Results for “payola”
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Payola and satellite radio

In the last two weeks I’ve heard the new George Harrison box set mentioned so often on channel 26 Sirius satellite radio — accompanied by the playing of Harrison songs — that I’ve concluded some form of payola is going on.  In its early days, satellite radio was critical of the mainstream radio stations for this practice, but now it’s jumped on board.  And you know what — no one cares!  Even on the internet, there is hardly anyone complaining.  Hard to believe, I know, but that is maybe one indirect advantage of the current political polarization.

And why should you complain about satellite radio payola?  Without payola, the stations choose songs (directly or indirectly, through dj instructions) to pull in the marginal subscriber.  With payola, payments from IP holders become a separate influence on program content.  Those payments are most likely to come from IP holders whose products show a high elasticity of demand with respect to advertising.  In other words, the influence of producer surplus rises, relative to consumer surplus.

Intuitively, that seems to me “music that a lot of listeners already are familiar with, even if they don’t know that a new boxed set just has been released” is how that category translates into satellite radio circa 2017.  Or, in other words, George Harrison.

Perhaps the most underrated George Harrison song is “You.

Addendum: Interestingly, payola in earlier parts of the 20th century seemed to favor music for the young, black music, and new, previously undiscovered artists.  It’s worth thinking through why this has changed.  For 1950-2000, there is no “marginal subscriber to radio” the way there is for satellite radio, rather most listeners are in the relevant network.  Furthermore, today’s satellite radio listeners are I believe considerably older and somewhat wealthier than the typical radio listener, either now or earlier.  When more or less everyone was on the “free radio network,” the high elasticity of profits with respect to advertising was for the artists who otherwise wouldn’t get much exposure.  In contrast, today it is for “golden oldies,” where the taste for the product already is there but information about availability may be lacking.

Here are previous MR posts on the economics of payola.

FDA payola?

The FDA will soon stipulate that researchers who accept more than $50,000 in corporate grants, contracts and consulting fees cannot sit on FDA advisory committees.  This will rule out many current advisors.

First, I wonder how this fits into the old Sam Peltzmann story that the FDA is too conservative in approving new drugs.

Second, what if we reformed in the opposite direction?  Why not do away with all the mandatory drug trials and the like, and simply let drug companies purchase approval for new drugs?  Think of the companies as posting bonds, and of course they still can be sued ex post if the drug harms somebody.  The companies still will have reason to conduct their own tests.  Set the price high if you wish.

To be sure, how much a company will pay for approval will depend on expected profits, not social welfare.  But even with market power there is usually some connection between those two magnitudes.  Or maybe the fear of lawsuits won’t deter poorly capitalized companies, but at the very least we could let the corporate giants take this path.

Some companies might be too overconfident about their drugs.  If you believe that, I hope you are buying puts on them.  Other companies might have excessively short time horizons.  If you believe that, I hope you are loading up on drug companies with heavy R&D and raking in your excess returns.

So does this idea have any takers?  If not, why not? 

Addendum: Matt Yglesias argues regulation is a substitute for litigation.

Mellencamp on Payola

Following my earlier post on payola, Les Jones points me to an interview with John Cougar Mellencamp. Key quote:

Look, in the ’80s when people were paying openly to get songs on the radio, here’s the way it worked. “We want you to play this record and we’re going to give you a spiff [kickback] of $100 to get it on the radio.” OK, the guy plays it for a week and says, “I’ve been playing the song for a week and nobody likes it.” “Well, here’s $200 to play it next week.” They’ve been playing the song for two weeks and nobody likes it. Guess what, they’re done paying. It’s over at that point. You cannot pay your way into having a hit. It won’t happen. The only thing you can pay your way into is having the opportunity to have a hit. If you don’t pay, you don’t even have the opportunity. That’s the way it should be done.

Payola II

Following my earlier post, an astute reader pointed me to an excellent analysis of payola:

[Payola] helped new musicians gain airplay. Payola combatted conformism and racism in the music business… Chuck Berry’s “Maybellene,” his first hit and still one of his most popular songs, was given initial airplay because of payola. Leonard Chess of Chess Records went to well-known disk jockey Alan Freed with a large catalog of material. Chess offered Freed partial songwriting credits on any song of his choice, provided that he would play and promote the song. Freed now had a stronger incentive to pick the best song and to promote it. After listening to hundreds of recordings, Freed picked “Maybellene.” Berry became a star, and the Freed estate continues to receive royalties…

The discussion, of course, is from Tyler’s book In Praise of Commercial Culture. (Yup, he’s the astute reader also!). See the book for more, including how racism factored into the payola “scandals.”

