3

BUYING YOUR WAY ONTO THE CHART

In the last chapter I established that something is making radio stations behave as though they were coordinated by a central actor, but that surprisingly this coordination does not come from the corporate radio chains. Still, this leaves open the question of exactly who is coordinating radio. One way to begin to answer the question is to think of the long-running (but now defunct) trade journal Radio and Records and see the radio industry as part of a broader music industry that includes such actors as instrument manufacturers, live performance promoters and venues, and most important of all, the recorded music industry. The recorded music industry is roughly the same size as the radio broadcasting industry and the two are tightly inter-connected, with the radio industry relying on recorded music for content and the recorded music industry relying on radio for promotion.

Consider that it is rare for a person to walk into WalMart or Best Buy or to log onto Amazon or iTunes and purchase music that they have never heard before. Most of the time we either have a specific purchase in mind or we browse until we recognize something that prior familiarity has taught us is worth $1.29 for an iTunes single or $14.99 for a compact disc. While we sometimes buy music based purely on a friend recommending it to us or after having heard it performed live, most of the time we buy music based on having been exposed to it through broadcast media, especially pop music radio. Even if we are already longtime fans of a band, broadcasting usually motivates the decision by making us aware of the new album and by convincing us that the new album is as good as the previous ones, not to mention that when we first developed a taste for the band a few years ago it was probably through broadcasting. In short, airplay is a major determinant of sales. The core theme of Jacob Slichter's candid memoir of one-hit-wonderdom can be summed up as “There is no better guarantor of a band's success than a hit single on the radio luring listeners into record stores to buy the album.”¹ Similarly, the gatekeeping model discussed in chapter 1 emphasizes how such “surrogate consumers” as radio effectively mediate between cultural distributors (e.g., record labels) and the ultimate consumers.

In part this is simply because broadcasting is an efficient way for us to become aware of music. However, there is also a certifying function above and beyond the simple fact of awareness. Our taste in cultural products is profoundly, even dominantly, shaped by perceptions of popularity, which we interpret as a signal of quality.² When radio stations play music, they are not just making us aware of songs, but suggesting that they are already popular. It is in this respect that the supposed impartiality of gatekeepers like radio stations makes their endorsements more valuable than advertising.

If airplay drives sales, then this implies that airplay is a nearly essential resource for pop musicians and their record labels. Record labels therefore go to great lengths to get airplay. The most basic practice is that record labels deluge radio programmers and other workers in the music industry with promotional copies of CDs in the hopes that they will be impressed by the music and give it airplay and other exposure.³ In addition, record labels employ large staffs of workers tasked with promoting music to radio stations. Often these promotional workers are responsible for a specific territory and hence are known as “locals.” In essence, then, a big part of the label strategy for getting airplay is to expose radio workers to their music and give them a series of sales pitches touting the music's virtues.

Ultimately though, the most direct way to get airplay is to bribe a radio station (or its employees) to play your music. Indeed, this is often exactly what happens, and the amounts involved can be substantial. Record label executives and a leading payola broker estimated the total volume of the market in the early 1980s as between $50 million and $80 million a year.⁴ Likewise, in an October 2001 e-mail, an Entercom executive estimated how much each of his stations was worth to record labels or their proxies and gave the expectation that each of his stations raise that much value, with estimates at about $75,000–$125,000 for stations in such youth-oriented formats as Alternative and Top 40 and less for stations in older-skewing formats like Adult Contemporary. Extrapolating the Entercom figures to the industry as a whole and adjusting for inflation gives a ballpark estimate comparable to that in the 1980s.

Payola is a broad family of practices with a wide gray zone that shades into legitimate promotion techniques. The most direct form of payola is simply a quid pro quo where a station (or the station's staff) agrees to play a particular song in exchange for cash, intellectual property rights, drugs, or sex. Most often payola is channeled through independent radio promoters and in-kind gifts. Independent radio promoters (IRPs or indies) are consultants who help record labels get airplay.⁵ Some of the services provided by indies are legitimate consulting, such as helping a label professionally package a CD and promotional mailer or crafting a sales pitch appropriate to a particular format. Such legitimate services are particularly important for small record labels that are too small to maintain a full in-house promotional staff, but this kind of outsourcing could be valuable even to a large record label since the indie may be expert on a locale or music genre that was previously unfamiliar to the label. However, indies are also known to commonly engage in money laundering. One way this works is that an indie keeps a station on retainer by buying its playlist.⁶ Since the monitored airplay databases update the playlists for most commercial stations every night, there is no real reason for the indies to buy playlists directly from the station. Rather, buying a playlist is a legal fiction that allows the indie a pretext for paying the station for access to and influence with the program director and music director. The involvement of indies keeps both the record label and the radio station ignorant of exactly how the payola process works, which serves them by creating plausible deniability but also allows indies to extract brokerage rents.

In the remainder of this chapter I will first review each of the four broadcasting-era payola scandals. This history shows both how payola has changed over time and how the underlying nature of the transaction remains similar, even after the practice was purged of its most unsavory elements in 1986. I will then present a time-series analysis of the most recent payola scandal, showing how transitory an effect it had on the ability of record labels to influence radio. Finally, I use game theory to explain why the natural equilibrium of the music industry is to be characterized by payola, even though the recording industry would prefer to be free of the expense.

