Flo & Eddie, Inc., a California Corporation, individually and on behalf of all others similarly situated, Respondent,v.Sirius XM Radio, Inc., a Delaware Corporation, Appellant, Does, 1 through 10, Defendants.

Brief

N.Y.April 29, 2016

CTQ-2016-00001 Court of Appeals of the State of New York FLO & EDDIE, INC., a California Corporation, Individually and on behalf of All Others Similarly Situated, Plaintiff-Respondent, - against - SIRIUS XM RADIO INC., a Delaware Corporation, Defendant-Appellant, - and - DOES, 1 THROUGH 10, Defendants. ------------------------------ ON APPEAL FROM THE QUESTION CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT IN DOCKET NO. 15-1164-CV BRIEF AMICUS CURIAE OF THE NATIONAL ASSOCIATION OF BROADCASTERS IN SUPPORT OF SIRIUS XM RADIO, INC. RICK KAPLAN SUZANNE HEAD NATIONAL ASSOCIATION OF BROADCASTERS 1771 North Street, NW Washington, DC 20036 Tel.: (202) 429-5430 Fax: (202) 429-5410 STEPHEN B. KINNAIRD PAUL HASTINGS LLP 875 15th Street, NW Washington, DC 20005 Tel.: (202) 551-1700 Fax: (202) 551-1705 Counsel for Amicus Curiae National Association of Broadcasters Date Completed: August 31, 2016 RULE 500.1(f) CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 500.1(±), amicus curiae National Association of Broadcasters states that it has no parents, subsidiaries, or affiliates. Dated: August 31, 2016 By: LEGAL_US_E # 123412441.2 /te0~{~ Stephen B. Kinnaird Counsel for National Association of Broadcasters -1 - TABLE OF CONTENTS Page -ii- RULE 500.1(F) CORPORATE DISCLOSURE STATEMENT ............................... i TABLE OF AUTHORITIES .................................................................................. iii INTEREST OF AMICUS CURIAE ......................................................................... 1 INTRODUCTION AND SUMMARY ..................................................................... 1 BACKGROUND ...................................................................................................... 3 A. Record Companies Are the Primary Holders of Copyright in Sound Recordings................................................................................. 3 B. Record Companies Have Long Encouraged the Radio Broadcast of Sound Recordings, Without Claim to Compensation, So As To Maximize Record Sales. ............................. 4 C. Record Companies Have Reaped Enormous Economic Benefits from Radio Airplay. ............................................................................. 9 D. Congress Has Denied Federal Copyright in Over-The-Air Radio Broadcasts of Sound Recordings because of the Historical Symbiosis of the Recording and Radio Industries. ............................ 11 ARGUMENT .......................................................................................................... 14 I. THERE IS NO NEW YORK COMMON LAW PROPERTY RIGHT IN THE PUBLIC PERFORMANCE OF SOUND RECORDINGS. ........... 14 A. Common Law Copyright Is Limited To Reproduction. ..................... 14 B. Copyright and Performance Rights Are Distinct Property Rights, and Creation of the Performance Rights in Modern Technologies Is Properly the Domain of the Legislature. ................. 15 C. This Court Should Not Extend Common-Law Copyright to Radio Broadcast of Sound Recordings. ............................................. 20 D. No Precedent Supports the Recognition of Exclusive Property Rights in the Public Performance of Sound Recordings. ................... 23 II. THE CREATION OF PERFORMANCE RIGHTS IN PRE-1972 SOUND RECORDINGS SHOULD BE LEFT TO THE LEGISLATURE. .......................................................................................... 27 CONCLUSION ....................................................................................................... 32 TABLE OF AUTHORITIES Page(s) -iii- Cases Bonneville Int’l Corp. v. Peters, 347 F.3d 485 (3d Cir. 2003) ............................................................. 10, 11, 12, 13 CA, Inc. v. Simple.com, Inc., 621 F. Supp. 2d 45 (E.D.N.Y. 2009) .................................................................. 27 Capitol Records, Inc. v. Mercury Records Corp., 221 F.2d 657 (2d Cir. 1955) ............................................................................... 28 Capitol Records, Inc. v. Naxos of Am., Inc., 372 F.3d 471 (2d Cir. 2004) ......................................................................... 15, 27 Capitol Records, Inc. v. Naxos of Am., Inc., 4 N.Y.3d 540 (N.Y. 2005) .................................................................. 3, 14, 15, 24 Chamberlain v. Feldman, 300 N.Y. 135 (1949) ........................................................................................... 27 Colt Indus. S’holder Litig. v. Colt Indus. Inc., 77 N.Y.2d 185 (1991) ......................................................................................... 29 Dowling v. United States, 473 U.S. 207 (1985) ............................................................................................ 18 Ferris v. Frohman, 223 U.S. 424 (1912) ...................................................................................... 16, 19 Fisher v. Star Co., 231 N.Y. 414 (1921) ........................................................................................... 26 Flo & Eddie, Inc. v. Sirius XM Radio, Inc., No. 13-23182-CIV, S.D. Fla. June 22, 2015) (rejecting performance rights under Florida law), appeal pending, No. 15- 13100 (11th Cir.), question certified, 2016 WL 3546433 (11th Cir. June 29, 2016) ..................................................................................................... 28 Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390 (1968) ............................................................................................ 22 TABLE OF AUTHORITIES (continued) Page(s) -iv- French v. Maguire, 55 How. Pr. 471 (N.Y. Sup. Ct. 1878)................................................................ 19 Gurnee v. Aetna Life & Cas. Co., 55 N.Y.2d 184 (1982) ......................................................................................... 31 International News Service v. Associated Press, 248 U.S. 215 (1918) ...................................................................................... 24, 26 Jerome H. Remick & Co. v. Am. Auto. Accessories Co., 5 F.2d 411 (6th Cir. 1925) .................................................................................. 28 Metro. Opera Ass’n v. Wagner-Nichols Recorder Corp., 199 Misc. 786 (1950), aff’d, 279 A.D. 632 (1st Dep’t 1951) ....................... 19, 25 Metro. Opera Ass’n v. Wagner-Nichols Recorder Corp., 279 A.D. 632 (1st Dep’t 1951) ..................................................................... 25, 26 Palmer v. DeWitt, 47 N.Y. 532 (2 Sickels 1872) ....................................................................... 16, 17 Roy Export Co. v. Columbia Broad. Sys., Inc., 672 F.2d 1095 (2d Cir. 1982) ............................................................................. 19 S. Pac. Co. v. Jensen, 244 U.S. 202 (1917) ............................................................................................ 30 Tompkins v. Halleck, 133 Mass. 32 (1882) ........................................................................................... 19 United States v. Am. Soc’y of Composers, Authors and Publishers, No. CIV.A. 42-245, 1950 WL 42273 (S.D.N.Y. Mar. 14, 1950) ....................... 29 United States v. Broad. Music Inc., No. 64 CIV. 3787, 1994 WL 901652 (S.D.N.Y. Nov. 18, 1994) ....................... 29 Waring v. WDAS Broadcasting Station, Inc., 194 A. 631 (Pa. 1937) ............................................................................. 23, 24, 25 TABLE OF AUTHORITIES (continued) Page(s) -v- Statutes and Public Laws 17 U.S.C. § 101 .............................................................................................................. 20, 21 § 106(4) ................................................................................................... 11, 18, 21 § 106(6) ......................................................................................................... 12, 18 § 110(1)-(7) ......................................................................................................... 18 § 110(5) ............................................................................................................... 21 § 110(9) ............................................................................................................... 18 § 114 .................................................................................................................... 18 § 114(d) ......................................................................................................... 14, 27 § 114(d)(1)(A) ..................................................................................................... 13 § 114(d)(2) .................................................................................................... 19, 21 § 114(d)(3) .................................................................................................... 