Why is Payola Illegal?

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.

Thursday assorted links

Further thoughts on why the end of net neutrality will be fine

If a cable company really is a monopolist, still they (mostly) maximize profit by giving customers (cost-constrained) what they want.  When the de Beers cartel had a monopoly on diamonds, did they also make you buy their favorite soda brand?  No, that would lower the overall value of the package and thus lower profits.

The main exception to this argument is that the monopolist may favor its own content.  Monopolizing instances of that practice still would be regulated under standard antitrust law, and also transparency requirements, and most of the critical discussion seems to ignore this.  Furthermore, it is harder to make a profit this way than you might think.  If Comcast promotes “the stupider Comcast version of CNN,” a lot of people just won’t be interested.  Most of these websites aren’t that valuable — look at the recent revenue results for Buzzfeed.  Nor do I think Comcast can get away with denying its customers say Google or Skype, either legally or economically.  That said, advocates of removing “neutrality” need to face up to the reality that they will be relying on discretionary regulation to a greater degree in some regards.  Read p.1 of the actual proposal:

Restore the Federal Trade Commission’s ability to protect consumers online from any unfair, deceptive, and anticompetitive practices without burdensome regulations, achieving comparable benefits at lower cost.

In the current debate, there is a common presumption that paying for slots hurts “the little guy.”  During the payola debates for radio, it turned out that payola favored the independent labels over the majors; see my book In Praise of Commercial Culture.  It doesn’t have to work out that way, but refusing to price scarce resources often helps the big established players, who can invest $$ to get what they want through bigger brand names or other means.   Note:

Pai says that one of the major mistakes of Net Neutrality is its pre-emptive nature. Rather than allowing different practices to develop and then having regulators intervene when problems or harms to customer arise, Net Neutrality is prescriptive and thus likely to serve the interests of existing companies in maintaining a status quo that’s good for them.

Furthermore, are there external benefits from small web upstarts?  Or are the external benefits from the big superstar internet companies?  If you are a Progressive who loves stable jobs and decent wages, you might think the more significant externalities are from the superstar companies.  Yet when it comes to net neutrality, all of a sudden the smaller companies are glorified and we need an ecosystem to foster them.  Overall, I don’t trust the regulators to make these decisions well, so I would rather take my chances with the market, even with some monopoly power at the cable end.

As Megan McArdle points out, over the last ten years consumers have opted overwhelmingly for the non-neutral private garden of Facebook.  That’s the real “threat” to net neutrality.  Personally, both as internet writer and user, I much preferred the older, semi-open, more neutral architecture of RSS and related systems.  The masses have spoken, however, and quite decisively in favor of less open systems and apps.  Nonetheless Alex and I still can do our thing on MR and in fact the project is thriving, and I would be shocked if it did not survive the new FCC decision.  That said, people want non-neutralities and they will introduce them to internet systems one way or the other, and suppliers will have to find ways to cope or perhaps even benefit.  To believe it could be any other way is a kind of wishful thinking, yes I want those old usenet groups back too.  All things considered, “net neutrality” is a biasing term, because the 2015-2017 period was by no means neutral either.  The notion represents a kind of undeserving “victory by language,” as who would wish to favor “bias” over “neutrality”?

Perhaps this point is misused a bit to make extrapolations, but still it is worth noting:

Pai…noted that today’s proposed changes, which are expected to pass full FCC review in mid-December, return the Internet to the light-touch regulatory regime that governed it from the mid-1990s until 2015.

More generally, I don’t see anything intrinsically morally wrong with a person deciding to “buy only one third of the internet.”  How many net neutrality supporters also favor or maybe even insist upon a’la carte pricing for cable TV?  What percentage of the public library do they take home over the course of their lifetime?

