What's wrong with payola? Nothing.

What's wrong with payola? Nothing.

What's wrong with payola? Nothing.

Moneybox
Commentary about business and finance.
July 27 2005 4:43 PM

What's Wrong With Payola?

The pointlessness of Eliot Spitzer's crusade against the music industry.

Illustration by Mark Alan Stamaty.
Click image to expand.

New York State Attorney General Eliot Spitzer is rocking. And rolling. On Monday, he announced a breakthrough in his latest crusade: a campaign to stamp out "payola"—the illegal practice of record companies paying radio stations and disc jockeys to play particular songs. After having uncovered evidence of payola by Sony BMG, Spitzer negotiated a high-profile settlement. The music giant agreed to stop the practice, hire a compliance officer, and pay a fine.

The settlement—likely the first of many for the already beleaguered music industry—was hailed by the American Federation of Television and Radio Artists and by Don Henley of the Recording Artists' Coalition (and of the Eagles). "There is no question that payola hurts recording artists."

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The activities, which are detailed in apparently incriminating correspondence posted by Spitzer's office, are reminiscent of the 1950s-era payola scandals, in which popular DJs like Alan Freed were caught taking cash in exchange for playing songs. In response, the Federal Communications Commission issued regulations in 1960 that require both broadcasters and people who make promotional payments to disclose the deals to the public. These were among the laws that Sony may have violated.

Clearly, people working in regulated industries—especially radio, where broadcasters operate under federal licenses—should get nailed when they break the rules. And in radio, pay for product placement without full disclosure is clearly against the rules.

But is it wrong? In the half-century since the original payola scandals, the music industry, the broader commercial culture, and consumer expectations have evolved to the point where the payola laws seem outmoded and backward-looking.

It's a truth universally acknowledged that manufacturers of everything from soap to computers pay the folks who control crucial distribution channels to display their wares prominently. It's legal, and no one minds. Viewers have accepted with equanimity the rise of (disclosureless) product placement in television shows and movies. In June, Randy Kennedy wrote an excellent brief dissertation in the New York Times on "co-op advertising," the process by which book publishers effectively pay Barnes & Noble for guaranteed placement at the front of stores. (No disclosure, no hint of illegality.) Why are Doritos bags stacked so nicely at the end of your supermarket aisle? Because Frito-Lay pays for them to be there. And the Web is one gigantic payola machine, from Amazon.com to the exploding realm of paid search.

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Not all forms of pay-for-placement are equally acceptable. Paying for shelf space can be problematic if you're in a highly regulated industry and fail to disclose the payments adequately. The Securities and Exchange Commission has come down hard on mutual-fund companies such as Franklin Templeton for using mutual-fund assets to pay brokerage firms for shelf space.

It's also potentially problematic—from a brand-building perspective, not a legal one—when the entity receiving the payments isn't presumed to be a mere seller of goods, but a curator, an impartial adviser, or a guide. RandyKennedy noted that "the practice seems less savory in bookselling, where bookstore owners and managers were once assumed to serve as an editorial presence, recommending and featuring books they liked." But, come on: Barnes & Noble is a retail operation, not a progressive book-lovers' cooperative.

Which brings us to radio. Payola is banned in radio because the airwaves are publicly licensed, which makes them subject to government regulation in a way supermarket shelves are not. After the 1950s payola scandals, government decided that radio stations should be as independent as possible from their suppliers (the music industry). The public should be able to count on radio stations to exercise independent critical judgment and to know that the music industry and the stations aren't conspiring to jam lousy bands down their throats while preventing artistically worthy groups from being heard.

Spitzer was shocked, shocked, to discover that commercial radio—the alphabet soup of KROCKS and HOT and KISS FMs—has programmers who act for reasons other than artistic worthiness. In the litigation release, he noted that "our investigation shows that, contrary to listener expectations that songs are selected for airplay based on artistic merit and popularity, air time is often determined by undisclosed payoffs to radio stations and their employees."

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But what exactly do the laws that Spitzer is enforcing accomplish? How, precisely, are consumers harmed if a radio station in Toledo played Celine Dion more than it otherwise would have in the absence of payments? Unless listeners were tied to chairs and forced to listen to Celine, there's not much of a case. (And in such an instance, the relevant laws broken would more likely have to do with torture.) Fifty years ago, the prospect of a big record company like Sony and a big radio station owner conspiring to fix what got played could have threatened an important component of the economy and actually stifled musical creativity. But not today. With declining record sales, the rise of Internet and satellite radio, and the advent of iTunes, iPods, and podcasting, radio stations and record companies have become an object of pity more than fear. Indeed, r ead the correspondence, and you'll find people who aren't particularly good at business (or spelling) exchanging penny-ante favors with equally pathetic DJs in order to get them to play the lame songs they know the market doesn't really want to hear.

Sure, marketing blitzes and intense radio campaigns can help push undeserving artists onto the charts. But music today is pulled by consumers far more than it's pushed by conglomerates. Technology and competition have liberated listeners from the clutches of bad Top 40 radio.

Artists might not get the kind of promotion they want if the Sonys of the world are paying stations to play Celine Dion. But show me a content creator—writer, musician, actor—who has ever been satisfied with the level of promotion his or her work received. In the 1950s, a quirky band had no way to gain national exposure. Today, music groups can control distribution and reach global audiences instantly. It's possible—though certainly more difficult—to build a career in music without radio stations or Sony.

Entertainment payola is harmless because this is a consumer market that functions reasonably well. Books and movies backed by huge, ubiquitous promotional budgets won't gain market share and displace competitors if they suck. The Island may have launched in 3,000 theaters, but it won't be filling them for long. We don't need laws to prevent the excessive marketing of The Island.Similarly, we don't need laws to stop labels from paying to put bands on the radio. If no one likes the music, it won't last, and the stations themselves will suffer. As Mel Karmazin, the former head of Infinity Broadcasting and CBS used to note, every radio comes equipped with an on/off switch.