19, 21 § 114(g)(2) .................................................................................................... 13, 29 § 115(a) ............................................................................................................... 21 § 301(c) ............................................................................................................... 11 Act of Aug. 18, 1856, ch. 169, 11 Stat. 138 (1856) ................................................. 17 Act of Feb. 3, 1831, ch. 16, 4 Stat. 436 (1831) ........................................................ 17 Act of March 4, 1909, ch. 320(d) & (e), 35 Stat. 1075 (1909) ................................ 18 Digital Millennium Copyright Act, Pub. L. No. 105-304, 112 Stat. 2860 (1998) ...................................................... 13 Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 109 Stat. 336 (1995) .......................................................... 12 Sound Recordings Amendment of 1971, Pub. L. No. 92-140, 85 Stat. 391 (1971) ............................................................ 11 Legislative Materials H.R. Conf. Rep. No. 105-796 (1998) ...................................................................... 14 S. Rep. No. 93-983 (1974) ....................................................................................... 12 TABLE OF AUTHORITIES (continued) Page(s) -vi- Sen. Rep. No. 104-128 (1995) ................................................................................. 13 Other Authorities Calif. Setting The Tempo in Sounds, Song, Style, BILLBOARD (Apr. 9, 1966) ..................................................................................................................... 9 Coase, Ronald H., Payola in Radio and Television Broadcasting, 22 J.L. & ECON. 269 (1979) ....................................................................................... 6 Dannen, Fredric, HIT MEN (1990) ......................................................................... 6, 7 Denisoff, R. Serge, SOLID GOLD, THE POPULAR RECORD INDUSTRY (1975) ................................................................................................................ 6, 7 Dertouzos, James N., Radio Airplay and the Record Industry: An Economic Analysis (2008), https://www.nab.org/documents/resources/061008 _Dertouzos_Ptax.pdf ........................................................................................... 10 Drone, Eaton S., A TREATISE ON THE LAW PROPERTY IN INTELLECTUAL PRODUCTIONS IN GREAT BRITAIN AND THE UNITED STATES (1879) ............................................................................................... 16, 17 Edison Research and Triton Digital, The Infinite Dial 2016, http://www.edisonresearch.com/the-infinite-dial-2016 ........................................ 8 Eliot, Marc, ROCKONOMICS: THE MONEY BEHIND THE MUSIC (1989) ...................... 6 “Ex’s” Striking It Rich on W. Coast, BILLBOARD (Dec. 11, 1965) ........................... 9 Fratrik, Mark R., How Will the Radio Industry Be Affected by Pre- 1972 Music Performers’ Fees 7 (July 27, 2015, http://www.biakelsey.com/pdf/ impactofpre72musicroyalties.pdf .................... 31 Hilliard, Robert L. & Keith, Michael C., THE BROADCAST CENTURY AND BEYOND (2010) .......................................................................................... 4, 5 TABLE OF AUTHORITIES (continued) Page(s) -vii- In Re: Determination of Royalty Rates and Terms for Ephemeral Recording and Digital Performance of Sound Recordings (Web IV), Docket No. 15-CRB-0001-WR (Copyright Royalty Board), Hearing Tr. (April 30, 2015) ................................................................................. 8 Keith, Michael C. , THE RADIO STATION (8th ed. 2010) ...................................... 6, 28 MacGillivray, E.J., A TREATISE UPON THE LAW OF COPYRIGHT IN THE UNITED KINGDOM AND THE DOMINIONS OF THE CROWN, AND IN THE UNITED STATES OF AMERICA (1902) ...................................................... 16, 17 Mol, Joeri & Wijnberg, Nachoem, Competition, Selection and Rock and Roll: The Economics of Payola and Authenticity, 41 J. ECON. ISSUES, 701 (2007) ............................................................................................ 5, 7 Nimmer, Melville B. & Nimmer, David, NIMMER ON COPYRIGHT (2016) ........................................................................................................ 3, 15, 21 N.Y. C.P.L.R. 901(a)(2) ........................................................................................... 30 PBS Newshour, Music Revolt (July 4, 2002), http://www.pbs.org/ newshour/bb/entertainment-july-dec02- musicrevolt_7-4 .................................................................................................... 4 Peterson, Richard A. & Berger, David G., Cycles in Symbol Production: The Case of Popular Music, AM. SOCIOLOGICAL REV. 158 (1975) ......................................................................................................... 4, 5 The Power of Radio: Nielsen Study Show Radio Drives Music Sales, Inside Radio (Oct. 29, 2012 - Oct. 27, 2013), Nielsen, Radio Airplay and Music Sales 2013, http://www.nab.org/documents/newsRoom/pdfs/Nielsen_Airplay_ Sales_Study.pdf. ................................................................................................. 10 Press Release, FCC, Broadcast Station Totals as of June 30, 2015 (July 8, 2015), https://www.fcc.gov/document/broadcast-station- totals-june-30-2016 ............................................................................................. 27 TABLE OF AUTHORITIES (continued) Page(s) -viii- Radio Advertising Bureau, Why Radio Fact Sheet (2016), http://www.rab.com/whyradio/pdf/ Full_Fact_SheetJune2016.pdf ..................... 8 Rau, Nate, Sony Nashville CEO Talks Importance of Country Radio, THE TENNESSEAN (Feb. 25, 2015), http://www.tennessean.com/ story/money/industries/music/2015/02/20/sony-nashville-ceo- talks-importance-country-radio/23768711 ........................................................... 8 Renhoff, Adam D., The Consequences of “Consideration Payments”: Lessons from Radio Payola (2010) ...................................................................... 6 Sidak, G. & Kronemyer, D., The “New Payola” and the American Record Industry: Transactions Costs and Precautionary Ignorance in Contracts for Illicit Services, 10 HARV. J.L. & PUB. POL’Y 521 (1987) .......................................................................................................... 7, 9, 10 U.S. Copyright Office, FEDERAL COPYRIGHT PROTECTION FOR PRE- 1972 SOUND RECORDINGS: A REPORT OF THE REGISTER OF COPYRIGHTS (2011) ............................................................................................ 11 INTEREST OF AMICUS CURIAE1 The National Association of Broadcasters (NAB) is a non-profit, incorporated association of radio and television stations and broadcasting networks. NAB represents the American broadcasting industry before Congress, the courts, the Federal Communications Commission, and other governmental entities. Many NAB members are not large entities; they are local, independent stations. The broad performance right sought by Plaintiff Flo & Eddie, Inc. (“FEI”) is unfounded in law, and threatens substantial disruption to the radio broadcasting and related industries and the viability of certain musical formats. NAB and its members have a substantial interest in this Court’s resolution of the certified question. INTRODUCTION AND SUMMARY The common law of New York does not recognize a right of the producers of sound recordings to control their public performance, including radio broadcast. This Court has recognized that common-law copyright protects only against the unauthorized reproduction of sound recordings. At common law, performance rights were distinct from copyright. Copyright has a distinctive rationale (that reproduction and selling copies is an act of inherent bad faith depriving the author 1 No counsel for a party authored this brief in whole or in part, and no entity other than amicus, its members, or its counsel has made a monetary contribution to fund the preparation or submission of this brief. -2- of the work’s value) that does not apply to performance rights, much less to radio broadcast of sound recordings. Plaintiff’s simplistic formulation that a person has an absolute common-law property right in all of her intellectual creations, including the right to control every performance of that creation, has never been the law. Performance rights have been predominantly a creature of statute, and Congress has granted them subject to statutory exceptions driven by public policy and particularized to the authorial work at issue. Specifically, Congress has recognized only a narrow right in the performance of sound recordings by digital audio transmission, excluding all forms of over-the-air broadcasting and many other ubiquitous public performances. Congress has generally denied owners the right to exclude