TCS Daily

The Permanent War on Payola

By Martin Fridson - November 1, 2006 12:00 AM

It lies within the government's power to outlaw a market, but not ordinarily to abolish it. At most, the authorities can drive the nexus underground. The resource-allocation need that gave rise to the market will survive. Associated transactions will assume a form that disguises, but does not alter, their substance.

In light of this foreseeable response, a recent New York Times report on circumvention of rules against payola—record companies' purchase of radio airtime—can hardly be called news. The supposedly shocking revelation was that Blackground Records and Roadrunner Records, two labels distributed by Universal Music Group, bought radio commercials that incorporated a couple of their current releases. This exposure propelled the songs to #1 and #2 on the charts.

According to the Times, the arrangement may have violated a settlement reached five months earlier between Universal and New York State Attorney General Eliot Spitzer. (Universal, which says it has no ownership stake in Blackground or management control of Roadrunner, launched an inquiry into those companies' actions.)

The Times speculated that music industry executives might make other attempts to capitalize on perceived loopholes in the settlements between Spitzer and various record companies. If they do, they will be continuing a tradition that dates back to the prohibition of undisclosed payola following sensational Congressional hearings of 1959.

Barred from accepting cash for airplay unless accompanied by prohibitively cumbersome announcements, radio stations resorted to "show-ola." That practice provided airtime to record companies in exchange for allowing bands to play, for less than their customary live-performance fees, at festivals staged and broadcast by the station.

Another subterfuge involved "independent record promoters." These operators shelled out vast sums to the stations, officially for the privilege of seeing the stations' playlists, but in reality to get their recording company clients' discs on the air. Thanks to the music industry's ingenuity in perpetuating the market for airtime, a new payola scandal has broken out every few years since Congress criminalized the practice.

Not addressed in the latest New York Times exposé, or in much of the commentary on Eliot Spitzer's crusade, is a fundamental question: Why it is deemed a crime to promote recorded music in the only way that works, namely, making sure that consumers hear it?

This principle was understood even before the recording era. Prior to beginning his celebrated collaboration with William Gilbert, British composer Arthur Sullivan promoted sheet music sales of one of his songs by inducing a leading baritone to include it in his public recitals. The quid pro quo was a share of the song's royalties. Later on, music publishers made similar arrangements with Al Jolson, knowing that stage performances of a song by "The World's Greatest Entertainer" were almost guaranteed to make it a hit. In one instance, Jolson received payment in the form of a race horse.

Nowadays, shelf space in supermarkets is routinely and openly purchased by food manufacturers. Bookstores charge for window displays without fear that prosecutors will show up on their doorstep. These mechanisms for achieving consumer awareness represent valuable resources. It furthers economic efficiency for firms to work out appropriate prices for such resources. Why, then, did Congress single out radio airtime as an awareness-building mechanism for which no market may lawfully exist?

Like most market interventions, the 1960 amendment to the Communications Act came at the behest of powerful vested interests. Up until the mid-1950s, roughly three-quarters of U.S. record sales were concentrated in the hands of four companies. By the end of the decade, however, their share plummeted to one-third. The change they had not counted on was the sudden emergence of rock and roll, which was pioneered by independents such as Chess and Sun.

Marketing professors' prescription would have been to adapt to the new consumer preference. The major corporations instead reacted instinctively by appealing to Washington for relief. Soon, the long-established industry practice of compensating disc jockeys for airtime was being portrayed as a vile form of bribery.

In reality, all that was distinctive about the independents' use of payola was that they relied on it more heavily than the majors. Unlike the industry giants, the innovative newcomers could not afford to sign well-established recording artists and deploy vast marketing teams. Adding insult to injury, the oligopolists' allies in Congress audaciously disinformed the public that payola was making it impossible hard for small labels to compete.

Predictably, outlawing payola did not end the practice, but merely caused it to take different forms. Still, the politicians achieved their goal of crushing the upstarts. Hampered in their efforts to obtain vital airtime, the independents were forced to cut deals with the majors or sell out to them. By 1979, six large companies controlled more than 85% of U.S. record sales.

After nearly five decades of futility, will Congress concede that a market will—and ought to—continue to exist for radio airtime, as it does for many analogous resources? In economic terms, rescinding the payola prohibition would eliminate sizable deadweight costs. Talented executives would no long spend time searching for loopholes in the regulations and the government would cease prosecuting the record companies for their resourcefulness. From a political viewpoint, however, legalization would eliminate politicians' regularly recurring opportunity to grab headlines with investigations of a glamorous business.

I leave it to readers to guess which of these considerations will prevail.

Martin Fridson is the author of Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace, which contains a more detailed economic perspective on payola.



We need the indies
It's positively refreshing to read an apologia for the practise of payola. And the author's anguished cry over the cumbersome nature of having to post a disclaimer, identifying air play as a paid ad, is amusing. To what end are we supposed to care passionately about the right of record producers to fill the air with unannounced commercial messages?