3.1 A History of Payola Scandals

Despite furtive and obfuscatory exchange, payola occasionally becomes notorious. Figure 3.1 illustrates the number of stories including the words “payola” and “radio” in the New York Times. As can be seen there was a huge wave of stories in 1959, when the term first reached the general public, and never again reaches such prominence. However, a series of much smaller jumps occurred in 1973, 1990, and 2005, implying that there is a payola scandal about every 15 years. Furthermore, if one reads the actual stories it becomes apparent that almost all of the stories in the off years are referring to the four main scandals and not reporting newly suspected instances of payola. Since all four of these payola scandals are well-documented, it is worth examining them in detail to understand how payola works, what implications it has for airplay, and why the scandals occur at such a regular interval.

FIGURE 3.1. Stories on “Payola” and “Radio” in the New York Times

3.1.1 The 1950s Scandal and the Rise of Rock and Roll

The original payola scandal came in the late 1950s as part of the long-standing rivalry between two royalty agencies: American Society of Composers, Authors, and Publishers (ASCAP, supported by Tin Pan Alley and holding mostly show tunes and classical music) and Broadcast Music, Inc. (BMI, supported by broadcasters and holding mostly country, rock, and R&B).⁷ ASCAP had been losing market share to BMI and it blamed this decline on a variety of cozy relationships that BMI had with broadcasters, including allegations of payola. At ASCAP's instigation, Senator George Smathers (D-FL) introduced a bill into Congress in 1958 to bar cross-ownership of record companies and broadcasting by the same company under the logic that such cross-owned broadcasters might favor records released by their sister record labels.⁸ The hearings included accusations that both payola and cross-ownership were responsible for the rapid displacement of traditional Tin Pan Alley pop music by rock and roll and other genre music in 1956. While later analyses have shown that payola was only partially responsible for the creative destruction of 1950s pop music, such a nefarious explanation pandered to the conservative tastes of the Senate, among whose ranks there were no teeny boppers.⁹ Throughout the various payola hearings in 1958 and 1959, congressmen and regulators were persistently bewildered that any disk jockey in his right mind would prefer rock and roll over show tunes absent inducement, a suspicion that was corroborated by cooperating witnesses flipped by the committee.

In 1959, the House of Representatives Committee on Legislative Oversight (or the Kefauver Committee) investigated the quiz show scandal, most remembered for Professor Charles van Doren's confession that the producers of 21 helped him cheat. In late 1959, the committee uncovered evidence of what are known today as “product shots.”¹⁰ The Tin Pan Alley camp took the opportunity to tip-off the committee about pop music payola. The Tin Pan Alley composer and American Guild of Authors and Composers president Burton Lane submitted a letter amply documented with articles from trade magazines that explained how product shots worked with pop music. Furthermore, this tip-off came a few months after the broadcasting industry did its reputation no favors by hosting the notorious Second Annual Radio Programming Seminar and Pop Music Disk Jockey Festival in Miami, a week-long event at which the record labels plied thousands of disk jockeys with prostitutes and prodigious quantities of alcohol.¹¹

In response to Lane's letter, the House convened the Harris hearings on “payola and other deceptive practices.” Two themes that emerged were that payola was pervasive and that it was key to the rise of rock and roll. Witnesses testified that bribes were often naked payments but also took the form of paying disk jockeys for side work, such as consulting or personal appearances at dances, as well as giving disk jockeys equity stakes in pop songs.¹² Of particular interest was Dick Clark, whose popular program Bandstand had a suspicious tendency to book artists in whom his publishing and record companies had a stake. Clark denied culpability but ended the conflict of interest by divesting these companies. The Federal Trade Commission held its own hearings and discovered that such equity stakes by disk jockeys were common and often took the form of a share of royalties. The most notable case of this is “Maybellene,” one of the first rock and roll songs whose publishing rights are split between Chuck Berry, who actually wrote and performed the song, and Alan Freed, who popularized the song by putting it in heavy rotation on his radio program. The conclusion to the original payola scandal was that in 1960, Congress made it a federal offense to give personal bribes to broadcaster employees. Bribing the broadcasting firm was already illegal, but until the 1990s payola was mostly personal bribes given to disk jockeys and programmers rather than to stations. In practical terms the law shifted primary responsibility for prosecuting payola from the FTC to the Federal Communications Commission and the Department of Justice.

3.1.2 The 1973 Drugola Scandal

The next major payola scandal came in 1973 as the by-product of a drug bust. In February of that year, a joint investigation by the federal government and the Royal Canadian Mounted Police resulted in the indictment of the New Jersey talent agent and gangster Pasquale Falcone for such crimes as importing 20 pounds of heroin through Montreal. Searches of his papers revealed that Falcone had also used a fictitious trucking company to bill false invoices to Columbia Records with the cooperation of David Wynshaw, the head A&R man at Columbia. The government searched Wynshaw's office and found documents showing that Wynshaw had helped his boss, Clive Davis, misappropriate funds from the company for such purposes as remodeling Davis's apartment.¹³ At this time Davis had worked at Columbia Records for seven years, the last two of them as president, and was generally credited with the company's belated but fantastically successful transition from Tin Pan Alley to rock music. Columbia hired a law firm to perform an ethics audit and fired Wynshaw and Davis, suing the latter to recover the embezzled funds. Although Davis was convicted of tax evasion, he went on to refute Fitzgerald's aphorism about “no second acts in American lives” by almost immediately landing a job at Arista Records. Decades later, Davis is still a powerful figure in the music industry.