others from performing sound recordings, and required compulsory licensing. The broad performance right sought by FEI trenches upon the personal property rights of record owners to use their property, and upon the federal copyrights of musical composers, and is irreconcilable with the economic structure of the recording and radio industries. As Congress has long recognized in denying broad sound-recording public performance rights under federal law, the recording and radio industries grow symbiotically. Radio airplay creates economic value in sound recordings, which is why record companies (the predominant holders of copyright in sound recordings) have expended (and continue to expend) vast resources to promote free radio -3- broadcast of their recordings. It would be ironic to award record companies damages for a use-radio airplay-that those companies assiduously urged for decades, without ever claiming a property right or demanding royalties. The reconciliation of the competing interests implicated by the public performance of sound recordings is a quintessentially legislative task. This Court should not retroactively create amorphous common-law property rights in radio broadcast of sound recordings, given that adaptation of New York common law in light of technological and economic changes must “reach just and realistic results.” Capitol Records, Inc. v. Naxos of Am., Inc., 4 N.Y.3d 540, 555 (2005) (Naxos II). Granting FEI the exclusive performance right it seeks would invite chaos and uncertainty and threaten reliance interests. This Court should limit any common- law property in sound recordings to the reproduction rights recognized in Naxos II. BACKGROUND A. Record Companies Are the Primary Holders of Copyright in Sound Recordings. Although the district court conceived the original copyright here as belonging to The Turtles, A-1680, record companies, not performing artists, “[a]lmost invariably” hold copyrights in sound recordings. Melville B. Nimmer & David Nimmer, 6 NIMMER ON COPYRIGHT § 30.03 (2016). Indeed, the Turtles originally assigned their rights to White Whale Records, and FEI only recovered those rights in a litigation settlement. A-1680; A-76. Although, depending on -4- contract terms, some artists may receive residuals, in the main record companies stand to profit from the expansive rule advocated by FEI.2 B. Record Companies Have Long Encouraged the Radio Broadcast of Sound Recordings, Without Claim to Compensation, So As To Maximize Record Sales. Record companies have for decades given away sound recordings for free and expended enormous resources to promote radio airplay, without ever demanding licenses or compensation. In the early days of commercial radio, networks broadcasted live musical entertainment featuring singers, bands, and orchestras. See Robert L. Hilliard & Michael C. Keith, THE BROADCAST CENTURY AND BEYOND 56, 101 (5th ed. 2010) (Addendum Exh. A). But the emerging television industry soon eclipsed radio in the early 1950’s as the medium for original musical entertainment. See Richard A. Peterson & David G. Berger, Cycles in Symbol Production: The Case of Popular Music, 40 AM. SOCIOLOGICAL REV. 158, 165 (1975) (Addendum Exh. B). Radio stations increasingly turned to having “disk jockeys” play records on air. Id.; Hilliard & Keith, supra, at 137. 2 Recording contracts often provide minimal compensation even to successful artists. See PBS Newshour, Music Revolt (July 4, 2002) (Don Henley, The Eagles: “Most artists don’t see a penny of profit until their third or fourth album because of the way the business is structured.”), http://www.pbs.org/newshour/bb/ entertainment-july-dec02-musicrevolt_7-4. -5- Beginning in 1955, coincident with the dawn of rock-and-roll, stations began adopting the “Top 40” format that transformed the radio landscape and its relationship with the record industry: This would mark the intensification of the long and intimate relationship (some would call it a marriage) between the radio medium and the recording industry, as both relied on each other for their well-being and continued prosperity. The recording industry manufactured the popular, youth-oriented music radio wanted and needed, and the latter provided the exposure that created a market for the product. From the perspective of the recording industry, radio was the perfect promotional vehicle for showcasing its established, as well as up-and-coming, artists. Hilliard & Keith, supra, at 151 (emphasis added). Top 40 unleashed a competitive fury among record companies (including smaller independents like White Whale Records) skirmishing for the airplay necessary to succeed in the lucrative teenage market. See Joeri M. Mol & Nachoem M. Wijnberg, Competition, Selection and Rock and Roll: The Economics of Payola and Authenticity, 41 J. ECON. ISSUES, 701, 707-08 (2007) (Addendum Exh. C); Peterson & Berger, supra, at 165. Local radio stations provided a springboard for national popularity because other stations would pick up on successful songs. Mol & Wijnberg, supra, at 709. Record labels placed such high economic value upon airplay that they gave “payola” to disk jockeys and others to play their music, leading Congress to outlaw -6- the practice in 1960 unless disclosed to the audience. See Adam D. Renhoff, The Consequences of “Consideration Payments”: Lessons from Radio Payola 134 (2010) (Addendum Exh. D). Nonetheless, the economics of record sales remained unchanged: The average rack capacity in a department store was about a hundred albums and the top 40 singles. To get on the racks it was necessary to be on the charts. In order to be on the charts, it was necessary to have rack space. The only way onto this ever-revolving carousel was radio, which became an increasingly critical factor in the manufacture of hits. Marc Eliot, ROCKONOMICS: THE MONEY BEHIND THE MUSIC 172-73 (1989) (Addendum Exh. E). As Nobel laureate Ronald Coase observed, “[t]o sell music on a large scale it is necessary that people hear it,” and thus once Congress restrained payola, record companies increased promotional activity. Ronald H. Coase, Payola in Radio and Television Broadcasting, 22 J.L. & ECON. 269, 316, 317 (1979) (Addendum Exh. F). Large record companies had “promotion men” on staff throughout the country to urge radio stations to play new singles. Fredric Dannen, HIT MEN 7 (1990) (Addendum Exh. G); R. Serge Denisoff, SOLID GOLD, THE POPULAR RECORD INDUSTRY 260 (1975) (Addendum Exh. H); cf. Michael C. Keith, THE RADIO STATION 106 (8th ed. 2010) (Addendum Exh. I) (“radio stations seldom pay for their music” because “recording companies send demos of their new product to -7- most stations”). They also distributed mini-albums and mass mailings to station personnel, and bought radio advertising spots featuring album cuts. Denisoff, supra, at 264, 268-69 (spot advertising turned Don McLean’s “American Pie” into 1971’s top record). Record companies targeted highly rated stations to induce airplay throughout the industry, as other stations would follow their lead. J. Gregory Sidak & David Kronemyer, The “New Payola” and the American Record Industry: Transactions Costs and Precautionary Ignorance in Contracts For Illicit Services, 10 HARV. J.L. & PUB. POL’Y 521, 526 (1987). The “buckshot” economic model of record companies-releasing many records so that a few would attain commercial success-contributed to the competitive frenzy for airplay. Mol & Wijnberg, supra, at 710; Denisoff, supra, at 97-98. Record companies showered radio stations with approximately 7,000 singles each year. Denisoff, supra, at 253. Radio promotional spending accelerated throughout the 1970s, and companies increasingly retained powerful independent promoters. Dannen, supra, at 11-17. Because record companies only made money from hits, and “[p]eople did not buy pop music they never heard,” “promotion, the art and science of getting songs on the air, drove the record business.