On the other hand I've never been greatly offended by the practise of payola. Even before its initial disclosure in the mid-1950s I always assumed that the reason so much crap was clogging up the airwaves was that the tunes selected to be popular were paid for by the producers. Is it so difficult for us to turn the dial, if the music is not to our taste?

The one thing that must be upheld to combat the dumbing down of our available broadcast music is that band space must be reserved for small, independent radio stations. The serious problem of homogenization comes from FCC rulings that promote the practise of all broadcast radio being cornered by one or several "clear channels", all of whom play exactly the same playlist across the country.

We need, just to point to one genre, to preserve radio programs like these:

We should also ban the word "radio" from all Rock lyrics...
The gratuitous use of the word "radio" within the lyrics of many Rock & Roll songs is shocking. There can be no compelling justification for this abusive practice on the part of song writers. Clearly, the music industry is pandering to the radio industry in an openly unfair attack (and in constraint of free competition) targeting song writers who are not able to come up with any such way to interject the word "radio" or the word "disc jockey" into their artistic efforts.

Here in America where we pay good money (and lots of it) to keep our politicians paying close attention to novel opportunities to insinuate the government into every aspect of our personal lives and the operation of our private companies it seems astounding that they could have missed this! Who are these elected officials, anyway? How do they expect government to continue expanding? Are they so out of touch that they don't even listen to the words? This is just so wrong. Canadians don't act like this. Of course, some of them are French. What's their word for disc jockey?

Payola is no more or less than the free market at work. Even Beanie admits that the practice is not offensive. A first for Beanie, where he asserts that the free market can actually work (e.g., just change the channel....). Too bad he can't extrapolate that to other industries as well. A question, beanie: Did the crap disappear AFTER payola was banned? I doubt it. Government regulation of the free market rarely achieves its objectives, and often makes things worse.


Hurrah for the free markets
Actually what I have asserted is not that the free market works-- free markets only homogenize available broadcast music into what people want us to hear, and not what we might want to listen to-- but that manual dexterity can still easily triumph over the desires of people who want our money.

Here's a great example of how free markets work. Locally we have certain important people who see an opportunity of making lots of money by selling us on a regional transit system, with state and federal governments picking up the tab. Only our area works very well with just street transit, except for our sports and entertainment arenas and the airport, which profit mightily from selling expensive parking to a captive market of customers.

So as a result, the system has been designed to only serve localities where it is not needed, while it is being excluded from precisely those areas where it is vitally needed, because of the money. THAT is the free market at work.

Fortunately we locals are not entirely dumb. We've killed it once now, and will kill it again every time it rears its ugly head.

Now to your question.

Q: After payola was banned, what changed?

A: Nothing.

In fact the only time things have changed-- for the worse-- was after conglomerate ownership of the media became deregulated. Our airwaves are now much more homogenized since it became possible for six media giants to own everything.

That's not the free market, that's rent seeking
"So as a result, the system has been designed to only serve localities where it is not needed, while it is being excluded from precisely those areas where it is vitally needed, because of the money. THAT is the free market at work."

A great example of public choice theory, not free market theory at work. Public transportation is a government monopoly even if it isn't actually run by the government. See for example taxi medallions in New York.

These markets aren't entirely free
Most of the so-called free market remedies we have in this country involve some sort of government complicity, where they have a man in position to open up the tap and let the money flow from Washington. Look, for instance, at farm subsidies. They allow certain classes of large farm owners to gain government relief from high costs, while enjoying the right to retain their private profits. It's America at work.

Here's another current scam. I understand that electronic voting systems are now in place in three out of four voting precincts in the country! If true, that's amazing. The systems are glitch prone and apparently easily cracked for an expert. And their software is a proprietary secret, despite the fact that at least one of the major companies is headed by an active leader in Republican affairs. They're the most expensive way to conduct an election, yet across the country boards are lining up to buy the things.

Why? The wheels have been greased with federal funds (as I recall, some two billion $$) designed to facilitate sales of these remarkable little turkeys.

Here's what the experts have to say about them:

That's why I'm a libertarian (note the small l) not a Republican
"Most of the so-called free market remedies we have in this country involve some sort of government complicity, where they have a man in position to open up the tap and let the money flow from Washington."

Here's another example. I engaged in a discussion on this site some time ago about the Kelo decision. My opponent argued that Kelo was a right wing decision. My counter argument was that if so, how come the justices that voted in favor of the government's right to take private property for another's private use were all supporters of government rights over individual rights (otherwise known as the left wing of the Court). What I should have said was that if government didn't have the power of eminent domain, then Kelo would be moot. The more power government has, the more it will be abused. IMO, that's the fundamental assumption of public choice theory. That's also one of the many reasons why I distrust the AGW alarmists. Entirely too many of them are closet socialists.

Eminent domain
If I may offer a small apologia, I am one of those so called socialists, although pretty strident and not in the closet. And I would suggest that people who understand that we are contributing quite seriously to the warming of the planet often do so because they have read and evaluated the available evidence. Not because K Marx told us to think that way.

But I don't expect to convert the unbeliever so easily. So I will instead relate an anecdote about eminent domain.