After being presented with evidence against him, Wynshaw decided to cooperate with the government and testified extensively about both the mafia and Columbia's payola practices. In 1972, soul music was taking an increasing share of the pop charts and—as record companies often do when a new genre emerges—Columbia responded to this by either acquiring outright or signing distribution deals with several small labels specializing in the new genre.¹⁴ Wynshaw testified that shortly thereafter Columbia began supporting this product line with payola amounting to at least $250,000 a year. Among the recipients of these bribes was the publisher of a music tip sheet who kept some of the money for skewing his publication and passed along the rest as bribes to radio station personnel. In other cases record producers and indies handled it. Most of the bribes apparently went to disk jockeys, despite changes to the radio industry in the 1960s to reduce their autonomy.¹⁵ A novel twist was that much of the payola was in the form of cocaine and heroin rather than cash and thus this episode is sometimes referred to as the “drugola” scandal. Conservative writers and politicians such as William Safire and Senator James Buckley (Conservative–NY) saw this incident, along with the recent overdoses of Janis Joplin and Jimi Hendrix, as indicative of the degree to which drugs had saturated rock music and called for further journalistic and governmental investigations to this effect.¹⁶

3.1.3 The Gambino Family and “The Network” in the 1980s

The outcry over drugola and the CBS ethics audit were apparently ineffective. In 1986, NBC News reported on the existence of “the Network,” a cartel of about a dozen independent radio promoters tied to the Gambino mafia family.¹⁷ The story included testimony from a disk jockey that indies affiliated with the Network had offered him cash and cocaine and from a competing independent radio promoter who claimed the Network had threatened him with violence. It closed with footage of a meeting between several members of the Network and the gangster John Gotti. Three days later, U.S. Attorney Rudy Giuliani issued subpoenas to the Recording Industry Association of America and the record labels. In response, the record labels issued a statement announcing they would no longer deal with indies. While Warner and CBS had made a brief unsuccessful attempt to boycott the indies in 1981, the 1986 boycott was more successful because all of the major labels joined and all of them feared further legal exposure to the U.S. Attorney's investigation.

At this point Giuliani lost interest in the case and it was turned over to his colleagues in Los Angeles, who focused on the indie Joe Isgro and his partner Ralph Tashjian. Isgro had long been a target of the Los Angeles Police Department's organized crime unit because he seemed to have close ties to the Gambino family, especially the underboss Joseph “Piney” Armone. In 1988, Isgro's former bodyguard, David Michael Smith, returned from England (where he had been avoiding a subpoena from Giuliani) and agreed to cooperate with prosecutors. In 1990, a federal grand jury indicted Isgro for racketeering, mail fraud, and distributing cocaine. Several days into the trial, the judge suspended the case—and ultimately dismissed it with prejudice—because the prosecution failed to divulge to the grand jury or the defense that a key prosecution witness was contradicting his own testimony from an earlier trial, which implies perjury suborned by the prosecutor.¹⁸ Nonetheless the Isgro (mis)trial was well-publicized and received far more press coverage than the events in 1986 that presaged it.

Whatever the procedural and ethical errors in the prosecution, the trial provided a revealing portrait of payola in the 1980s.¹⁹ During this period, record labels spent at least $50 million a year on the Network, with Isgro alone taking receipts of about $10 million a year. The system worked such that members of the Network claimed particular radio stations as their territory. When a station started playing a song, the indie who claimed the station would bill the record label for the add.²⁰ If labels refused to pay, they would find their artists blacklisted from the station until the indie was appeased. In exchange for allowing indies control over their airplay, radio station personnel would receive cash payments, often stuffed into record sleeves. In the Isgro case, Smith testified that he routinely handled briefcases with $100,000 in cash which was parceled out in units of several thousand dollars to programmers, other indies, and Piney Armone. Likewise, a disk jockey testified that Tashjian would often send him an eighth of cocaine hidden inside of an audio cassette. In a separate prosecution, a Network subcontractor, Howard Goodman, was convicted of bribing radio programmers by sending them birthday cards stuffed with tens of thousands of dollars in cash.²¹ Altogether, the indies so effectively controlled radio during this period that they could exclude songs for which bribes were not paid. Thus, it is perhaps more appropriate to think of payola in the early 1980s as being more of stations and indies extorting the labels than the labels and indies bribing the stations.

Although the prosecutors botched the 1990 Isgro trial, the 1986 major label boycott of indies was effective at restructuring the relationship between labels, indies, and stations. First, while the labels did not indefinitely preserve their commitment to avoid dealing with indies, they reallocated the expense from a general budget item to artist support. The consequence is that since 1986, indie billings have been recoupable debt against royalties and this has made artists share the expense with the labels.²² Joe Isgro described the change as follows:

What the labels wanted to do was move the cost of indie promotion to the artist. That's what they're doing. The companies funnel money through management and tour support, and it gets paid to us with their full knowledge and direction. They have deferred that cost, charging it back to artist royalties. I think it was a brilliant move.²³

The other major change was that the independent radio promoters reformed their business practices. The Network cartel, with its mob connections, envelopes of cash, and distribution of cocaine was broken and replaced by more professional independent radio promoters. A new generation of indies, most notably Jeff McClusky, developed the comparably expensive but much more palatable business practice that prevailed during the 1990s of gift exchange centered around support for station promotional campaigns rather than quid pro quos for cash and drugs pocketed by program directors. One measure of the extent of these changes is that while the 2005 scandal revealed that record labels were still compensating radio stations for airplay, at least they were finally doing so without using either drugs or the mob.

3.1.4 Corporate Radio, Professionalized Payola, and the 2005 Spitzer Investigation

The dramatic changes to the radio industry in the late 1990s form the back story to the 2005 payola scandal. The Telecommunications Act of 1996 (among other things) dramatically relaxed restrictions on the number of radio stations any one firm could own. This unleashed a wave of conglomeration and in 1999 Clear Channel merged with Jacor to achieve its current size as owning about a thousand radio stations at any given time, far larger than either its closest competitors or than was allowed prior to 1996.²⁴ Owning about a tenth of all commercial radio stations has helped make Clear Channel a favorite target for criticism by investigative journalists and the “media reform” social movement.²⁵ Thus, when Clear Channel attempted to institutionalize and rationalize payola, it did not go unnoticed.

