Why is Payola Illegal?

by on June 16, 2004 at 7:45 am in Economics, Music | Permalink

Payola, making undisclosed payments to radio or tv personnel in return for the inclusion of material in programming created a big fuss in the late 1950s (it was made illegal in 1960) and again in 1986 when Al Gore investigated the "new payola." But why should payola be illegal? A song played on the radio is really an advertisement for the CD. Firms pay to advertise music on billboards and on television, why is this ok but paying to advertise on the radio not ok? Similarly, grocery stores price shelf spacing - some people object to this but it isn't illegal.

Most people's initial reaction is to say that payola prevents the "true" distribution of musical preferences from reaching the airwaves. Implicitly they think that if it was legal the big record companies would use their wealth to promote music that listeners would prefer less to what they would have heard without advertising. But that is a very strange, albeit common, view of advertising. Advertising increases demand the most and is thus most productive when it introduces consumers to a product that they really want but don't yet know about. Payola, therefore, ought to increase the amount of new music heard - it's payola/advertising that allows a new entrant to access listeners/consumers and beat out the big established artists/firms. Record firms have been the most vociferous opponents of payola for the same reason that established firms everywhere want restrictions on advertising.

I have benefited from discussions on payola with Mike Ward.

Here are some further thoughts and complications regarding payola.

Actually, payola isn’t illegal if it goes to the station, rather than to the DJ, and if it is disclosed. But if radio stations don’t want their DJs profiting from payola they can easily write this into their contracts. Since contract law can handle the DJ issue it seems doubtful that the real intent of the Federal Communications Act was simply to help radio stations from being abused by their employees. Apparently, the requirement of disclosure was a big enough deterrent to prevent the real issue, payola to the stations, although some stations occasionally do play songs “as presented by Arista Records.”

The issue is further complicated by the role of Billboard magazine and other radio charts. Getting on the chart may generate momentum thus

Canadian pop rocker Avril Lavigne’s new song “Don’t Tell Me” aired no fewer than 109 times on Nashville radio station WQZQ-FM.

The heaviest rotation came between midnight and 6 a.m., an on-air no man’s land visited largely by insomniacs, truckers and graveyard shift workers. One Sunday morning, the 3-minute, 24-second song aired 18 times, sometimes as little as 11 minutes apart.

But what many chart watchers may not know is that the predawn saturation in Nashville — and elsewhere — occurred largely because Arista Records paid the station to play the song as an advertisement….The practice is legal as long as the station makes an on-air disclosure of the label’s sponsorship — typically with an introduction such as “And now, Avril Lavigne’s ‘Don’t Tell Me,’ presented by Arista Records.”

Using advertising to bias the charts in this way seems like a relatively new phenomena so I don’t think it explains the animus towards payola. Correcting this problem, say by counting only top-hour plays, doesn’t seem so difficult either.

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