… Even the best A&R-artist and repertoire-staff in the world couldn’t save you if radio gave you the cold shoulder.” Id. at 9. -8- The same dynamic exists today. More than 246 million people (comprising over 91% of those 12 or older) listen to radio each week. Radio Advertising Bureau, Why Radio Fact Sheet (2016), http://www.rab.com/whyradio/pdf/ Full_Fact_SheetJune2016.pdf. Radio remains critical to music discovery. See Edison Research and Triton Digital, The Infinite Dial 2016, at 33-34 (68% of people aged 12 and older who said it was important to keep up-to-date with music used AM/FM radio to do so, the highest percentage among public sources), http://www.edisonresearch.com/the-infinite-dial-2016/; Nate Rau, Sony Nashville CEO Talks Importance of Country Radio,” THE TENNESSEAN (Feb. 25, 2015) (“‘If you’re not on country radio, you don’t exist.’”), http://www.tennessean.com/ story/money/industries/music/2015/02/20/sony-nashville-ceo-talks-importance- country-radio/23768711/; In Re: Determination of Royalty Rates and Terms for Ephemeral Recording and Digital Performance of Sound Recordings (Web IV), Docket No. 15-CRB-0001-WR (Copyright Royalty Board), Hearing Tr. 966:16-23 (April 30, 2015) (testimony of Aaron Harrison, Senior Vice President, UMG Recordings, Inc., characterizing “[t]errestrial radio” as “a platform where we can break artists and get the DJs … to pump up artists” so that listeners “migrate from terrestrial radio to actually purchasing” the music). Unsurprisingly, White Whale Records engaged in extensive radio promotion in developing The Turtles’ hits in the 1960s. Former Turtle, Howard Kaylan -9- testified that promotion “was everything when they came out. And radio was the only forum for it at the time. So, yes, it was vital in the ’60s.” A-79 (Kaylan Tr. 70:21-24) (emphasis added). White Whale founder Ted Feigin attributed the Turtles’ first hit single partly to his and his co-founder’s abilities, as “former promotion men,” “‘to call on their collective experiences … with distributors and disk jockeys.’” “Ex’s” Striking It Rich on W. Coast, BILLBOARD, Dec. 11, 1965, at 3; Calif. Setting The Tempo in Sounds, Song, Style, BILLBOARD, Apr. 9, 1966, at 1 (Turtles manager Bill Utley: “we still need disk jockey play on the East to get us on the Top 10 nationally”) (Addendum Exh. J). FEI and its predecessors have known for nearly fifty years that terrestrial radio stations have played their songs, but have never demanded any license or compensation to play Turtles songs. A-84 (Kaylan Tr. 99:1-100:4); A-99 (Cohen Tr. 165:7-168:12); A-106-07 (RFA Response No. 10). C. Record Companies Have Reaped Enormous Economic Benefits from Radio Airplay. The economic benefit of radio promotion to record companies is evident from its duration. “Radio airplay is advertising for prerecorded music. It notifies the consumer of the availability of a new product and enables him to sample that product before purchase; it is generally believed to be the greatest stimulant to sales of a particular pop album.” Sidak & Kronemyer, supra, at 526. “[A] primary objective of record company promotion efforts is to induce some minimum -10- sufficient number of highly rated radio stations to add a record to their playlists so that the record is reported in the hit singles charts of weekly trade publications like Billboard and Radio & Records.” Id. at 527. Studies commissioned by NAB confirm the economic benefits of free radio airplay to the record companies. A Nielsen Company study evaluating 2012-13 data reported a significant and immediate impact of radio airplay upon song sales.3 A study by economist Dr. James Dertouzos attributed a significant portion of industry sales of albums and digital tracks (between 14-23 percent, potentially $1.5-2.4 billion annually) to radio airplay.4 As the Third Circuit observed: The recording industry and broadcasters existed in a sort of symbiotic relationship wherein the recording industry recognized that radio airplay was free advertising that lured consumers to retail stores where they would purchase recordings. And in return, the broadcasters paid no fees, licensing or otherwise, to the recording industry for the performance of those recordings. Bonneville Int’l Corp. v. Peters, 347 F.3d 485, 487-88 (3d Cir. 2003) (footnote omitted). 3 The Power of Radio: Nielsen Study Show Radio Drives Music Sales, Inside Radio (Oct. 29, 2012 - Oct. 27, 2013); Nielsen, Radio Airplay and Music Sales 2013, http://www.nab.org/documents/newsRoom/pdfs/Nielsen_Airplay_Sales_Study.pdf. 4 James N. Dertouzos, Radio Airplay and the Record Industry: An Economic Analysis (2008), http://www.nab.org/documents/resources/061008_Dertouzos_ Ptax.pdf. -11- D. Congress Has Denied Federal Copyright in Over-The-Air Radio Broadcasts of Sound Recordings because of the Historical Symbiosis of the Recording and Radio Industries. Conscious of this mutually beneficial relationship, Congress has repeatedly considered, but never granted, copyright in over-the-air broadcasts (analog or digital) of sound recordings, and beginning in 1995 established only a narrow right in certain other digital transmissions necessary to combat piracy and reduced sales. Until 1971, Congress afforded no copyright protection to sound recordings, despite repeated efforts of the record industry to secure it beginning in 1906. Bonneville, 347 F.3d at 487; U.S. Copyright Office, FEDERAL COPYRIGHT PROTECTION FOR PRE-1972 SOUND RECORDINGS: A REPORT OF THE REGISTER OF COPYRIGHTS 7-10 (2011). In the Sound Recording Amendment of 1971, Pub. L. No. 92-140, 85 Stat. 391, Congress established a limited copyright in the reproduction of sound recordings to protect against piracy. Rather than act retroactively, Congress applied the right only to recordings fixed on or after February 15, 1972. 17 U.S.C. § 301(c). Although musical composers had long enjoyed an exclusive right in the public performance of their compositions, see 17 U.S.C. § 106(4), Congress continued to rebuff the recording industry’s attempts to obtain the same. Congress considered, and rejected, a sound recording performance right in 1976. Senators who led the opposition to the bill explained: -12- For years, record companies have gratuitously provided records to stations in the hope of securing exposure by repeated play over the air. The financial success of recording companies and artists who contract with these companies is directly related to the volume of record sales, which, in turn, depends in great measure upon the promotion efforts of broadcasters. S. Rep. No. 93-983, at 225-26 (1974) (minority views of Messrs. Eastland, Ervin, Burdick, Hruska, Thurmond, and Gurney). In 1995, Congress first created a limited performance right in sound recordings only for certain digital transmissions to prevent piracy and the erosion of record sales by new technologies. The advance of digital recording technology and the prospect of digital transmission capabilities created the possibility that consumers would soon have access to services whereby they could pay for high quality digital audio transmissions (subscription services) or even pay for specific songs to be played on demand (interactive services). The recording industry was concerned that the traditional balance that had existed with the broadcasters would be disturbed and that new, alternative paths for consumers to purchase recorded music (in ways that cut out the recording industry’s products) would erode sales of recorded music. Bonneville, 347 F.3d at 488 (footnote omitted). Congress accordingly enacted the Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 109 Stat. 336, 336 (1995), which gave the sound-recording owner the exclusive right “to perform the copyrighted work publicly by means of a digital audio transmission.” 17 U.S.C. § 106(6). This Act provided a compulsory licensing -13- scheme distributing royalties 50% to copyright holders and 50% to three classes of musical artists. Id. § 114(g)(2). Congress created multiple exemptions to this novel digital performance right, including “nonsubscription broadcast transmission.” Id. § 114(d)(1)(A). Congress granted only this “narrow” right to avoid “upsetting the longstanding business and contractual relationships among record producers and performers, music composers and publishers and broadcasters that have served all of these industries well for decades.” Sen. Rep. No. 104-128, at 13 (1995). It refused to impose “new and unreasonable burdens on radio and television broadcasters, which often promote, and appear to pose no threat to, the distribution of sound recordings” and which (unlike subscription broadcasters) have public service obligations as a condition of their licenses. Id. at 15. Congress also ensured that all other analog performances-such as by restaurants, hotels, retail stores, and night clubs-remained untouched by federal copyright. With the advent of Internet streaming and webcasting, “the recording industry became concerned that technology would erode recording sales by providing alternative sources of high quality recorded performances.” Bonneville, 347 F.3d at 489. In 1998 Congress passed the Digital Millennium Copyright Act, Pub. L. No. 105-304, 112 Stat. 2860 (1998), expanding the class of transmissions -14- available for statutory licensing, but leaving intact the exemption for over-the-air broadcasting. H.R. Conf. Rep. No. 105-796, at 80 (1998). Thus, balancing public and private interests, Congress has woven a highly reticulated scheme granting only a limited performance right in certain digital transmissions with numerous exemptions. Congress has excluded not only over- the-air broadcast transmissions, but many other transmissions, including transmissions within or to business establishments. 