In 2001, Clear Channel considered signing an exclusive chainwide deal with the independent radio promoter Tri State Promotions & Marketing, which was rumored to charge up to $1,000 for getting a song played on one station.²⁶ Having a single indie control access to a company that owned about one in ten American radio stations would give Tri State more market power and probably increase payola costs. Likewise, Clear Channel proposed charging for “back-announcing,” which is when a disk jockey reads the song title and artist after a song has played. In January 2003, Senator Russ Feingold (D-WI) introduced the “Competition in Radio and Concert Industries Act” and held related hearings in the Commerce Committee. Several provisions were directly aimed at Clear Channel, which in addition to radio also had a near monopoly on concert promotion.²⁷ In part thanks to the regulatory threat and other criticism, Clear Channel almost immediately cut off all ties to independent radio promoters and in late 2005 spun off its concert promotion unit into an independent company called Live Nation. However, far from ending payola, Clear Channel's shunning of indies appears to have had the effect of driving record labels to more brazen direct promotion practices. As the state of New York discovered, the labels lacked the tact to practice payola as discreetly as had the indies.

As with the 1959 Kefauver investigation and the 1973 drugola scandal, the New York state investigation grew out of an earlier investigation. New York State Attorney General Eliot Spitzer made a practice of investigating corporations and extracting consent decrees that effectively established new regulatory regimes, and the strength of this record got him elected governor (although a prostitution scandal kept his tenure short). In 2004, Spitzer's office was investigating the failure of record companies to properly pay out royalties to artists (whom the labels claimed they were unable to locate). Because promotional expenses are deducted from royalties, this naturally led Spitzer's office to the issue of payola, particularly at the Entercom Contemporary Hits Radio station WKSE-FM in Buffalo. In 2004 alone, WKSE-FM raised $93,000 in payola (not including the hard to quantify value of live performances). In November 2004, the state subpoenaed records and between July 2005 and June 2006, it signed consent decrees with Sony BMG music, Warner Music Group, Universal Music Group, EMI Music North America, CBS Radio, and Entercom Communications. These firms account for the overwhelming majority of record sales and a healthy minority of radio stations. The consent decrees all required the firms to make charitable donations and abide by a series of restrictions on business practices, such as reporting to the monitored airplay databases when songs are played as part of advertising time (such as sponsored “showcase” programs). In April 2007, the FCC released the “Rules of Engagement,” its own set of consent decrees with Clear Channel, CBS, Entercom, and Citadel which required these leading radio chains to devote a quota of airplay to music on independent labels and to keep records of label gifts which would be open to FCC audits.

Perhaps the most interesting result of the 2005 payola scandal were the many subpoenaed documents appended to the New York consent decrees showing how payola worked. These documents were typically receipts or invoices filed by record company people and (in accordance with the post-1986 system) ultimately billable to the band as “recoupable debt” against royalties. Less often they were discussions between record company people of promotional strategies. Relatively few of the documents are e-mails between radio stations and record company people. Presumably such negotiations mostly occur on the phone or in person, but they can nonetheless be inferred when the record company person invoices the transaction.

Many of the documents describe giving gifts to radio stations. The gift may be provided with only an expectation of future reciprocity, which makes it a true gift in the technical sense used by social scientists. As in other spheres, the in-kind form, the tactful avoidance of directly discussing reciprocity, the asynchronous achievement of reciprocity, and a rather loose and flexible accounting of whether reciprocity is achieved all obscure the underlying transactional aspect of a gift exchange relationship.²⁸ Sometimes these gifts can be things like a sound board or office equipment, but the vast majority of the time such gifts are tied to the station's own promotional campaigns to attract and retain listeners. For instance, when a DJ announces on the air that the tenth caller will get concert tickets, that prize was almost always a gift from a record label. A special case of in-kind gifts is “showola,” where bands perform for free on the air or at concerts staged by the station. While these gifts usually go to promotional expenses, over the long run they are fungible with the station's general revenues as stations learn to keep lean promotional budgets since they can depend on continuous support from record labels to achieve this function.

Note the irony that in radio the recent shift away from the cash nexus and toward gift exchange is seen as an advance for professionalism rather than backsliding into patrimonialism, even though arms-length money-based quid pro quo exchange is typically seen as a defining characteristic of modernity.²⁹ Newer promoters like Jeff McClusky, who facilitate gift exchange, are universally seen as more professional than the older “Network” promoters, who mostly relied on cash. This is because even in modern economies, there are strong cultural and legal norms as to which goods and services can form an exchange circuit (i.e., legitimately be exchanged for one another).³⁰ The exchange of cash for airplay is prohibited by laws against payola and stigmatized by the romantic ideology of artistic creativity. As such, professionalism consists of finding ways to legitimate the exchange not by rationalizing it, but by obfuscating it so as to keep from spoiling the interaction.

In those e-mails that directly involve the radio station, the tone is often of a friendly gift exchange where exchange is in-kind and reciprocity is only implicit. For instance, in several e-mails, Mike Danger of WZNE maintained a friendly tone and used rhetoric consistent with mutually beneficial long-term partnership, as when he wrote to an EMI official:

I need a favor…

Carson and I are planning a trip to NYC to visit labels and we need air and hotel. We'd like to fly out on 1/29 and return on 2/1. Can you hook us up?

I promise to say good things about you in front of [REDACTED].

MD

The EMI promotional person likewise treated the request as part of an embedded tie and merely asked for arrival and departure time, without specifying exactly what WZNE would be expected to do in return.

