payola 2.0: a proposal for partial deregulation of sponsorship identification requirements

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    Payola 2.0:Payola 2.0:A Proposal for PartialA Proposal for PartialDeregulation of SponsorshipDeregulation of Sponsorship

    Identification RequirementsIdentification Requirements

    Ian Smalley

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    November 26th, 2008

    CCTP- Broadcasting: Rights and Responsibilities

    For as long as the music industry and commercial radio have coexisted they

    have been inextricably linked. For record labels and the artists they represent,

    commercial radio airplay presents the most sure-fire method for creating a hit record.

    Getting a new song on the air for the masses to hear is paramount over any other type

    of promotional effort the record label can conceivably try, and they will go to any length

    to ensure that their artist gets played. This need for guaranteed radio plays has led to

    the practice of paying for airplay, or as it has come to be known, payola. A term coined

    by Variety in 1938, payola is the practice of making undisclosed payments or other

    inducements to radio broadcast personnel in consideration for the inclusion of material

    in radio programming, and it is a practice that has permeated throughout the music

    industry-radio relationship in one way or another for many decades (Repyneck 1).

    Payola has been an issue in broadcasting for almost as long as there has been

    radio. The practice of pay-for-play has morphed through the years, constantly evolving,

    slipping through loopholes, and evading federal restrictions. Despite the repeated

    allegations, investigations, and statute updates, payola has always managed to survive.

    The most recent emergence of payola has birthed a system that no longer deals with

    drugs, bribes, and women, but rather functions as an incredibly powerful, nation-wide

    institutionalized system. Through independent promoters and legal practices that barely

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    circumvent the federal laws, payola continues to influence what gets played on the

    radio.

    It has become apparent over the years that regulation amendments and industry

    investigations have been unsuccessful in quelling the payola epidemic. It is time to

    address the problem in a new way by looking it directly in the eye and bringing the

    issue into the open. By partially deregulating the sponsorship identification restrictions

    that are in place for radio stations, payola will finally be brought out into the open and

    controlled. Enacting a contractually-obligated pay-for-play system will allow radio to

    function and regulate itself as a market, lowering exorbitant independent promoter costs

    for labels, eliminating the need for shady business dealings between record companies

    and radio stations, and allowing a more efficient allocation of promotional resources for

    everyone trying to get their songs played. Payola has survived underground in one

    form or another for more than sixty years, and a partial deregulation of the system will

    finally bring it into the open where it can be controlled and utilized effectively.

    The first signs of a pay-for-play style of promotion within the music industry can

    be traced all the way back to the 1920s and 30s. Back in those days sheet music

    publishers would pay famous performers like Al Jolson and Fanny Brice to play their

    musical pieces in during live performances, and in return for the inclusion into the

    performance the performer would receive a cut of the publishers sheet music sales

    (Marcus 5). Although initial payola statues were first enacted in 1927, they were

    sparingly enforced and were easily evaded (Conway 4). Payola did not gain notoriety

    on a national and political scale until the late 1950s, when serious competition between

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    independent record labels and established companies allowed it to flourish (Repyneck

    2).

    During the 1950s radio station DJs were enormously influential and powerful

    people in the music world. Unlike modern radio, where on-air talent is mostly filler

    between songs, with no real control over playlists, the 1950s DJ was a powerful

    gatekeeper to radio airplay, and usually the one who got the final say over what got put

    on the air. It was around this time that record labels began to realize that they could

    exploit the DJs gatekeeping power for their benefit by bribing them to play certain

    songs. Booze, broads, and bribes came to signify the situation, and payola became a

    pervasive part of the radio-record label relationship (Conway 4).

    Payola finally got some national attention and became a political issue in

    November of 1959, when a House of Representatives subcommittee investigating quiz

    show scandals widened the scope of its inquiry on corrupt broadcasting practices to

    include payment for radio airplay (Marcus 5). Although payola was not explicitly illegal

    under federal law, the New York District Attorney was investigating some of the more

    famous DJs like Dick Clark and Alan Freed regarding their participation in bribery from

    record labels. Alan Freed eventually pled guilty to two counts of commercial bribery in

    1962, effectively ending his career (Repyneck 2). As the subcommittee hearings ended

    in 1960 Congress passed newer anti-payola statues. Section 317 of the

    Communications Act of 1934 was amended, requiring broadcaster disclosure of any

    song played on air that had been paid for by money or any other type of service or

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    consideration; radio stations would also be held responsible for any employee who

    participated in any type of payola practice (Marcus 5).

