Payola Unbound

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Rock and roll came in 50 years ago, and so did Congressmen berating payola for promoting this "bad" music. They passed laws against the payola. The rock and roll went on and on, and so did the payola.

Now comes Eliot Spitzer shaking down music publishers for hefty amounts to avoid trials. Warner Music Group settled for $5 million and Sony BMG Entertainment for $10 million. What is this thing called payola and why doesn’t it go away? Why is it illegal?

Payola occurs when music publishers pay singers and players of music to sing or play their songs. Payola is the payment, in money or in kind. Payola doesn’t go away because it is so basic to the music business. It’s a way for the publishers to get their music sung and played without placing the singers and players full time on their payroll or making them formally part of their company.

Music publishers sell records, CDs, sheet music, and such. To advertise their songs to the public so that they may buy, they sometimes pay others to make the song known. When this happens, the payola is payment for advertising. We have no reason to expect advertising to go away.

There is no mystery to payola’s existence. The mystery is how and why payola has become illegal.

The larger, more established, and more successful music publishers have multiple ways of promoting their product, such as through sponsoring concerts, artists, billboards, web sites, samples, ads, and payola etc. The smaller, less established or newer independent publishers do not find it economical to use all these methods. They often prefer to get their music played via payola, paying others who have built-in audiences to play their songs. Al Jolson got a lot of payola, even a race horse.

Now, the big guys don’t like it when the little guys horn in on their customers. They don’t want the little guys to become big guys. The big guys hit upon a bright idea, a very old idea that Adam Smith knew about. Why not get together and ban these payments? Then the little guys will stay little. Meanwhile we’ll use all the other methods and keep ourselves big.

This banding together is called forming a cartel. But there are hitches. About 1 minute or less after the big guys agree on the cartel, each of them sneaks off to a telephone and calls his favorite disk jockey and offers payola. This is called "cheating," but to circumvent an agreement such as this is hardly something anyone need worry about and it’s good for the customers. The cartel members have even more incentive to pay the payola if they think no one else is doing it. The cartel collapses.

The big guys also have to prevent the little guys from continuing to pay the payola. The 1917 cartel was called MPAA (Music Publishers’ Protective Association), which sounds like something the Black Hand would invent. MPAA managed to get the vaudeville theatre operators to boycott any publisher who was not a member of the MPAA. This scheme collapsed almost immediately. Ronald Coase’s research on this subject quotes historian Hazel Meyer’s book: "Within twenty-four hours, the overt payola to vaudeville performers stopped. Within another twenty-four hours, payola was underground."

Coase also informs us about the history of payola back into the 1800s. The established publishers in England in the 1860s paid the leading singers royalties to sing their songs. A newcomer, W.H. Hutchinson, could not afford this, so he paid payola to smaller singers to introduce his songs. Pretty soon, the larger houses imitated him. In America, business was similar, and the houses competed for artists. In the middle 1890s, the music publishers formed a short-lived cartel. It collapsed when its members "began to make secret arrangements with headliners." Variety magazine assisted in other cartel formation attempts when its publishers realized it meant greater ad revenue for the magazine. In the 1930s the payola switched to leaders of big bands; in the 1950s, to disk jockeys.

There are other ways besides cheating or secret production in which cartels fall apart. They usually cannot control the entry of newcomers, who then proceed to undercut the cartel and gain market share. They can’t control product changes. They can’t control competition from substitute products.

Unless a cartel can gain ironclad enforcement, it usually falls apart. The best enforcement is to get a law passed. Enter the state. Payola is illegal because the big guys have succeeded in getting regulations and laws passed to make it illegal, the motive being to keep the little guys little.

The lawmakers who pass these laws have their own motives that we need not go into. In one way or another, they get their own payola. Sometimes they are just plain ignoramuses who think they’re doing the little guys a favor, or at least they sometimes say so!

The faces of the big guys change, but their incentive to organize through the state is a constant. We therefore observe them pushing, over a 43-year period, for regulation of payola under the NRA in 1935 (found unconstitutional), under Federal Trade Commission (FTC) rules between 1935 and 1938 (another failure), until they achieved some success in 1960 by getting legislation that amended the 1934 Communications Act. This made the Federal Communications Commission (FCC) the federal regulator of payola.

The big guys didn’t get all they wanted in 1960, but half a loaf is better than none. They got a law that says that if you take payola for a song you have to announce the details on the air. This rather messes up a show, so it had some effect. But payola set in again because publishers, big and small, still want to advertise their music. There’s outright payola that ignores the law, in which the broadcaster simply doesn’t announce that the music is supported by a promotion. The FCC and others are lax in checking up, you see. Then there’s subtle payola. This can get complicated with some gaining and others losing. The gist of it seems to be that the publishers acted through intermediaries (promoters) who got playlists from the broadcasters and then reported back to the publishers who then influenced the playlists, with money and favors being passed along here and there. Sony’s settlement also mentions such heinous practices as payments in kind to radio programmers, contest giveaways to audiences, and payments to stations to cover their operating expenses.

The net result is that 45 years after the 1960 legislation, we again hear loud voices in the industry pushing for tougher laws to bar payola. There’s little point in trying to figure out who’s right and wrong among the new set of players, who gains and loses, or what should be done in terms of new laws and amendments. It’s all a big waste of time and effort, a big charade in which all those seeking gain will posture and wag their fingers at payola. Congressmen will act all morally outraged, pointing to some lurid piece of testimony about some "whore" who gladly took money to play any drivel. Some popular author will testify about how outrageous these practices are. Someone from Cato will try not to alienate anyone while half-heartedly compromising. A few people will speak plainly about how banning payola harms them and others, but they will be ignored.