In other cases the programmers are much more aggressive and blunt, most notoriously WKSE programmer Dave Universal, who eschewed the use of indies and would explicitly negotiate the dollar value of airplay directly with record labels and treat the label's debt to him as an expense account. Universal went so far as to repeatedly demand payment and to threaten to blacklist a label's artists. Of course at times the labels also bargained aggressively. For instance, WBLI promised to play EMI artists in exchange for travel to the Video Music Awards and when the label realized that they were only being played once a day, a label official felt cheated and asked a subordinate:

Do they have their tickets yet? Do they have their flight shit done? I mean we can cancel the travel portion. I really don't give a rat's ass.

Likewise, EMI decided to stiff WSTW when it discovered that the station wasn't playing N.E.R.D. as frequently as the label felt was implied by their deal.

In almost three out of four documents, the record label is providing an in-kind gift. About half of the time this gift is concert tickets (sometimes including travel to the concert and not always for the band being promoted) and the other half of the time it is consumer electronics such as iPods or video games. In a minority of cases the gift is swag, often autographed by the band. The usual assumption is that these gifts will be passed on to listeners, but in some cases it is ambiguous whether they will be retained by station staff. Indeed, in an e-mail offering bribes to 13 programmers, a promotional person at Universal offered great specificity about the terms of the quid pro quo but was explicitly indifferent as to whether the gift would be used for a listener contest or the programmers' personal use:

Six-0 Gotta Go!

If your station adds and accumulates 60 spins on Pat Green's “Guy Like Me” by Sunday midnight, February 29, according to Mediabase…

We will fly a station staff member plus one guest, -or- a winner plus a guest to ANY Pat Green show in the United States that is agreed upon. (Sold-out shows and private shows excluded.)

One hotel night stayover, unless otherwise agreed

2 roundtrip tickets

2 show tickets

2 meet & greet passes

2 merchandise items

1 box of Pat Green albums for qualifying

2 additional albums for those attending shows

In other cases it is clear that gifts are being retained by the station staff, as when Warner Brothers paid $680 to send the staff of WSPK to dinner (on behalf of the Donnas) or $150 to buy a mini-fridge for WARQ (on behalf of My Chemical Romance). Likewise, two Virgin record officials venting about Dave Universal's avarice mentioned that Dave requested that Virgin Records not mention the deals to his own colleagues as “these deals are between Dave and Virgin.”

In about 15 percent of the documents, the record label simply paid cash for spins. Sometimes this was as a time buy or showcase, where the station buys advertising time to play the music. Such a practice is legal as long as there is an on-air disclosure along the lines of “this is a paid advertisement” or “this song was brought to you by Universal Music Group.” More often, though, the money goes through indies and is not disclosed on the air. For instance, between May and September of 2004, EMI devoted $76,499 to marketing the rock band Pillar, and almost all of that money went to indies, who billed $300 to $1,000 for each station that added the band to its playlist. In one case a label that made payment directly (rather than through an indie) decided to conceal the payment as “website support,” before stopping to wonder whether the radio station actually had a website.

About 10 percent of the documents involved “showola” or concerts hosted by radio stations with tickets given to listeners and the performance usually broadcast on the air. Sometimes showola involves sending the bands to perform at the station concert, but just as often it is simply underwriting the concert.

In about 3 percent of the documents, the record labels dispense with honest graft and simply try to scam the radio stations with “phoner” campaigns. In these campaigns, labels hire telemarketers or indies and have them call in four or five times a day to request a song. On at least six different occasions, Universal Music Group used phoners in campaigns ranging in scope from 117 stations on behalf of Ludacris to a campaign devoted entirely to the MTV program Total Request Live on behalf of Lindsay Lohan. These campaigns were so thoroughly planned as to demand that the age, race, and gender of the callers match the demographics of the station's actual listeners. The manipulation of request lines by phoners is an open secret. Indies list these services on their websites, and radio stations are appropriately skeptical of requests and often ask follow-up questions to try to suss out whether a caller is a genuine listener.

3.2 Suppressing Payola

Of course, the New York state payola investigation was not primarily a data collection effort but an exercise of public policy intended to reduce the prevalence of payola in radio. To consider the investigation on its own terms, it is worth considering whether the New York and FCC settlements were successful in changing the business model of the music industry. A 2008 survey of independent record labels conducted by their trade group, A2IM, found most members reporting that payola had “decreased significantly in recent years” but that one in four had been approached about paying payola since the settlements, and about half said IRPs were still important to airplay.³¹ Further evidence is difficult to come by because payola is surreptitious by nature and so there is a severe reflexivity problem in trying to measure the effects of exposure and criticism.

While only police work, witness testimony, and subpoenas can conclusively demonstrate a particular instance of payola, statistical analysis can help us estimate its prevalence over time. The purpose of payola is to allow record labels to co-opt radio airplay. While record labels have other, more legitimate, ways to influence broadcasting, payola is part of their portfolio of tactics and presumably has some marginal effect in helping record labels control radio airplay. In other words, when payola is common, record labels have more control over song selection and, conversely, song selection is relatively exogenous to the system of radio stations. Diffusion patterns differ dramatically depending on whether growth is endogenous or exogenous to the system of adopters and thus payola should be reflected by an especially exogenous pattern. In fact, comparison of songs mentioned in the documents subpoenaed by the New York state investigation against a comparable control sample showed that songs known to have involved payola do have the expected pattern of especially exogenous diffusion curves.³² This implies that even without direct documentary evidence of payola, its prevalence can be inferred by analyzing the diffusion of songs. Unlike relying on documentary evidence, this indirect approach escapes the problems of reflexivity and temporal sparseness.