17 U.S.C. § 114(d). FEI now seeks a categorical state common-law property right in all public “performances” of sound recordings that bulldozes those carefully crafted distinctions, and sweeps in the playing of pre-1972 tracks not only on the radio but in any business or public accommodation. ARGUMENT I. THERE IS NO NEW YORK COMMON LAW PROPERTY RIGHT IN THE PUBLIC PERFORMANCE OF SOUND RECORDINGS. A. Common Law Copyright Is Limited To Reproduction. In Naxos II, this Court recognized common-law copyright in sound recordings, but underscored that this exclusive right is strictly one to reproduce the copyrighted work. In that case, the Naxos record company had reproduced records of restored Gramophone classical recordings, even though Capitol Records owned Gramophone’s rights. In extending common-law copyright to reproductions of a sound recording, this Court emphasized that strict liability in copyright was -15- predicated upon the “view that bad faith was inherent in the act of copying and selling a work without permission from a competitor because this would deprive the true owner of the work’s value.” 4 N.Y.3d at 563 (emphasis added). This Court noted that the 1786 New York copyright statute preserved “‘the rights, which any person may have, to the printing or publishing of any book or pamphlet, at common law, in cases not mentioned in this act,’” id. at 550 (citing L. 1786, ch. 54, § IV) (emphasis added), and accordingly held that “[a] copyright infringement cause of action in New York consists of two elements: (1) the existence of a valid copyright; and (2) unauthorized reproduction of the work protected by the copyright.” Id. at 563 (emphasis added). Accord Capitol Records, Inc. v. Naxos of Am., Inc., 372 F.3d 471, 479 (2d Cir. 2004) (a “‘common law copyright’ … means protection against copying ….”) (emphasis added) (Naxos I); 2 NIMMER ON COPYRIGHT § 8.02[A] (2016) (“[a]s the label ‘copyright’ suggests, it is the act of copying that is essential to, and constitutes the very essence of all copyright infringement.”). B. Copyright and Performance Rights Are Distinct Property Rights, and Creation of the Performance Rights in Modern Technologies Is Properly the Domain of the Legislature. The district court noted that New York common law also affords certain protections to certain performance rights, and leapt to the untenable conclusion that any form of intellectual labor gives rise to common law copyright. A-1682. But -16- this Court has taught that “[t]he right publicly to represent a dramatic composition for profit, and the right to print and publish the same composition to the exclusion of others, are entirely distinct, and the one may exist without the other.” Palmer v. DeWitt, 47 N.Y. 532, 542 (2 Sickels 1872); see also E.J. MacGillivray, A TREATISE UPON THE LAW OF COPYRIGHT IN THE UNITED KINGDOM AND THE DOMINIONS OF THE CROWN, AND IN THE UNITED STATES OF AMERICA 120 (1902) (“In a dramatic or musical work, the two rights-the copyright and the performing right-exist side by side; but they are quite distinct from one another, and may pass into different hands. The copyright can only be infringed by copying, the performing right by representation or performance.”) (emphasis added) (Addendum Exh. K). Furthermore, the law has never given blanket protection to all forms of performance rights. An author’s right to control performance of an unpublished dramatic work came to be known as “playright,” as distinct from copyright. See Eaton S. Drone, A TREATISE ON THE LAW PROPERTY IN INTELLECTUAL PRODUCTIONS IN GREAT BRITAIN AND THE UNITED STATES 553-54 (1879) (“Playright defined”) (“The exclusive right of multiplying copies is called copyright. But this does not embrace the right of representation,” which is “wholly distinct in nature,” and “playright means the right to play a drama,” and also “the right of performing a musical composition”) (emphasis added) (Addendum Exh. L); see also Ferris v. -17- Frohman, 223 U.S. 424, 432 (1912) (enforcement of “playright”). Indeed, “[a]t common law there was no performing right in the proper sense of the term, but an unpublished manuscript was protected from performance as from any other invasion of the author’s exclusive right to it.” MacGillivray, supra, at 122. Publication extinguished both common-law copyright and playright. Palmer, 47 N.Y. at 543. The legal paths of copyright and performance rights have long diverged, and different protections have extended to limited types of works. The first English copyright act, the Statute of Anne in 1709, did not protect playright. “Until the passage in England of the statutes 3 and 4 William IV (chap. 15), an author could not prevent anyone from publicly performing on the stage any drama in which the author possessed the copyright. He could only prevent the publication of his work by multiplication of copies of it.” Palmer, 47 N.Y. at 542. Indeed, Congress did not vest a right of public performance of dramatic compositions in the copyright owner until 1856, Act of Aug. 18, 1856, ch. 169, 11 Stat. 138, and even then did not create a similar right for authors of musical compositions (despite having granted them copyright a quarter century earlier, see Act of Feb. 3, 1831, ch. 16, 4 Stat. 436; Drone, supra at 90). Not until 1897 did Congress create a right of public performance of musical compositions. MacGillivray, supra, at 287. In 1909, Congress cut back on the public-performance right for musical compositions by -18- limiting it to performances for profit, thus drawing a distinction from dramatic compositions. Act of March 4, 1909, ch. 320(d) & (e), 35 Stat. 1075 (emphasis added). While Congress has now granted musical composers exclusive public- performance rights, without a general for-profit limitation, 17 U.S.C. § 106(4), it has done so subject to numerous statutory exceptions (including many performances by educational, governmental, retail, veterans, fraternal, and charitable organizations). Id. § 110(1)-(7), (9). “A copyright, like other intellectual property, comprises a series of carefully defined and carefully delimited interests to which the law affords correspondingly exact protections,” and “has never accorded the copyright owner complete control over all possible uses of his work.” Dowling v. United States, 473 U.S. 207, 216-17 (1985) (internal quotation marks omitted). Furthermore, as noted above, Congress has granted much narrower performance rights to the owners of copyrights in sound-recordings: i.e., “to perform the copyrighted work publicly by means of a digital audio transmission,” 17 U.S.C. § 106(6), with exclusions for nonsubscription radio broadcasting and for transmissions within or to business establishments, among others, id. § 114; supra at 12-13, leaving all other types of public performances untouched. Moreover, even that right is not an absolute property right; given the compulsory licensing -19- provisions, the owner of the copyright in a sound recording generally has only a statutory right to compensation. 17 U.S.C. § 114(d)(2) & (3). In summary, the common law did not historically recognize performance right beyond playright in unpublished manuscripts. The common law may afford protection to creators against wrongful conduct, such as piracy, misappropriation, breach of implied contract, and unfair competition. See Ferris, 223 U.S. at 437 (enjoining performance of a “piratical composition”); French v. Maguire, 55 How. Pr. 471 (N.Y. Sup. Ct. 1878) (enjoining unauthorized performance of unpublished play); Tompkins v. Halleck, 133 Mass. 32, 36-46 (1882) (performance violated the spectator’s implied license and deprived the author of his rights); Metro. Opera Ass’n v. Wagner-Nichols Recorder Corp., 199 Misc. 786, 796-97 (1950), aff’d, 279 A.D. 632 (1st Dep’t 1951) (finding unfair competition in the capture of broadcast to make competitive recordings); Roy Export Co. v. Columbia Broad. Sys., Inc., 672 F.2d 1095, 1098, 1105 (2d Cir. 1982) (upholding verdict of copyright infringement for use of Charlie Chaplin film clips in a CBS Chaplin biography, and unfair competition for CBS’s broadcast of that biography). But this does not equate to an absolute property right against the world, and exclusive property rights in performance do not ineluctably flow from intellectual labor, as FEI maintains. Creation of such exclusive rights is the legislature’s domain, for it can balance competing public and private interests as common-law courts cannot. -20- C. This Court Should Not Extend Common-Law Copyright to Radio Broadcast of Sound Recordings. There are multiple reasons why this Court should decline to declare an absolute common-law property right in public performance of sound recordings. First, the physical embodiments of sound recordings (“phonorecords” in the parlance of federal copyright law, 17 U.S.C. § 101) are, unlike unpublished manuscripts for which common-law playright was recognized, products that are sold or distributed in commerce and are the property of their owners. Although FEI has repeatedly claimed an exclusive common-law right of “use” of the sound recording (including performance), such an exclusive right of use would pro tanto diminish the separate right of the phonorecord owner to use his property. If FEI truly held the exclusive right to “use” the sound recording, even after sale or other transfer of the phonorecord, no purchaser could play his own CD or downloaded copy of a Turtles track, even for private