Or think of the whole issue in terms of a regulatory principal-agent problem.  Let’s say the water company has “too much” market power, and the public regulator doesn’t have the will or the resources to constrain the company properly.  Said company refuses to let Perrier flow through the pipes as an alternative option to plain tap water, for fear too much of the profit would go to France.  That somewhat mirrors potential problems from net non-neutrality.  But is it likely that a zero price for water is close to the correct solution?  I do get that alternative solutions might in some ways involve greater faith in outside regulators, such as antitrust authorities, but zero price is an awfully blunt instrument for a rapidly changing setting such as data flow.  It certainly hasn’t worked well for water, in a wide range of settings.

Finally, Viking notes in the MR comments:

The real benefits of net non neutrality would be applications that require a guaranteed minimum latency. Non net neutrality would allow some market participants to pay more for reduced latency, which could benefit video conferencing, virtual reality, remote surgeries, VOIP (already part of video conferencing) and other possibly new applications, say remote monitoring and control various kinds.

Are the defenders of net neutrality considering those opportunity costs in their assessments?  I don’t see it.

To be sure, net neutrality really might be better.  You might have a high opinion of the net neutrality regulator and a low opinion of all the other regulators of unjust or inefficient conduct.  You might think bandwidth won’t become scarce anytime soon, and that new, alternative uses for greater bandwidth just aren’t that promising.  You might think that access auctions disadvantage “the little guy,” and furthermore the positive externalities are on the side of the little guy, and thus we should stifle price-based access auctions.  You might think that rationing on a quantity/access basis will be more fair or efficient than rationing by price.  All that is possible.  But it seems hard to know those claims might be true.  Instead, those comparisons would seem to suggest a fair degree of agnosticism.  But when I read proponents of net neutrality, I am more likely to see a harsh excoriation of commercial incentives, or cable companies, than a balanced weighing of those considerations.

Neutrality ain’t neutral, it’s time to get over that myth.

Here is Tom Hazlett on the topic, here is my earlier column.

Should we worry that Netflix is buying transit rights from Comcast?

I say no (for background read here, and Dan Rayburn has very useful coverage, dispelling a variety of myths).  To be sure, one may believe there are monopoly problems at the retail level in the cable sector.  We could alleviate those with local loop unbundling and/or deregulation, as I discussed yesterday.  But within that setting, Netflix paying Comcast won’t make that monopoly worse.

In support of this conclusion, I would cite two literatures.  The first is Ronald Coase’s analysis of payola.  If a gatekeeper can extract payments from input suppliers, the end result of that process need not be bad for consumer welfare and very often is positively good for consumers.  In a nutshell, the gatekeeper won’t want to exclude the programs which consumers really want.  Those programs contribute to the profits of the gatekeeper.

The second literature is that on double marginalization.  This literature considers settings where you have a retailer with market power and an input supplier with market power, and the input supplier needs the retailer for access to consumers.  In those cases either integration or Coasean bargaining is usually in the interests of consumers, as it minimizes the double mark-up and thus lowers the costs of the market power.  To put this more concretely, the two parties will deal so that the marginal cost of the input to the monopolist is lowered, the monopolist expands output (and profit), and those gains are shared between the two institutions with market power.

When you put those two theories together, Netflix buying transit rights from Comcast is likely fine.  Don’t translate your opposition to cable monopoly into opposition to this agreement.  Seton Motley asks a good question:

Should we worry Amazon (Prime) buys transit rights from UPS & USPS?

So, if someone criticizes this new deal, but cannot put the argument in Coasean language, they probably have not thought it through carefully enough.

Moving beyond that, can we think of reasons why the basic Coasean results may not hold?

1. Expected joint profit doesn’t map perfectly well into consumer surplus.

2. The status quo ex ante was based on some amount of queuing of Netflix access, rather than a dollar-based marginal cost for selling the input, as in basic Coasean models.

3. None of these transactions are purely Coasean when regulatory threats beckon and thus a wider range of outcomes is possible.

4. Comcast has read Doug Bernheim and can now construct a scheme to preempt Netflix from this market altogether,

I’ve pondered those long and hard, but the standard Coasean results still seem reasonably likely.  And if they are not, it would be for reasons so convoluted it is unlikely to represent anyone’s actual worry.  From that list only #4 seems to have any bite, but I don’t see that #4 applies empirically.  Netflix has risen greatly in value over the last year, this new development is hardly a surprise, and the fees to Comcast, while secret, have been described as “de minimis.”  There is quite a good chance that Netflix benefits from this deal and this is more of a “we are here for good” statement than Netflix falling off a cliff.