To estimate the sensitivity of payola to the policy shock of the 2005 scandal, I collected a sample of 1,137 songs released between 2002 and 2007.³³ For each of these songs I identify how many stations began playing the song per week and use this as the basis of a multilevel diffusion curve (MDC) analysis. This technique combines information on the diffusions of many innovations to identify patterns in what sorts of innovations tend to diffuse by which patterns.³⁴ In this case I analyzed the data to create a time series of diffusion patterns to examine the effect of the policy shock. Or rather, to examine the set of policy shocks, as the most recent payola scandal was not a single event but a series of related events unfolding along the following timeline:

 

• January 2003—Senator Feingold reintroduces “Competition in Radio and Concert Industries Act” and holds Commerce Committee hearings

• March 2003—Clear Channel cuts ties to independent radio promoters

• October 2004—New York Attorney General subpoenas record label documents

• July 2005–June 2006—Each of the four major record labels signs a consent decree with the New York Attorney General

• October 2006–December 2006—New York Attorney General signs consent decrees with CBS and Entercom radio chains

• April 2007—Federal Communication Commission signs the “rules of engagement” consent decrees with Clear Channel and three other large radio chains

 

Using MDC, I constructed a time series shown in figure 3.2 of how exogenous song diffusion curves were throughout this period.³⁵ When this metric is high it indicates that stations tended to adopt pop songs in a wave just after the initial release, whereas when the metric is low adoption tends to be less coupled to the release date. This pattern of an immediate batch of adoptions up front is consistent with a model where each actor in the system is responding to influence from outside the population of actors. Since the record industry is the most plausible source of exogenous influence on the song choices of radio, the metric can be interpreted as the degree to which the record industry has influence over radio.

This time-series analysis shows that diffusion patterns were generally similar throughout the period of the scandal, with a few exceptions. Most notably, there was a sharp (and brief) dip in the exogeneity coefficient when the New York Attorney General subpoenaed documents and a smaller dip several months before the FCC reached its “rules of engagement” consent decrees with the four largest radio chains. This indicates that during these two periods, record labels were unwilling or unable to exert substantial pressure on the radio industry. The most likely cause for these brief relaxations of control are deterrence and regime uncertainty.

By 2004, New York Attorney General Spitzer had a reputation for aggressive but brief inquiries into white collar crime in various industries. Typically he would subpoena documents, issue press releases and leaks that tarnished companies' reputations (and often creditworthiness), and finally reach a consent decree in which the company neither confirms nor denies wrongdoing but agrees to make a charitable donation in lieu of a fine and abide by a new set of rules. Although Spitzer almost never actually brought cases to trial, his investigations themselves could be devastating. This threat of embarrassment was particularly acute for the radio and recorded music industries, as they desperately needed favorable policy environments: continued deregulation in the case of radio and aggressive intellectual property rights enforcement in the case of recorded music. Firms that are highly sensitive to the policy environment must be highly attuned to how legitimate they appear, and so public shaming by Spitzer was a severe threat.³⁶ Not surprisingly, when Spitzer first demanded documents the music industry appears to have panicked and perhaps ceased not only payola practices for which a court might find grounds for conviction, but also promotion practices that while perfectly legal could still be framed as shameful by a notoriously zealous prosecutor. Such a freeze-up is reflected by the almost zeroed-out rate of exogenous patterns of adoption immediately after the subpoenas.

FIGURE 3.2. Exogenous Diffusion Coefficient by Quarter

Likewise, the last quarter of 2006 saw another drop in the capacity of the record industry to influence radio adoption patterns. Around this time, members of the FCC began taking seriously the findings of the New York state investigation. In theory, radio stations do not own their broadcasting frequencies as freehold property but are only licensed to use them to serve the public interest. Therefore, technically payola is a violation of the licensee's trusteeship of public property and the FCC is responsible for policing such malfeasance. That the FCC had been upstaged by a state prosecutor implied a dereliction of duty, especially since Spitzer directed most of his attention to record labels and with a few exceptions did not demand reforms or fines directly from broadcasters. In particular, the two Democrats on the FCC, Michael Copps and Jonathan Adelstein, were sympathetic to the media reform movement and had previously expressed concern about the payola issue at events sponsored by the Future of Music Coalition. In late 2006, the New York state investigation was coming to a close with the signing of consent decrees with Entercom and CBS (as well as Spitzer's election as governor). This provided an opening for the FCC to launch its own investigation and set its own rules, in much the same way that from 1958 to 1960, the Kefauver Senate hearings, begat the Harris House hearings, which in turn begat hearings at the Federal Trade Commission and ultimately passage of an amendment to the Communications Act in Congress. There was a nontrivial threat that the FCC would take drastic action such as revoking broadcasting licenses of gross offenders (most obviously Entercom) or creating campaign finance style bans of the exchange of anything of value between labels, indies, and stations to be backed up by regular audits tied to license renewal. As such, it behooved the music industry to walk the straight and narrow until the FCC closed the issue. Similarly, in 1986 the RIAA voted to break ties to indies just days after Giuliani subpoenaed evidence from them.

In all of these cases, trading patterns between the recording and broadcasting industries were disrupted by the realization of prosecutorial scrutiny and the proximate deterrence it implied. However, the key word is “proximate” as business models quickly reverted to something close to the status quo ante. Shortly after both the Spitzer subpoenas and the beginning of FCC interest in the scandal, the record industry reassumed its usual influence over radio, in both cases before the state even finalized its sanctions. In the case of the FCC inquiry, it quickly became apparent to informed observers that the FCC did not plan a harsh response to the payola issue, in part because Chairman Martin was extremely focused on the issue of cable television rates and did not want to be distracted for the remainder of his term by making payola a high priority. Therefore, well before the FCC actually issued its “rules of engagement,” it became clear to the music industry that the FCC intended to reach a negotiated light solution rather than an imposed harsh one. Likewise, Spitzer was known for inquiries that were severe but not sustained, and thus after the subpoenas it was likely that he would not further scrutinize the industry.

