

Not so! If you read the documents on Spitzer's site, you will find an account where a DJ who hated Good Charlotte revised his opinion after hearing a couple thousand George Washingtons. In this case he was controlling his own playlist.

|7.27.05 @ 3:59PM|#

Is anyone actually still under the illusion that Spitzer's cases serve any legitimate purpose, aside from his inevitable campaign for governor? And I realize that that isn't legitimate...

|7.27.05 @ 4:03PM|#

Did the distinction I drew about the airtime market and the music market just fly over everybody's heads?

"You're making the mistake of assuming that broadcast radio stations have an obligation to listeners." I didn't comment on the morality of it, just its adherence to the market. When payola and cross-ownership influence what gets played, then the decisions about what gets played on the radio are that much less influenced by consumer demand. You can argue that this is good, bad, or indifferent, but it's inarguable.

"The only way I could see this being an issue is if the radio stations publicly state, "we accept no payola bribes", but then they actually do." Actually, unless I'm mistaken, they are required to make such a statement as a condition of getting broadcast license - which is why Spitzer was able to build a case.

|7.27.05 @ 5:42PM|#

No, many of us don't read most of your posts, that's all.

|7.27.05 @ 6:29PM|#

Well CTD, I did say, "For the most part....

|7.27.05 @ 8:41PM|#

When payola and cross-ownership influence what gets played, then the decisions about what gets played on the radio are that much less influenced by consumer demand. You can argue that this is good, bad, or indifferent, but it's inarguable.

I'll argue. The influence is always ultimately between the producer and consumer (of music in this case). Payola may distort the signaling mechanism through the use of the airtime middlemen, but in the end, what matters is the listener paying the producing team (artist/label/affiliate). The middlemen may seem to make the signaling less efficient (less immediate consumer influence), but they incorporate their own set of signals into the listeners' carrier wave, and end up transmitting more information. An producer or a broadcaster may choose to pay for more spins of a song with some preferred message, even if the fans don't want to buy more copies. Ignoring consumer influence creates its own market signal which is of no greater or less abstract importance than the consumer-to-producer signal upon which it rides.

The market fails only when the signals are blocked (price control, for example). Even then, individuals are shrewd enough to set up a new (often black) market outside the old channels. There's a difficulty in claiming market failure when substitutes are available. If the radio sucks, I can do something else with my eartime. Radio is only one aspect of the big Market, and it doesn't operate in isolation from all the other aspects.

However if one planned for radio to exist forever as it once was, one might be inclined to see change as failure.

|7.27.05 @ 8:49PM|#

Let me restate-- The retail listener is only part of the demand for music. Payola is another part of demand. They're both consumers, in that they pay the creator and distributor, but in different ways. The all-payola station is a music consumer just as much as is a no-payola station.

|7.27.05 @ 10:40PM|#

Interesting post, Dynamist.

This, though, seems to be missing something: "The middlemen may seem to make the signaling less efficient (less immediate consumer influence), but they incorporate their own set of signals into the listeners' carrier wave, and end up transmitting more information."

The "more" information that is being transmitted is inferior information, insofar as the implied endorsement that comes from playing a record is not the best judgement the middlemen can make. You seem to be positting static listener/consumers, and I don't think that's the case. You don't just listen to the radio to hear what you already like.

|7.27.05 @ 10:50PM|#

I suspect that the holy war against payola is motivated at least partially by racism. It certainly was in the fifties ("Nobody in their right mind would listen to this jungle music - they must be bribing the disc jockeys to play it."). Today the bulk of the payola investigations are directed against "Urban" stations. Cowinkydink? Mmmmm...

Yet, as many broadcasters have maintained (and more than a few have learned the hard way) the best payloa can do is prime the pump for songs that would become hits anyway. Conversely, no matter how sweet the kickback, if you're playing crap people don't wanna hear, you'll go out of business. The market works.

|7.27.05 @ 10:52PM|#

And, of course, they don't play more records - those they'd have played anyway, plus those they're bribed to play. For every "extra" record they play, one other cut doesn't get on the air.

|7.27.05 @ 11:29PM|#

If I don't like the music I change the station.

Next question?

|7.28.05 @ 12:01AM|#

What really destroyed radio, and top 40 music in general, is when the public started to prefer to "listen" to strippers who happen to sing instead of real artists. The Buggles got it right in 1981: Video really killed the radio star.