    To comply with these new disclosure requirements radio station were required to

    identify any songs that were paid for, and the person, company, or corporation who paid

    for them, directly after the song was played (Conway 2). This meant that with the

    proper disclosure, pay-for-play was completely legal under the new laws. Unfortunately,

    neither radio stations nor record labels want to make these disclosures to the listening

    audiences. Record labels do not want the audience to think that they had to pay money

    to get their artists song on the air; they would rather have them think that the playlist

    inclusion was based solely on artistic merit of the song. Additionally, radio stations

    would prefer not to break up the flow of their radio show or music playlist with constant

    paid-for-by pseudo-commercials. Instead of acquiescing to the new regulations, radio

    and record label executive chose instead to engage in a practice that has become

    second nature when dealing with payola statutes: reinventing pay-for-play tactics,

    finding loopholes, and circumventing the law.

    Payola took a more outlaw and underground path throughout the 1960s and

    early 1970s. Mimicking the free-thinking and wild-acting ways of this era, payola often

    came in the form of illicit payments involving increasingly large sums of money, drugs,

    and prostitutes (Conway 4). The bribes of the 1950s had reemerged despite the new

    anti-payola laws, and in many ways they were even more pervasive in the industry. A

    new payola investigation started in 1973 when a New Jersey grand jury conducting a

    drug investigation on a man with mob ties found that he had close connections with the

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    director of artist relations at Columbia Records (Conway 4). Senator James Buckley of

    New York and the Recording Industry Association of America (RIAA) worked together

    closely to conduct an investigation into Columbia Records and other major record labels

    to ensure that their business dealings were legally and morally strong. They were

    looking to create a program to monitor the standards of conduct for all record label

    employees, one that required anyone who had any contact with radio stations to sign

    anti-payola affidavits (Conway 4). Although twenty-one people were indicted by the

    grand jury, the FCC inquiry was eventually made a non-public proceeding and the whole

    issue lost any interest amongst the public.

    Although it seems that the 1973 investigation merely provided another instance

    of anti-payola statutes being weakly enforced, that event, coupled with the Racketeer

    Influenced and Corrupt Organizations (RICO) statute enacted in 1970 forced payola to

    reinvent itself once again (Marcus 6). Penalties under the RICO statute could be

    imposed on any company found to be engaging in bribery and were much more heavily

    enforced and harsh. Companies had been able to get away with a lot under the feebly

    enforced payola statutes created in 1960, but the threat of heavy penalties from RICO

    statutes forced record and radio companies to take a step back and create a different

    system to protect themselves from serious criminal liability. This need for another

    payola reinvention was how the new and more organized system of independent

    promoters was born.

    Independent promoters (indies) were used in the radio station-record company

    relationship as middle-men; someone who could facilitate interactions between the two

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    while insulating them from any possible criminal liability. Initially, when the nascent

    system was more legitimate, independent promoters were hired by record companies

    because of their close ties with radio stations within a certain markets (Boehlert, Payola

    is Dead 2). There were so many radio stations nationwide that it was impossible for

    record label staffers to monitor them all, and indies were hired and paid to lobby

    program directors for song airplay, earning a flat fee on a per-project basis. As time

    passed however, networks of independent promoters formed, developing powerful and

    strategic relationships with both radio stations and record companies (Marcus 7). Once

    paid lobbyists in separate markets, the industry of independent promotion soon evolved

    into an expensive phalanx of toll collectorswho billed record companies exorbitant

    fees for very little work (Boehlert, Payola is Dead 2).

    Under the new system of independent promotion a record company would pay a

    large retainer, as well as a separate fee based on the number of adds to radio station

    playlists a song gained to the indies (Repyneck 4). The independent promoters in turn

    create close relationships with many of the nations biggest radio stations, paying them

    huge fees (often more than $100,000) to deal exclusively with them and gain access to

    their advanced copy of playlist. Although they cannot legally have direct access over

    what songs are added to the playlist, the nature of their exclusive relationship with radio

    stations can influence what is added, and they in turn charge record labels a large sum

    for each song add (Boehlert, Pay For Play 2).