The most interesting case is the 1986 response, in which the radio and record industries did make permanent changes to the details of the payola business model, but within a few years had reestablished something functionally equivalent in broad outline. Prior to 1986, payola was funneled through a cartel of indies connected to organized crime who claimed stations as territory and compensated program directors with cash and cocaine. More recently, a station is usually not exclusively represented by one indie, there is free entry into the indie market, the indies are respectable and professional and they tend to operate by developing gift exchange relationships with stations using in-kind gifts that mostly go to benefit the stations' own promotional campaigns. While these details were substantially different from (and almost certainly preferable to) the old system, the end result is the same: resources are flowing from the record industry to the radio industry in order to affect the choice of songs for airplay. Furthermore, while it is difficult to make a precise estimate, the volume of trade appears to be comparable. For instance, Dannen (1990) provides estimates for the independent radio promotion budget of a single as ranging from $100,000 up to $300,000 under the old system, in the early 1980s. In 1998, under the new system, it cost about $350,000 in independent radio promoter billings to get the song “Closing Time” substantial airplay in Alternative, Top 40, and Adult Contemporary.³⁷ Controlling for inflation, Slichter's figure is right in the middle of Dannen's range. Since “Closing Time” was a reasonably popular song but never reached the top ten, this implies that the Jeff McClusky model of providing in-kind support for station promotional campaigns is more subtle but just as expensive as the Joe Isgro model of stuffing cash in record sleeves. This should not be surprising, as it is common for an industry to reconstitute itself in response to regulatory threat in ways that obey the letter of the law but evade the basic motivation.³⁸ The regime uncertainty of active government involvement may disrupt trade, but once the punishments are doled out and the rules are rewritten, the market reestablishes itself in a new form.

3.2.1 The Robust Logic of Payola

The most fundamental question is why the payola market continually reestablishes itself and who benefits from the system.³⁹ This question is best answered by considering a starting point where payola does not exist, either because it has recently been purged or because we posit a hypothetical state of nature relationship between Crusoe Records and Friday Broadcasting. In such a situation, radio programmers are choosing songs based only on their best estimate of their appeal to listeners. In some cases they will consider a song and reject it. This is frustrating to the person responsible for promoting this song, and it may occur to them that if the intrinsic merits of the song are less than the competition, they can sweeten the deal with a little payola.

It makes sense for stations to accept this payola if they expect that the value of the bribe is greater than the loss of advertising dollars implied by the drop in ratings (if any) that will follow from deviating from the playlist they would construct only with regard to audience interest.⁴⁰ The model is slightly more complicated but largely comparable if payola is directed to station staff rather than directly to the bottom line. In theory it might present a principle-agent problem for the station staff to benefit while, on the margin, decreasing station ratings. However, when payola is an accepted business practice it can be an implicit part of compensation which is fungible with direct station expenditures, and may even be preferable for management as it evades taxes, places the risk of variable revenues on the staff rather than the station, and avoids monitoring costs. Although it is difficult to prove this model in modern radio, it was definitely the case in vaudeville and early radio when performers would often have little or no salary and were expected to earn an income on kickbacks from Tin Pan Alley publishers.⁴¹ Likewise, it is worth noting that before the first payola scandal, station management tended to take a “boys will be boys” approach to payola. When stations nowadays instigate payola investigations of their own staff, the motive appears to be avoiding state sanctions rather than maximizing ratings through preserving the integrity of their playlist.

In any case, it's unlikely that a radio station would be asked to take a bribe to play a really unappealing record, since a reasonable record label wouldn't want to waste money promoting music that they know to be terrible.⁴² Of course if a station prefers song A, but accepts a dollar to replace it with B, then song A will not be played, even though it is the best choice on the merits (albeit perhaps only by a small margin). The owners of song A may make a counter-offer of two dollars, and the price will escalate from there. At this point, payola is no longer a sweetener used to induce consideration of marginal songs, but a mandatory part of business even for songs that are intrinsically very appealing. A bidding war for airplay breaks out and this eventually leads to rent dissipation, with the cost of payola equaling the marginal benefit of airplay and this cost being so high that nearly all profits from the recording industry are captured by broadcasting. At this point the volume of the illicit payola market attracts the interest of the state and/or the recording industry grows frustrated and attempts collective action. Whether by state or by trade group, such a response temporarily suppresses payola and brings the system full circle.

Indeed, this stylized model closely matches the historical facts and helps explain why—like a cicada—every 15 years or so payola emerges from underground and becomes conspicuous. The need to control the publicity that drives record sales spurs record labels to co-opt radio stations. Since there is a finite amount of airplay, the record labels effectively get into bidding wars over it and eventually this behavior grows so egregious that it attracts the interest of the state or the labels themselves balk at the expense. Boycotts are temporarily honored or prosecutions temporarily terrify the industry into staying on the straight and narrow, and then the cycle of bribery begins anew.