A number of years ago I was in Estonia, before the fall of Communism (in 1985 it was tottering though). We were driving through a suburb of Tallinn, and I remarked to the driver how much the place looked like the American suburbs. So I asked him if everyone owned their own home.

Oh no, he said. Everything is different here. We don't get to own property, we have to enter into a 99 year lease with the state, and then build our house on it.

But your system is exactly the same as ours, I said. You pay rent to the state to use the land, and they get to take it back if they want it for something else. While we have to pay property taxes for the use of the land. And if they want it back they can take it through the process of eminent domain. The system is the same, only the words are different.

Similar, but not quite the same
With a lease, you will always have to negotiate a renewal when it expires. Eminent domain takings are rare by comparison.

One reason for owning property is capital appreciation. When the property owner is the state, it is the only one that can possibly benefit from long term appreciation. Of course, that depends on how much of the appreciation is real as opposed to depreciation in the value of the currrency, if the inflation rate is high enough, the capital gains tax may be more than the inflation corrected appreciation. Thus the incentive for all governments to have inflationary monetary policies.

Good story, though.

How is 0.1C to 0.2C serious warming?
Why am I not surprised that roy actually likes the idea of govt owning everything.

That the govt can take your land if you don't pay the exorbinant taxes on it is proof that govt has too much power, not evidence that things are as they should be.

Roy...This is about radio...
But, as long as you started this then let's talk about the nature of the sovereign. (It might relate to the original topic if we stipulate that eminent domain ultimately includes radio stations as well as our homes and businesses.)

The sovereign owns everyone and everything within his borders. This is an immutable feature of sovereignty. All nations assure each other that their borders and their absolute political powers inside those borders are inviolable. It is their deal and we have nothing to say about that.

John Locke's philosophy of government declared that there exists a (virtual) social contract between the sovereign and his people. The people consent to be governed provided the sovereign guarantees their natural rights of "life, liberty, health and property. Otherwise, the people have the right of revolution.

Of course, this is tricky. The nations have been awarded absolute political sovereignty by each other! The government writes a constitution and laws, appoints an executive to enforce the laws and a judiciary to administer justice regarding the constitution and the laws.

Those laws specify under what circumstances the government might deny its people their natural rights to life, liberty, health and property. The government can execute us, imprison us, put us in harms way and, indeed, take away our property. The government would prefer that we do not exercise our right to revolt so the constitution and the laws are structured so that most of us might agree that those among us who are executed, imprisoned, harmed or disenfranchised have been fairly treated in accordance with our laws and our best interest as a society. (Those bad people broke the law and had it coming.)

In some sense, the government is taking care of certain of these matters for us because their justice might be superior, more timely and less risky (better, faster and cheaper) than we could do for ourselves. Of course, we are speaking about domestic policy, here. Foreign policy is quite another matter.

The government's agenda is best served if it has lots of latitude regarding this social contract. There are lots of laws on the books and a certain arrogance regarding enforcement. For example, agencies like the IRS want us basicly terrified that they could summarily seize everything we own and toss us into federal prison for no particular reason if that is their "finding". Such findings can be entirely invented and many times are.

Financial economics are best served with the factors of production managed by private (versus State) entities. Therefore, we have the illusion of private property. You are correct, however, that real estate and (income producing) capital assets are taxed every year. The profits earned through business activity are also taxed. The priviledge of hiring employees is taxed (one half of the social security tax). The workers are taxed the other half of the social security tax, their own incomes are taxed by the federal and the state governments, their private property is taxed and virtually all private consumption purchases are taxed at a rate equivalent to the probable profits earned by the party selling those goods or services.

Under the Communist system where the State owns and operates all such businesses the government is only able to extract and spend the net profit from their own GDP. In America the various governmental bodies (Federal State and Local) strip off 30% of our GDP while the net profit in our entire $12 trillion GDP is only 10%. How this financial magic works should be the subject of another post, sometime, if you are interested.

Nevertheless, your comment regarding the ownership of property under the Communist system verses the Capitalistic system is dead on. The sovereign has eminent domain. The only reason our government lets us believe we own anything is that they make more money this way. If state ownership worked better instead, then you can bet your boots we ourselves would be living under communism. The sovereign states need to maximize the money they are able to extract from their own GDPs to compete with each other. Nature of sovereignty. Not ever going to change.

A truly radical message
Now I'm confused. You're telling me the Sovereign (the State) owns everything. I was under the understanding our system was better because they guaranteed the right to hold private property.

You explain this dynamic tension very nicely in your last paragraph. All our rights are actually held at the whim of the Sovereign, and the Constitution is just a scrap of paper to keep us from rebelling.

I can't think of a single nation on earth where the people "consent" to be governed, not even Bhutan. Tell them you don't need them any more and they'll clap your ass in prison. Not only that, if they really don't like you they'll suspend your right of habeas corpus, and there you'll sit til the end of time with no hearing date scheduled.

Withdrawing one's consent can be a dicey undertaking. John Locke may be all well and good. But when I need help I'll call on Patrick Henry and Tom Paine.

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