    With these strong and exclusive relationships forged, the independent promotion

    industry grew throughout the early 1980s, and by 1985 the record industry was

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    reportedly spending somewhere between $60 and $100 million a year on indie

    promotion (Conway 4). The record labels were starting to worry about the level of

    control indies had over their relationship. They were able to charge their exorbitant

    prices for every song of the labels that was added, regardless of whether they

    influenced the add or not. They were essentially collecting payment for every new song

    that made it on the air, even if they only had to do work to influence a fraction of the

    adds. Despite the apparent one-sidedness of their relationship, the labels were too

    afraid to bring ties with the indie promoters, because just as they had a strong influence

    over what was played on the radio, they had an equally strong influence over what was

    not, and labels were too afraid of indie backlash, and the resulting loss of valuable radio

    airplay to try and buck the system.

    Independent promoters truly became nation-wide institutionalized powers with

    the Telecommunications Act of 1996. The new Act brought about a change in radio

    station ownership limits, and a resulting consolidation of ownership within the industry

    (DiCola and Thomson 3). As more and more stations were owned by larger parent

    companies the independent promoters who had forged strong, exclusive relationships

    with these companies found themselves in a position of great power. Where they had

    once been a hired middle-man to different market area radio stations, independent

    promoters now found themselves as powerful toll collectors with potentially exclusive

    access to almost sixty percent of the top one hundred stations in the United States

    (Repyneck 4). When radio corporations decided to deal exclusively with the large

    independent promotion firms they were essentially creating a closed market where the

    promoters could drive up prices. Again, record labels found themselves in an

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    unfavorable relationship, but one where they had to continue to pay. It was a system

    driven out of fear; an insurance policy for record companies who wanted the sense of

    security from knowing that they had paid the top indies (Boehlert, Payola is Dead 2).

    The fear of losing the radio airplay that is so critical to making a hit song simply

    outweighed the financial burden that the independent promoter relationship was causing

    on them.

    In spite of careful efforts to keep the way that independent promoters and record

    labels could influence what was played on the radio hidden some people began to pay

    closer attention to the whole radio station-indie promoter-record label system. After

    receiving a number of tips from radio and music industry insiders New York Attorney

    General Eliot Spitzer began an investigation into how record companies were

    influencing what was played on the radio, and whether or not their methods were

    violating federal anti-payola statutes (Conway 7). Spitzer subpoenaed hundreds of

    emails and files from the giants of the two industries; the four major record companies

    (Universal, Sony BMG, Warner Bros., and EMI) and the nine major radio corporations

    (Clear Channel, Infinity, Entercom, Emmis, Cumulus, Cox, ABC, Citadel, and Pamal)

    (Marcus 9).

    Spitzers investigation initially targeted Sony BMG, and emails uncovered during

    the probe soon showed that the label was engaging in payola and offering inducements

    to radio stations and their employees in exchange for airtime for Sony Artists (Conway

    7). The inducements came in many forms, everything from direct cash bribes and

    vacation packages, to equipment purchased for the station and prizes furnished for

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    contests. The goods and services were used to buy airplay for specific songs as well

    as generally promote Sony throughout the station.

    As a result of the investigation Spitzer and Sony reached a settlement on July 25,

    2005. Under the terms of the settlement Sony BMG did not have to admit to or deny the

    allegations, but they had to enter an Assurance of Discontinuance with the Attorney

    General agreeing to stop all payola practices, pay $10 million to a New York charity, pay

    $100,000 to cover all investigation fees, implement business reforms, and make a

    statement acknowledging their wrongdoing (Conway 8). Allegations were made against

    the other three record labels as well, and similar evidence was found. By July 2006

    settlements had been reached with all four labels, totaling $30.1 million. Each labels

    settlement was roughly proportionate to their relative size within the recording industry,

    with EMI paying $3.75 million, Warner Bros. paying $5 million, Sony BMG paying $10

    million, and Universal paying $12 million (Marcus 10).

    In an effort to hold radio companies responsible as well, Spitzer sent the volumes

    of evidence that he had compiled to the FCC so that they could launch an investigation.