The clearest illustration of the cyclical nature is the situation before and after the 1986 RIAA boycott of indies. In 1973, Columbia Records responded to the “drugola” scandal by purging David Wynshaw and Clive Davis and hiring an outside law firm to audit the company's involvement with drugs, organized crime, and payola. Within a few years, the situation had apparently reverted to type. In 1979, Dick Asher was transferred from an overseas stint to work as a vice president of CBS Records (the parent company of Columbia).⁴³ He discovered that the company had low margins on high sales in large part because it was spending $10 million a year on independent radio promoters. As a cost-cutting experiment he refused to pay indies to promote Pink Floyd's single “Another Brick in the Wall” to Los Angeles radio stations, reasoning that promotion oughtn't be necessary for a song that was already a hit and which came from a best-selling album and was being supported by an extremely successful concert tour. In fact, none of the four Top 40 stations in Los Angeles would play the song. Asher interpreted this as evidence that paying indies was not a consulting service but payola and the system was so strong that it did not influence radio so much as control it, with payola being effectively a compulsory tax. Pink Floyd's management's interpretation was much more pragmatic; the band needed to get on the radio and if paying the tax was necessary, then CBS better pay it.

The next year, David Horowitz at Warner Brothers reached a similar reading of the balance sheet and decided to boycott the use of independent radio promoters, with CBS joining in a few months later.⁴⁴ These decisions faced resistance from label heads (i.e., middle management) at both Warner and CBS, who felt that this placed them at a competitive disadvantage, and Billboard reported that Atlantic, a Warner subsidiary, simply ignored the policy. In response to this boycott, the Network gave another example par les autres performance by blacklisting Loverboy (one of Asher's pet projects at CBS) and the Who (one of Warner's most reliable acts). Again, artist management pressured record executives to appease the indies and developed workarounds with the label heads to circumvent the ban for the few months it took for Asher and Horowitz to come to reason and resume paying the Network.

The next attempt at breaking payola came in 1986, after Giuliani subpoenaed record label documents regarding the Network. This time the major labels presented a united front through the RIAA and had the power of constraint in that the Network understood that the labels feared public association with the mob and possible prosecution. This credible and united opposition broke the Network and reduced the volume of payola down to trivial levels. However, the interesting thing is that the industry could not maintain a low payola equilibrium.

Almost immediately following the RIAA's ban on direct interaction with indies, artists and artist managers began seeking a competitive advantage and using payola to attain it. In a few cases, established and cash-rich artists would pay the expenses out-of-pocket, but the business model quickly developed that the label would loan this money to the artist as “tour support” to be recoupable against future royalties. Of course this meant that artists kept less of the royalties, but they were willing to do so for greater airplay and eventually they entered an arms race with other artists where this was not a competitive advantage but a necessary baseline expense. As described above, by the late 1990s (if not earlier), the expense (if not the form) of payola was comparable to that in the early 1980s. This should not be surprising since in a market the price of a fixed quantity resource tends to be bid up to its value. Payola was just as expensive in the 1990s as the 1980s because it was just as important for record sales.

Thus, payola is something that begins as a bribe paid by labels and artists, but can quickly end up as extortion demanded by broadcasters. A particular record company can benefit tremendously if it provides payola and its rivals do not, for this company will not only have a great advantage in promoting its products, but will pay a low price for doing so. However, once payola becomes universal all the record companies pay a high price and have no net promotion advantage for doing so. This incentive structure is the familiar prisoner's dilemma, where an actor's best outcome is to cheat while its partner behaves, followed by them both behaving, followed by them both cheating, and worst of all is for the actor to behave while its partner cheats. Since for any given partner action, the actor's greatest payoff is for cheating, the dominant strategy is to cheat. Unfortunately this means that most of the time both of them will cheat and such mutual defection has a dismal joint payoff. In the case of the record industry, this means little or no aggregate gain in promotional exposure and with rent dissipation diverting much of their profits to broadcasters.⁴⁵

The only solution to the prisoner's dilemma is collective action over repeated interaction, but even this is tenuous. In essence, rather than buying a scarce resource and bidding up the price, record companies could agree with each other to refuse to pay for the resource. In this light, it makes sense that Joe Isgro sued the major record labels for forming a combination in restraint of trade after the RIAA voted to stop paying bribes to the Network. The RIAA's action was in fact a textbook case of a monopsonistic cartel, though the absurdity of Isgro's suit is that the market they agreed to stay out of is itself illegal. Unfortunately for musicians and the record industry, cartels are extremely vulnerable to cheating (especially when monitoring is unfeasible because the behavior at issue is surreptitious) and thus it's not surprising that the prisoner's dilemma reached its usual unpleasant equilibrium.

Indeed, the issue of escalating promotion costs and the ineffectual collective action efforts of firms to limit them is an old one. Similar practices known as “song plugging” were pervasive during the vaudeville era, when the basic business model was not the sale of recorded music promoted by broadcasting but the sale of sheet music promoted through live performances. As with payola, bidding wars broke out and began to swallow the earnings of composers and the profits of publishers. To solve this situation, in 1917 the various Tin Pan Alley publishers and Variety magazine formed the Music Publishers Protective Association.⁴⁶ The explicit goal of the trade association was to get its members to eschew bribing stage performers. Although this was self-regulation and the promotion medium at issue was the stage, not the airwaves, the goal was similar to that of the various attempts by the state since 1960 to keep a lid on payola in broadcasting. However, the publishers almost immediately reneged on their promises to one another to eschew bribes and let the music speak for itself. In hindsight, it's not surprising that Music Publishers Protective Association failed to eradicate payola in 1917 when we know that similar attempts at collective action in 1981 and 1986 failed, and even the state (with its power to subpoena, fine, and jail) could not accomplish the feat either in 1960, 1973, or 1990. While it is too early to say conclusively whether payola will survive the aftermath of the 2005 scandal, historical precedent and basic logic suggest that it is a permanent feature of the music industry.