use. But even a more limited exclusive right - the right to publicly perform a sound recording, see 17 U.S.C. § 101 (defining “publicly”) - has no common law roots. For decades, owners of phonorecords - not just radio stations, but also restaurants, taverns, night clubs, retail outlets, carnivals and festivals, conventions and tradeshows, colleges and universities, amusement parks, and organizations or private persons holding large social or charitable functions, among others - have used their property to perform sound recordings publicly. Record companies have never asserted any common- -21- law copyright in those performances; never demanded a license; and never sought compensation. This Court should not grant a novel categorical common-law right of public performance that would declare all these established usages unlawful for pre-1972 sound recordings.5 Second, a performance right in sound recordings would adversely affect other copyright holders. Sound recordings generally involve either reproductions of, or derivative works that are based upon, copyrighted musical compositions. Cf. 17 U.S.C. § 101 (definition of “derivative work”). Recording artists and companies may have a license to use those compositions, 17 U.S.C. § 115(a); 2 NIMMER ON COPYRIGHT § 8.04 (2016), but composers are entitled to earn royalties from radio broadcasting and certain other public performances, 17 U.S.C. § 106(4); 2 NIMMER ON COPYRIGHT § 8.14[A] (2016). Giving the sound-recording owner the exclusive right to control public performances potentially restricts composers’ ability to profit from their creation. Congress mitigated the conflict for post-1972 recordings by requiring compulsory licensing, 17 U.S.C. § 114(d)(2), (3), but a common-law court has no such power. This Court should reject FEI’s facile conception of an exclusive state-law right that enables record companies to control 5 Indeed, under FEI’s proposed rule, business establishments would owe compensation to sound-recording owners even when not owed to musical composers. See 17 U.S.C. § 110(5) (excluding certain public performances by businesses and restaurants from the composer’s statutory public-performance right). -22- the economic returns of different copyright holders. The balancing of the competing interests of different copyright holders in recorded music belongs to the legislature. Finally, recognition of a broad public-performance right encompassing radio broadcasting would be particularly inappropriate. Radio broadcast is a “performance” of a sound recording, Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 398-99 & n.23 (1968), but it cannot be equated with common-law playright. Playright protected the dramatist from competitive performances that might prevent or diminish economic gain from using the unpublished manuscript in his own performances, or impair his ability to derive revenue from other potential performers. But in the modern economic and technological era of radio broadcasting of sound recordings, nothing of the kind has existed. Record companies are not licensed to perform their own radio broadcasts, and there is no market for licensing tracks to radio broadcasters. As demonstrated above, the economic value of pre-1972 sound recordings lay in their commercial sale; only hits generated profit; and no songs became hits without radio airplay (i.e., “performance”). Radio stations in turn derived value through the sale of advertising from the sound recordings freely provided (and ardently promoted) to radio stations by record companies. Supra at 3-10. -23- The district court found it “inexplicable” that in this era record companies never demanded broadcast royalties under common law, A-1683, but only because it disregarded the economic nature and value of the putative right. Any such demand would have destroyed the record companies’ investment in the sound recording. As a practical reality, when FEI’s sound recordings were created, sound recordings had little or no independent economic value, and gained value only by their repeated performance by radio broadcasters. Congress has resisted ever recognizing any exclusive federal property right in over-the-air radio broadcast of sound recordings because of the unique, historical economic symbiosis of the radio and record industries. Supra at 11-14. This Court should reach the same conclusion under the common law. D. No Precedent Supports the Recognition of Exclusive Property Rights in the Public Performance of Sound Recordings. No common-law case supports FEI’s claim to a broad and exclusive property right in the public performance of sound recordings. In Waring v. WDAS Broadcasting Station, Inc., 194 A. 631 (Pa. 1937) - a case predating the modern practice of record promotion through radio airplay - Fred Waring’s orchestra had a contract with the Ford Motor Company to give weekly live radio performances. Id. at 633. It had also licensed a record company to produce and sell records, but with a disclaimer on the label that the recorded performance was “[n]ot licensed for radio broadcast.” Id. Waring sued to enjoin a radio station from broadcasting -24- its sound recordings. The Supreme Court of Pennsylvania held that musical artists have common-law rights of property if they “elevate interpretations to the realm of independent works of art.” Id. at 635. In addition to holding that the license restriction against radio broadcast could be enforced in equity, id. at 637-38, the Pennsylvania court held that the orchestra’s property rights in performance could be protected under the doctrine of unfair competition. Id. at 638. The court relied upon the U.S. Supreme Court’s holding in International News Service v. Associated Press, 248 U.S. 215 (1918), that even though intellectual labor may not give rise to an absolute property right against the public, it may give rise to a more limited property right enforceable in equity against those who misappropriate it. 194 A. at 638-40. The Pennsylvania court found that the radio station engaged in unfair competition because Waring’s orchestra performed live over the radio for compensation, and that “the constant broadcasting of the records diminished the commercial value of the orchestra’s performances.” Id. at 641 (footnote omitted). Although the Waring court’s identification of a common-law right in public performance of sound recordings was unfounded, and should not be followed, there is a wide gulf between the limited right against misappropriation and unfair competition recognized in Waring, and the exclusive property right sought by FEI. See Naxos II, 4 N.Y.3d at 563 (distinguishing between strict liability action for copyright and action for unfair competition). Nor has the factual predicate for -25- Waring’s court finding of liability - commercial competition between live and recorded musical performances - existed at any time relevant to the Turtles’ recordings. The Metropolitan Opera case also does not support FEI. That case did not involve the performance of sound recordings. Rather, the Metropolitan Opera had an exclusive recording contract with Columbia Records and an exclusive broadcasting contract with the American Broadcasting Company. The defendant pirated live opera performances that were broadcast over the radio. It sold competitive unauthorized recordings of the performances, “with a consequent loss of revenue to Columbia Records and Metropolitan Opera.” Metro. Opera, 199 Misc. at 789-90. Nothing in the decision suggests any exclusive right of the Opera to control the public performance of its authorized sound recordings. Indeed, like the Waring court, the Metropolitan Opera court relied upon the doctrine of unfair competition. Citing International News Service, the court held “that property rights of commercial value are to be and will be protected from any form of unfair invasion or infringement and from any form of commercial immorality,” and enjoined the defendant from continuing its piratical business. Id. at 795-96 (emphasis added). On appeal, the First Department affirmed this holding, and upheld the injunction “against acts of infringement induced by defendants’ unfair course of business.” Metro. Opera Ass’n v. Wagner-Nichols Recorder Corp., 279 -26- A.D. 632 (1st Dep’t 1951). The Metropolitan Opera precedents, grounded in unfair-competition doctrine, cannot be stretched to support FEI’s claim to exclusive rights to the public performance of the Turtles’ sound recordings. This Court has recognized the distinction between exclusive intellectual property rights and more limited property rights that are merely protected against unfair competition. In Fisher v. Star Company, this Court quoted approvingly the U.S. Supreme Court’s ruling that, even in the absence of “‘any general and absolute property’” right, courts of equity may nonetheless protect pecuniary rights against unfair competition. 