    Unfortunately the FCC was not as proactive as Spitzer, and the investigation was not as

    strident. Instead of continuing the investigation the FCC eventually settled with the four

    major broadcasters (Clear Channel, CBS, Citadel, and Entercom), requiring them to

    agree to consent decrees that said their 1,653 stations would refrain from engaging in

    any type of payola practices and forcing them to pay a total of $12.5 million in fines

    (Dunbar 1).

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    There is no doubt that both Eliot Spitzer and the FCCs investigations were a

    step in the right direction. It was the first time that the underground payola tactics that

    permeate throughout the music industry were thoroughly addressed, and the penalties

    enforced were the first major repercussions that the record labels and radio stations had

    ever suffered. Unfortunately the fines assessed and the consent decrees that the

    involved parties agreed to will do little to stop the payola problem. Payola has survived

    in the music industry for over sixty years, and has always found a way reinvent itself

    and bounce back when challenged. Additionally, the $30.1 million in fines levied on the

    four major record labels are only a tiny portion of their net worth when you realize that

    they control more than 80 percent of the $12 billion in annual music sales (Marcus 9).

    While the penalties may seem huge, they are only a slap on the wrist to these huge

    corporations, and will not be much of a deterrent. Finally, the consent decrees that the

    record labels signed are not very extensive in their regulation, and will not be vigilantly

    regulated by the FCC. While the Spitzer investigation finally shined a spotlight on the

    pay-for-play problems that have become so serious in the music industry, the penalties

    brought down on the companies involved will do little to deter a practice which has

    become so ingrained within the system.

    It is obvious that a major change needs to be made in the way the payola issue is

    addressed. Some argue for a total prohibition of all pay-for-play practices, with the

    industry being strictly regulated by the government and FCC. While this vision of a

    radio industry based solely on artistic merit and listener satisfaction is certainly a

    pleasant and utopian one, the fact is that it will never truly be possible. Payola has

    survived for the last 60 to 70 years because of its ability to adapt and evolve to every

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    challenge that it has faced. Radio airplay is so valuable to record labels that there will

    always be a huge incentive to figure out some way to influence a radio stations decision

    on adding a song to their playlist. If the government and FCC are actually able to

    strictly regulate the payola statutes, and eliminate the numerous loopholes that payola

    has always snuck through, then payola will just move farther underground, adopting

    even more corrupt tactics to pay for airplay and evolving into an even more crooked

    system (Katunich 36).

    Another approach that many would argue is the solution is the total deregulation

    of payola. They say that eliminating any restrictions on paying for undisclosed radio

    airplay would rid the industry of all the tricky, semi-legal tactics that payola utilizes,

    turning it into an honest, money driven system (Sidak 570). While it is true that a total

    deregulation of payola would eliminate the need for back-room dealings, it would also

    create a market where only the industry giants could compete. By allowing complete

    freedom to pay for unregulated radio airtime they would be creating bidding wars

    between the major record companies. These bidding wars would drive the prices for

    airplay up to astronomical levels, shutting out all but the major financial giants. When

    only a few would be able to compete for airtime the radio stations would turn into their

    personal broadcast networks; radio shows would become nothing more than

    infomercials showcasing all the artists of the highest bidder.

    It is plain to see that neither of these extremes are the proper answer to the

    payola problem. Total prohibition is simply impossible to completely achieve, and total

    deregulation would only allow the richest to compete essentially creating an oligarchy

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    on the airwaves. Somewhere between these two extremes lies an answer however. A

    partial deregulation of sponsorship identification restrictions would finally bring the back-

    room payola dealings into the open, and allow them to be controlled in a manner that all

    could take advantage of. By allowing for the contractually-enforced purchase of airtime,

    while limiting the amount of airplay that could be purchased, a new, more effective

    system will be created that will eliminate the exorbitant independent promoter costs and

    allow pay-for-play to function as an efficient market.