The answer is simple: freedom. Repeal the amendments to the Communications Act. Then repeal that Act too. Deregulation is not impossible. It’s tough though because of the interest group politics involved.

The basic problem is that our legal system is sclerotic. Our legal arteries need an angioplasty. They’re clogged up with too many laws and regulations. We the people actually need a new circulation system altogether. We can’t change our arteries or strike at the root of our problems without (1) a revolution in our thinking about our relationship to our rulers, and (2) actually changing our legal institutions, which will also be revolutionary.

When and if we move in a new direction, we will still want law. What will it be? What should it be?

Law based on rights or natural law is a viable option. How does this work for payola?

Payola is entirely legitimate (under natural law). It is voluntary among all who are involved. The publisher volunteers payment if he wants to promote a song. The song plugger, be it an itinerant minstrel, a dance band, a disk jockey, a broadcaster, a vaudeville theatre performer, or an internet web site, voluntarily accepts payment to play the song. The listener who hears the song, whether for free or after having paid admission, can buy or not buy the song. The listener can listen to the song or switch it off. If he has paid admission and doesn’t like what he has heard, he can patronize some other artist in the future.

Payola is not a bribe, not immoral, not a flagrant evil, not unclean, not reprehensible, not wrong, not dirty competition, not a detriment to those engaging in it, not an insidious curse, not devious, not an unfair trade practice, and not a surreptitious inducement for the public to buy a song, These are the descriptions used by those who wish to form a cartel and pass a non-rights based law that constrains what otherwise freely acting people might harmlessly wish to do. This is the language of legal arteriosclerosis, a malady that eventually kills if not treated.

Payola is not an extraneous inducement that interferes with music being played for its own merits. It is not a sensible cause of moral indignation. It is not a legitimate reason for rights-based law, although non-rights based law does regulate it. It does not force bad music on the public. The public selects its own bad (and good) music.

Magazines, newspapers, and web sites take something like payola all the time. They give more and better ad space to those who pay them for it. Now suppose that the advertisers pay the web site to mention them in their content, to plug them. That’s plugola, similar to payola. Suppose that in a movie scene, a Jaguar auto is prominent. Chances are there has been a promotional payment. Suppose a columnist mentions how good a movie is. Perhaps he has been paid plugola by the producers. Actors and others endorse products all the time. Would it surprise you to learn that they may have been paid to do so?

Although there is no good reason for payola to upset anyone, it upsets many who shout "deception!" Some believe this. Other shouters are hypocrites who are in the business of selling books and scandals, or benefit by painting themselves as taking the moral high road.

I am most concerned about those who believe there is something deceptive or unethical here. Often these believers have passed through the U.S. educational system, had a course in economics or ethics, and sincerely think they know what’s going on in such matters. If you happen to be one of these people, I’m saying that you have not been told the whole truth. You have been told half-truths, and the net effect has been to deceive you. Your brain is in good working order, and if you have no psychological need to remain fixated on a false belief system, then please allow yourself to entertain the hypothesis that payola is not bad. When Mr. Spitzer and others shout deception, they have their own agenda and it’s not to help you.

Some who really consider themselves deceived think that the menu of potential music that might have been aired has been misrepresented to them. They think they have a property right on what tunes the musicians or disk jockeys play. This is not so. It’s obvious that a listener has no such right for over-the-air broadcasts. Even when customers pay for a concert, their rights are limited. The musicians choose the tunes.

If you are someone who expects other people to purify, in some way that I cannot imagine, the information that you tune in to or are exposed to, you are expecting too much. You certainly cannot expect the law or lawmakers to accomplish this for you. Filtering information is your job just as much as choosing your diet is.

The attitude of demanding that laws solve our personal problems, which seems to approach madness, is not limited to payola but extends to all advertising, food labeling, toy safety, and much else. The idea is to "let George do it." It’s actually not madness at work here, but another form of a cartel, an association of a stratum of voters who wish to impose the costs of labeling on everyone else by passing laws requiring labeling.

Having said that and understanding some of the economics of this process, I still feel that I am living in a country gone mad that allows and encourages these games to be played. The results of 50 years of laws like this are chaos, rancor, absurdity, phoniness, resentment, and nonsense.

In all instances of advertising, whether straight ads, payola, plugola, endorsements or whatever, the rights-based approach is let the listener beware and let the buyer beware. If you consent to hear the ad or tune in the program or read the column, and you do consent, then you are responsible for judging the merits of what you hear.

Distinguishing what’s true and what’s false by who is providing the message and what their interest in it might be is your individual responsibility. This is a basic and age-old human activity. After the first few instances in which you are deceived, you are supposed to figure out that some situations produce more reliable information than others. If you believe everything you read or hear in ads, it’s your problem. If you judge by appearances, it’s your problem.

To add to the insanity, consider the ambitious Mr. Spitzer again. He’s running for governor in 2006. His peculiar aptitude is in building his career out of prosecuting non-crimes against Martha Stewart, mutual funds, and now music publishers. Mr. Spitzer has called the payola "bribes." This is inaccurate. There is every reason to believe that broadcast employers full well understand and condone payola to employees and take it into account when salaries are determined.

Mr. Spitzer is neither insane nor atypical. But any system that encourages behavior like his needs to be put out of its misery. The plug needs to be pulled. U.S.A. stands for the United States Asylum, it appears.

The incredible fact is that the fines extracted by Spitzer will be turned over to Rockefeller Philanthropy Advisors who will then use it to fund music programs in New York state. There being no connection between music programs and listeners to shows produced by those who took payola, this procedure is a fitting conclusion to this particular episode in the mindless payola story.

Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.

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