And seriously, when was the last time you heard any unknown or offbeat artists on mainstream radio? It's not payola, but risk-averse station managers who refuse to stray outside the thin band of commercial pablum that's preventing anything new or exciting from emerging.

|7.28.05 @ 3:54AM|#

Deus: If you're correct about managers, maybe the market works too well, giving them information about what people will certainly pay for over what people might pay for. The distribution alternatives now arising have low costs of entry so podcast managers need not be as risk averse. The long tail is the future.

|7.28.05 @ 4:03AM|#

joe: Many people do listen to hear what they already like. The fat section of radio is top 40, or historical capsules of top 40 to match the age of the population.

One of my friends cannot hear Fleetwood Mac too many times. She doesn't care about what she's not hearing, she just wants to sing along with what she knows.

But then, that's not what the hullabaloo is about. The complaints are about hit-making, not milking the golden geese.

|7.28.05 @ 6:58AM|#

Next question?

What if you don't like any of the stations and haven't for a long time?

What if you live in a city of millions whose FM dial can reliably accommodate 50 stations, but one can only pick up 5 or 10 FM stations?

|7.28.05 @ 9:02AM|#

Dave W.-

If there's nothing good on the radio I listen to a CD.

|7.28.05 @ 9:53AM|#

For every "extra" record they play, one other cut doesn't get on the air.

For every "extra" four commercials, one other music cut doesn't get on the air. Why isn't Spitzer going after those stations that sell commericals?

Meanwhile, Spitzer gets paid by stealing people's money. Oops, I meant from tax revenue.

|7.28.05 @ 10:00AM|#

Thoreau,

In economics, we call that market failure. And we try to fix it, not ignore it.

|7.28.05 @ 10:06AM|#

Dynamist, "But then, that's not what the hullabaloo is about. The complaints are about hit-making, not milking the golden geese." Yes, that's exactly what I was saying - programmers are "hitmakers" - that's the import of their "information-providing" activity. To the extent that said activity reflects pay-to-play, they are putting out inferior information.

jc, because the licensees of sections of the spectrum are bound by a clause in their contract not to accept payola. They are not similarly bound not to play commercials. That's where Spitzer gets his authority.

So your next question should be, but why is that distinction made? The answer is that there is a difference between the music played on a station (the product, and the "information" being provided to the music market, using Dynamist's term), and the commercials being played on a station. There is presumption that commercials are aired because they pay to be there, while programming decisions are presumed to made without such payments, a presumption that both reflects and is reflected in the law.

|7.28.05 @ 10:32AM|#

Thoreau,

If there's nothing good on the radio then the market hasn't worked - period.

|7.28.05 @ 10:48AM|#

malcolm-

Telegraph wires aren't transmitting anything interesting these days. Should I be worried about the health of the market?

|7.28.05 @ 11:13AM|#

Thoreau,

Big difference - telegraphy is a dead (superceded) technology. Radio isn't - for billions of people worldwide it's the number one means of staving off boredom when driving to and from work every day, and is unlikely to be superceded until cars start to drive themselves (which of course may well soon happen). Hence, there is a desire to see the market remain free, which I believe will result in a wonderfully diverse and healthy radio. Unfortunately i don't think the market always works - free markets always work, but markets aren't always capable of keeping themselves free, because it's often in the interest of a small number of individuals to corner the market for their own gain. Sure, the human will will always endure, either through the underground (pirate radio in the '60's, for instance) or illegally (downloading now) but i believe a diverse, vital mainstream is very doable. it's just that to get there, sometimes you have to nail a few bad guys in the process.

|7.28.05 @ 3:02PM|#

It feels like some forget TANSTAAFL. It seems like "free" radio because much cost is hidden from listeners by the advertising-based distribution model. The musicians are ultimately getting some of the listeners' money, as are the radio stations, and the radio manufacturers. The radio that came with your car was incorporated into the price of the car.

Satellite radio collects your listener fee directly rather than passing through the advertising economy. Choice is there and the market is working. The law and many sentiments are still sitting beside the telegraph waiting to hear a new song.

|7.28.05 @ 3:29PM|#

Dynamist,

I fail to see how a sclerotic oligopoly, firmly in the control of a handful of huge corporations who handpick which from a list of basically identical products consumers are going to be allowed to choose from, using a sewn-up system of complete vertical integration, can in any way be mistaken for a free market. Well, i guess it works if your name is Sony, or Clearchannel. In a free market, the public gets what the public wants. here we have the exact opposite. Just because a market is working efficiently (which is all your post seems to be describing) does not mean it's working freely.