    The first aspect of the partial deregulation plan would be the actual purchase of

    airtime. Record labels would be allowed to sign contracts with radio stations or

    corporations to buy a specified amount of radio airplay, with prices varying based on

    amount of airtime purchased, and time of day that the song was to be played. The radio

    station would no longer be required to immediately disclose these song sponsorships on

    air. Instead there would be weekly disclosures to trade press of all airtime bought by

    record labels. Each disclosure would identify the song, artist, record label, amount paid,

    and the amount of airplay received. The radio stations would also be required to file

    quarterly summaries of airplay purchased in the public inspection file and maintain an

    up-to-date online database that the public could access, summarizing the weekly

    disclosures to the trade press. Finally, the radio station would file annual airplay

    purchase reports to the FCC, allowing the FCC to monitor the prices paid and allowing

    them to evaluate if the market is operating fairly and effectively. It is important to

    remember that if the sponsor is immediately identified it is completely legal to pay for a

    song to be played, it is just that both radio and record labels do not want to distract or

    bother the listener with constant paid for by announcements. By partially deregulating

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    the sponsorship identification requirements the information is still made available to the

    public, albeit in a much more efficient and palatable fashion.

    The second aspect of the partial deregulation proposal, contingent on the first,

    would be to enact a limit on the amount of radio airplay a record company could

    purchase. By capping the amount of plays a label could pay for it would ensure that

    labels could not buy their success on the industry charts. An appropriate amount of

    time that a label could purchase per contract would be determined by a panel of radio

    and music executives working with the FCC. The FCC would have the authority to

    regulate the amount of time that could be purchased as well as the amount being paid,

    a precautionary measure to prevent major radio and record companies from colluding to

    shut out smaller independent labels with skyrocketing prices. Once the predetermined

    contract was up, the radio station and record label would be free to renegotiate a new

    contract.

    Some might worry that the freedom to negotiate multiple contracts would

    essentially allow the labels to circumvent the airplay limits by purchasing contract after

    contract, but as the radio establishes and stabilizes itself as a market, it will not be

    necessary. If a label purchases a contract and the song becomes wildly popular, there

    will be no need to pay additional money to keep it on the air, as it has already become a

    hit and the radio will continue to play it to satisfy listeners. If a song is extremely

    unsuccessful after its initial contract the label will probably no longer want to pay money

    to promote it, just as a radio would be hesitant to play a song that is being poorly

    received. In the middle-ground, if a song enjoys only a mild success, is when possible

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    negotiation could occur to purchase more airplay and boost the songs popularity. In

    radio you cant buy a guaranteed hit, only the chance at a hit. Radio will always be

    driven by what the audience wants to hear, and while these contracts can help to get a

    song introduced to a playlist, the supply and demand nature of radio airplay will always

    be the determining factor as to whether a label wants to buy more airtime, and whether

    a radio station deems the song as worthy to be on the playlist. It is important to

    remember this concept when addressing the potential negative effects of payola partial

    deregulation.

    Detractors will argue that of any type of deregulation of payola will cause a lack

    of diversity in radio. Left to the bigwig executives, playlists will become homogenous

    and bland one long infomercial for record companies. These people fail to realize that

    due to supply and demand and a radios need to attract listeners, there is an economic

    incentive for radio stations to make programming decisions based on the perceived

    artistic merit and entertainment value of a song, even in the presence of pay-for-play

    exchanges (Repyneck 8). It is a very simple concept that has always driven radio; if a

    station plays substandard music they lose listeners, if they lose listeners they lose their

    advertising revenue. Since advertising is the most lucrative form of revenue that a radio

    station has they will never do anything to jeopardize losing the listening audience that

    brings in that cash. Prudent business judgment demands that all involve produce and

    distribute music of a caliber that will satisfy its listeners, and the supply and demand

    relationship with the listener will always be the most important factor in what gets played

    on the air.

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    Partial deregulation of payola will not only avoid these adverse effects to radio

    quality, but it will also benefit almost all parties involved. Record labels would no longer

    have to deal with the exorbitant fees charged by independent promoters. Instead of

    paying thousands of dollars to the indies for every song added to a radio playlist (no

    matter if the indie promoter actually influenced the add or not) they would be able enter

    contractually enforceable deals directly with the radio stations. These once shady back-

    room deals would be brought out into the open, allowing for more honest and efficient

    negotiation. By having control over what they are paying for an exact amount of airtime

    the record labels can spend their promotional budget more efficiently, allocating funds to

    other areas of promotion while remaining confident that their artists song will be on the

    air (Katunich 39).