You also could try this argument:

5. By agreeing to pay a price for transit rights, Netflix imposes a negative pecuniary externality on smaller streaming services and content providers, which in the longer run will mean a negative non-pecuniary externality for variety-seeking consumers.

Maybe, maybe so.  I do take that argument seriously.  But it’s also unconfirmed, Coase on payola implies it won’t be so bad, and furthermore the Netflix transaction, in stand-alone terms, still would seem to be welfare-improving.  Besides, what happens if Netflix expands by 5x or 10x, should the company never have to pay anything?  Is it so terrible if tomorrow’s necessary equilibrium shows up today?

Addendum: Timothy Lee offers a different perspective.  Perhaps I am failing to understand his argument, but I don’t see why having a cluster of mid-level intermediaries should make the market as a whole more competitive.

Or you may be tempted to write a screed about the dangers of moving away from net neutrality, and associate this development with that movement.  I say you would do better to stick to the specific economics of this particular issue and explain, in terms related to the Coasean model, exactly what will go wrong.

Further addendum: Joshua Gans offers comment.

*Climbing the Charts*

The author is Gabriel Rossman and the subtitle is What Radio Airplay Tells Us About the Diffusion of Innovation.

In other words, there is lots of payola.  My blurb is:

Gabriel Rossman is the leading researcher in the sociology and economics of the music industry, and this book shows him at the top of his research and exposition powers.

You can buy it here.  Rossman blogs here, and he is on Twitter here.

Will Google’s Dutch auction go well?

It sounds great: cut out the investment banking fees and just offer a straight Dutch auction on the stock. After all, aren’t auctions the perfect market institution?

Co-blogger Alex thinks that the investment banks have had a comeuppance due for a long time; he may well be right.

Under standard practice, the underwriters give underpriced shares to favored investors and executives. The value of those shares rises on opening day. The insiders are happy but the company has left money on the table. In extreme and indeed pathological cases the discount can be as high as eighty percent. So why have companies tolerated this practice for so long?

Under one apologetic view, the kickbacks, underpriced shares, and payola are necessary. Someone has to produce reputation for the stock. The investment bank is paid to do this. The underwriter, in turn, gives insiders good deals to get them to boost the stock. If you own some shares you will do your best to talk up the issue. The efficient markets hypothesis? Well, it may be true at the margin, but how do we get to this margin in the first place?

I heard another point from one industry insider. Investors feel better about a stock if it goes up on day one. For the long-run good of the stock, it is important to have a price rise in the beginning. If investors sour on the stock in its early days, it may never recover its reputation.

Other skeptics wonder how the results of the auction can be predicted? How many people will show up with bids? What if we gave an auction and nobody came? Other worriers fear the temptation for untutored investors to bid too high at first, pushing the shares to unsustainable levels. After all, no single investor will have the final price much with his or her bid.

There is yet another fear. If the auction is fair, the stock will sell at roughly the same price on day one and day two. So if there is some uncertainty surrounding the initial auction, why not just hold off your buying until day two? But then how do liquid markets get established in the first place? How can you get concentrated buying interest on day one, but without violating either fairness or the efficiency of markets?

The resolution: …will have to wait for the facts and thus the actual auction. But my suspicion is the following. Some percentage of the original underpricing, but by no means all, is in fact a legitimate return to the investment banks. I thus worry that Google will not see strong demand on day one. On top of that, there is a puzzle. Unless you think all of the initial share underpricing is an legitimate fee for services rendered, why have markets tolerated this practice for so long?

By the way, David Levy informs me that used book dealer ALibris will try a share auction as well. For whatever reasons, except for Google, only small companies have shown an interest in these alternative institutions. France uses such auctions more commonly; it seems that the first-day price run-up is smaller but still present. On one hand, these other examples suggest that the auctions are a viable institution. On the other hand, it makes you wonder why the practice is not used more often.

Addendum: Here is a very good piece on the auction of Salon.com stock.