    This economically efficient promotion concept also translates to the smaller

    independent labels who have historically struggled to get their songs on the air. In the

    past it was simply impossible for these smaller outfits to pay an independent promoter

    the kind of money necessary to get a song on the air. With the new partial deregulation

    system the independent labels will be able to more effectively allocate their resources

    behind an artist (Katunich 31). If they have an act that they truly believe is a sure thing

    they can basically pool their resources behind the artist and bet it all on them. They will

    be able to get that artists song on the radio, and also enjoy a far more direct return on

    their investment than they would when dealing with an indie promoter. While an indie

    would charge the small label for every song add to any station, under the new system

    they would be able to pick the most receptive market to their artist and only pay money

    to put the song on the air in those markets. The difference between paying an indie

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    thousands of dollars because a their song was played a few times on at 4 am, and

    paying for the promise that their song will be played during the popular evening show

    targeting their niche audience is huge for a small label with few resources.

    Perhaps the party that benefits most from the more economically efficient

    promotion is the artists themselves. In the past it could cost hundreds of thousands of

    dollars to promote an artist on the radio, and usually the artist would have to recoup all

    of those promotion fees against their album sales before they actually saw any money.

    The more effective allocation of the promotional budget that partial deregulation allows

    will save them money in radio promotion, and also allow for increased promotion in

    other fledgling areas that are becoming more popular in the digital age. New

    consumers are active, migratory, and socially connected and it may be time for labels

    and artists to begin to investigate new and exciting ways to promote their product

    (Jenkins 18). Additionally, the artist would be confident in knowing that they had their

    labels full support, as evidenced by the contracts signed to buy airplay for their songs.

    In an era where radio is still the principal promotional tool, but new media is becoming

    increasingly relevant, the artist will still be able to enjoy their radio airplay while

    branching out into newer promotional markets.

    The final player in the whole system who will enjoy the benefits of partial

    deregulation of payola is the radio stations. In a way, they will not have to change

    much, but their lives will become much easier. They will still be receiving money to add

    songs to their playlists (from record label contracts rather than lump sums from

    independent promoters), while maintaining the final word on what gets played. As was

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    explained before, radio playlists will always be dictated by what gets the listeners tuned

    in. The new system of deregulation will just make it easier to abide by the FCCs

    consent decrees and avoid any shady or questionable deals with independent

    promoters. They will not even have to worry about their sponsorship disclosures

    disrupting the radio broadcast since they will no longer be immediately required. Partial

    deregulation of payola would allow the radio stations to continue functioning as they had

    before while further distancing them from any potentially improper interactions.

    It is plain to see that a partial deregulation of sponsorship identification

    requirements will allow record labels and radio stations to drop the back-room payola

    dealings that have plagued the system for years and allow them to operate more

    efficiently and effectively. Under Section 317 of the Communications Act it is

    legislatively possible for the FCC to waive the necessity of immediate on-air

    identification in any case or class of cases with respect to which it determines that the

    public interest, convenience or necessity does not require the broadcasting of such an

    announcement (Sidak 570). If Congress could authorize them to waive the

    requirement, they could quite obviously authorize them to utilize an alternative method

    of disclosure. The FCC would still require that each station post disclosures in weekly

    trade press and in online databases, file quarterly summaries in the public file, and

    submit annual summaries with an FCC inspection committee to monitor the new system

    for its fair practices and allocative efficiency.

    For over sixty years payola has been an ubiquitous and influential presence in

    radio broadcasting. From the free-wheeling drugs and hookers schemes of the 60s

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    and 70s to the itemized billings of current-day independent promotions corporations,

    pay-for-play practices have always found a way to evolve with the times, continuously

    slipping through loopholes and circumventing poorly enforced federal laws. It is time

    that these underground tactics be brought out in the open and addressed. A partial

    deregulation of sponsorship identification requirements will remove many of the

    questionable elements of payola and allow the purchase of radio airplay to function as a

    market, creating a more efficient and honest system for everyone involved. Radio

    stations will no longer have to worry if their dealings are violating FCC regulations or

    federal statutes. Record labels will no longer be held hostage by independent

    promoters and their fraudulent billings. Artists will be able to more efficiently use their

    promotional budget to create a buzz around their band. Listeners will still enjoy a

    diverse radio playlist that is dictated by what they want to hear. Every attempt to

    completely kill payola in the past has failed, and often made the system stronger, so it is

    time to use the system to our advantage, as an allocative tool in the radio market.

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