231 N.Y. 414, 429 (1921) (quoting International News Serv., 248 U.S. at 236). Contrary to FEI’s conception, intellectual creation does not necessarily yield an exclusive right of use of the creation, “‘even if it took labor and genius to make it,’” and protection against unfair competition does not depend upon exclusive property rights of use. Id. (finding that artist had unfair- competition claim based on use of cartoons even in the absence of copyright) (quoting International News Serv., 248 U.S. at 246 (Holmes, J., concurring)). Accordingly, cases that rely upon unfair-competition doctrine do not support FEI’s claim to an exclusive and absolute property right in the public performance of the Turtles’ sound recordings, enforceable in strict liability. Thus, even if this Court were inclined to create a limited property right against misappropriation, neither -27- the legal precedent nor the facts at hand provide any basis for fashioning such a right or defining its scope.6 II. THE CREATION OF PERFORMANCE RIGHTS IN PRE-1972 SOUND RECORDINGS SHOULD BE LEFT TO THE LEGISLATURE. Determining new “performance rights” is an inherently legislative task. See Chamberlain v. Feldman, 300 N.Y. 135, 139-40 (1949). Congress has grappled with the intricacies of defining exclusive performance rights and crafted numerous exemptions and compulsory licenses. 17 U.S.C. § 114(d); supra at 11-14. Expanding the state common law into radio broadcast rights is especially treacherous, given the diverse and increasingly interstate character of radio. The United States has over 15,000 AM and FM radio stations, Press Release, FCC, Broadcast Station Totals as of June 30, 2016 (July 8, 2016), 6 The district court’s finding that Sirius XM engaged in unfair competition was rife with error. The court misconceived broadcasting as distribution (rather than performance) of the copyrighted work; found unfair competition without finding bad faith; and made the unfounded suggestion (under the guise of “economic common sense”) that radio airplay somehow destroys record sales and deprives record companies of licensing revenues, even though there is no extant market for radio licensing of pre-1972 works. A-1692, 1698-99. Cf. Naxos I, 372 F.3d at 482 (bad faith is an element of an unfair competition claim under New York law); CA, Inc. v. Simple.com, Inc., 621 F. Supp. 2d 45, 54 (E.D.N.Y. 2009) (internal quotation omitted) (unfair competition requires proof of special damages in the form of “direct financial loss, lost dealings, or an accounting of the profits caused by the anticompetitive acts at issue”). Sirius XM did not appeal these rulings, and the district court’s application of unfair-competition law is outside the certified question. Upon a proper view of the law, no record company in the modern era has any pecuniary right in the public performance of sound recordings that would be protected against unfair competition, but this Court may leave that question to another day. -28- https://www.fcc.gov/document/broadcast-station-totals-june-30-2016, many of which broadcast to multiple states. Many are small and independent; others are part of syndicated networks. Some are noncommercial. See generally Keith, supra, at 23-29, 313-17. Patchwork common-law copyright regulation of modern radio would invite utter confusion and uncertainty. Radio entities could never predict with certainty when an interstate broadcast would be deemed an “infringing” performance in a particular state, and which state laws apply. Capitol Records, Inc. v. Mercury Records Corp., 221 F.2d 657, 662 (2d Cir. 1955) (applying law of state of infringing acts). Under federal law, radio broadcasting is deemed a public performance to a “great, though unseen and widely scattered, audience,” Jerome H. Remick & Co. v. Am. Auto. Accessories Co., 5 F.2d 411, 412 (6th Cir. 1925), but a multistate broadcast performance creates no complication for a federal statutory right. Under common-law state regulation, however, it is not only uncertain which if any states would recognize a performance right, cf. Flo & Eddie, Inc. v. Sirius XM Radio, Inc., No. 13-23182-CIV, S.D. Fla. June 22, 2015) (rejecting performance rights under Florida law), appeal pending, No. 15-13100 (11th Cir.), question certified, 2016 WL 3546433 (11th Cir. June 29, 2016), but also which states have regulatory jurisdiction over a multistate performance. Moreover, there -29- is uncertainty whether an out-of-state programmer distributing to a network could be deemed liable in states where any participating station is located. Radio stations also cannot predict what payments would be owed and in what amount, or to whom they would be paid. There is no public mechanism to determine who has common-law copyright in pre-1972 sound recordings. Moreover, in a common-law system, liability for playing any particular song would be indeterminate until fixed by individual settlement or jury trial. There is no single compulsory licensing scheme as exists under federal law (much less one rewarding musicians and artists rather than only record companies), or expert body like the Copyright Royalty Board to set rates. See 17 U.S.C. § 114(g)(2). There also can be no single federal court consent decree to establish a uniform system to collect royalties (such as ASCAP or BMI for publishers and composers). See United States v. Am. Soc’y of Composers, Authors and Publishers, No. CIV.A. 42-245, 1950 WL 42273 (S.D.N.Y. Mar. 14, 1950); United States v. Broad. Music Inc., No. 64 CIV. 3787, 1994 WL 901652 (S.D.N.Y. Nov. 18, 1994). The district court suggested that the New York courts could fashion comparable consent decrees, A-1690, but overlooked that those were U.S. government antitrust actions against licensing organizations for alleged anticompetitive activities. Radio defendants could face the vagaries of class actions, with the possibility that owners of valuable assets may opt out (see Colt -30- Indus. S’holder Litig. v. Colt Indus. Inc., 77 N.Y.2d 185, 194 (1991)). It remains unclear whether any multi-plaintiff or multi-defendant class action could be certified, given that individualized implied-license and equitable-estoppel defenses of radio stations may predominate over common questions. See N.Y. C.P.L.R. 901(a)(2). Chaos would reign. The high litigation costs and unpredictability of determining common-law liability and royalties will deter stations from playing pre-1972 tracks, or at least playing them as much, to the detriment of many stakeholders. Songwriters and publishers who derive royalties from broadcast of pre-1972 songs under federal law will be injured by reduced airplay. Lack of airplay may erode public interest in pre-1972 music, harming recording artists who still derive income from licensing, concert tours, or album sales. And the district court conceded that variable state regulation “could upend the analog and digital broadcasting industries.” D.I. 88-1, at 40. Those factors militate against dramatically expanding common-law rights. There is certainly no warrant for creating broader state-law rights than those Congress granted for post-1972 recordings. See A-1690 (noting that courts may conform state common law to federal statutory limitations). In all events, this Court should not recognize such unforeseen rights retroactively. Especially here, the common law is not “a brooding omnipresence in the sky” in which courts merely discover the law. S. Pac. Co. v. Jensen, 244 U.S. -31- 205, 222 (1917) (Holmes, J., dissenting). Although common-law decisions are typically retroactive, “where there has been such a sharp break in the continuity of law that its impact will wreak more havoc in society than society’s interest in stability will tolerate,” a court may deny retroactivity to “an issue of first impression whose resolution was not clearly foreshadowed” where retroactivity would be inequitable. Gurnee v. Aetna Life & Cas. Co., 55 N.Y.2d 184, 191-92 (1982) (internal quotation marks omitted). It would be fundamentally unfair for the recording industry to induce airplay actively for decades without claim of compensation, deriving enormous economic benefits therefrom, and then to demand retroactive compensation from broadcasters for conduct that has always been understood to be free and indeed authorized. Radio stations, particularly those who have invested substantial resources in developing oldies and classic-rock formats, have strong reliance interests that should be protected. There are about 1,850 such stations, many small. Mark R. Fratrik, How Will the Radio Industry Be Affected by Pre-1972 Music Performers’ Fees 7 (July 27, 2015), http://www.biakelsey.com/pdf/ impactofpre72musicroyalties.pdf. For many, common-law copyright liability for all pre-1972 spins may destroy the format’s economic viability, and stations cannot always readily switch formats in competitive markets. This Court should not retroactively recognize new property rights in pre-1972 recordings. CONCLUSION This Court should answer the certified question in the negative. Rick Kaplan Suzanne Head NATIONAL ASSOCIATION OF BROADCASTERS 1771 N Street, NW Washington, DC 2003 6 (202) 429-5430 August 31,2016 LEGAL_US_E# 123412441.2 Respectfully submitted, /~15_t~ Stephen B. Kinnaird PAUL HASTINGS LLP 875 15th Street, NW Washington, DC 20005 (202) 551-1700 stephenkinnaird@paulhastings.com Counsel for Amicus Curiae National Association of Broadcasters -32- EXHIBIT A Robert L. Hilliard & Michael C. Keith, THE BROADCAST CENTURY AND BEYOND (5th ed. 2010) ~ e Broadcast Century and Beyond ELSEVIER FIFTH EDITION Robert L. Hilliard and Michael C. Keith AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO FOCAL PRESS IS AN IMPRINT OF ELSEVIER • Focal Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1GB, UK © 2010 Elsevier, Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher's permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. library of Congress Cataloging-in-Publication Data Hilliard, Robert L., 1925- The broadcast century and beyond I Robert L. Hilliard, Michael C. Keith. - 5th ed. p.cm. Includes bibliographical references and index. ISBN 978-0-240-81236-6 (pbk.: alk. paper) 1. Broadcasting-United States-History. I. Keith, Michael C., 1945- II. Title. PN1990.6.U5H48 2010 384.54'0973-dc22 2009053962 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-0-240-81236-6 For information on all Focal Press publications visit our website at www.elsevierdirect.com 10 11 12 13 14 5 4 3 2 1 Printed in the United States of America Working together to grow libraries in developing countries www.elsevier.com I www.bookaid.org I www.sabre.org EESEV!I.ER ~~~.~~~~ Sabre Foundation -1 :c rn ;:c 0 )> ;:c z G) airwaves. 56 The Davis Amendment When Congress renewed the FRC's mandate in 1928, the legislation included an amendment by Tennessee Congressman Edwin Davis that called for equality of radio service to correct what many perceived as a geographic imbalance of broadcasting stations. Davis's amendment called for equal allocation of licenses, frequency bands, hours of operation, and radiating power. Heretofore, most of these perks had gone to the large population centers in the East and Midwest, leaving the more rural parts of the country with fewer stations, operating mostly at lower power. Davis felt that a powerful trust was dominating radio by favoring stations in heavily populated regions where advertisers could reach more people while ignoring the "public interest" of the sparsely settled areas in the South and Southwest. His amendment required the FRC to divide the country into five geographical zones and create a plan that would redistribute broadcasting facilities equally among them. The FRC designed an arrangement whereby each zone would have an equal number of clear, regional, and local channels. In this effort, Davis prevailed against strong opposition from both the radio trust and politicians from heavily populated regions. In the 1932 elections Davis lost to an oppbnent backed by big radio companies, and by 1936 the equalization amendment was repealed. 1929 Radio programming and the materialistic abandon of the Prohibition Era would roar together into the last year of the decade, the U.S. middle and upper classes mindless of the consequences. Music filled the airwaves: pop singers, pop instrumentalists, pop bands; serious music, too, from string quartets to symphony orchestras.Variety shows on radio increased as more and more stage and vaudeville stars began to test the waters of reaching more unseen people in one performance than they had played to in theaters throughout their careers. Two types of radio drama made their debut: (1) the so-called "thriller" drama, somewhat equivalent to the horror and adventure TV programs of the last decades of the 20th century, and (2) serial drama, that is, continuing characters in a continuing story, a genre that expanded into many forms on radio, and later on TV, from day and evening soap operas to sitcoms to cop/cowboy/hospital clinic series. Their successes perhaps reflecting national attitudes of patronization, condescending tolerance, and insensitivity, the two series that made their network debuts in 1929 and continued for many years as U.S. favorites were both about ethnic minorities. One of these shows, The Rise of the Goldbergs, was the continuing saga of an urban Jewish family. Although the characters and situations were stereotyped, they were treated gently and often with dignity. The Rise of the Goldbergs continued on radio and into television, ending only during the 1950s McCarthy era when the show's ~ew its that the war. n exposure uption; the f4; and the :from then 1e political orps joined ion of Italy were about :were com- with some twar world. )y featuring 1d comedy/ : sensitivity, enemy, the ms of black writers as m and abili- s, providing any extent movements i broadcast- e called by Radio got a periods for j the other possible to t reduction 1e "wartime L case that gh Marconi :rican engi- ved that he 1e Supreme ·, bankrupt, ribution to historians, true inven- war and Recovery-Full of Sound and Fury, Signifying .. Transition to TV 1944 its networks-the Blue Network, which later becomes ABC. The public continued to be hungry for news, especially as the tide of war turned in favor of the Allies and its end was almost in sight. D-Day signaled the invasion of Europe, and General Douglas MacArthur returned to the Philippines. The networks' percentage of program hours devoted to news had increased from about 7% in 1939 to about 20% in 1944. Shortwave transmitters carried battlefield reports from the Pacific, and information and entertainment from the United States to the Soviet Union. On-the-spot D-Day reports were described on wire recorders and as soon as feasible sent to relay stations in London for broadcast directly to the United States. Music still dominated the domestic airwaves, accounting for about a third of the network's schedules; 75% of that was pop music by performers such as Frank Sinatra, Bing Crosby, and Glenn Miller. Drama comprised more than a fourth of NBC and CBS programming, with MBS devoting more than a third of its weekly hours to news and talk shows. After the war the volume of news would decrease, and drama, variety, comedy, music, and other entertainment programs would overwhelm- ingly dominate. With the war still in progress, politics took on an even greater importance for the public. The largest radio audience up to that time, surpassing the previous records for President Roosevelt's Pearl Harbor address and for the reports on D-Day, listened to the November 7 election returns of Thomas E. Dewey's challenge to a Roosevelt bid for a fourth consecutive term; more than 50% of all radio homes in the country tuned in. The year 1944 solidified Clark Hooper's new ratings system; determined through random telephone calls, it replaced Crossley's as the principal method of radio audience measurement. Media barons got a break in 1944. The FCC discontinued its cross-ownership study, and did not at that time go ahead with a ban on newspaper/radio station com- mon ownership in the same community; it decided to rule on a case-by-case basis. The FCC also increased from three to five the number ofTV stations a single entity could own. NBC and CBS made their AM programming available to the FM outlets of their AM affiliates at no cost and enticed more advertising by providing these addi- tional outlets to sponsors at no additional charge. The FCC began hearings in 1944 to determine what to do about frequency allocations for the expected growth of new and existing broadcast services follow- ing the war. One key issue was whether to continue the old, low-quality TV stan- dards or to introduce new ones that had been developed during the war. The "old boys," an RCA-led coalition including NBC, GE, Philco, and DuMont, wanted to pro- tect their already-huge investment by maintaining the old standards; the "new boys," a coalition led by CBS and including Westinghouse and Zenith, wanted their devel- oping color system and higher definition in the ultra-high-frequency band to be given an opportunity in the marketplace. The old boys won. After extensive hear- ings, the FCC issued its decision the following year, 1945. The decision strengthened FIG 4.5 Fred Allen became one of radio's foremost entertainers in the 1940s. His legendary radio feud with Jack Benny provided many laughs. 101 rf.J :::> 0 c: :::> LJ...: UJ :c 1- l Jgram but on g, reporting 1came known rica. The hese two ought to 1te best, ·e was. for sitcoms, a successful comedians, teir own TV )-rated radio amous logo, Broadcasting and Blacklisting-A Decade of Shame the Eye. Perhaps the most innovative artist in television history-one who used the potential of the visual medium more creatively than anyone else-was Ernie Kovacs, who got his first network job in 1951. As exciting and farsighted as Kovacs's work was, though, it was too far ahead of its time for broadcast executives and advertisers, and his sporadic career on network television ended with his death in an auto acci- dent in 1962, at about the time television might have been ready to give him the superstardom it had up to then denied him. Not only was television badly hurting movies, but it began to take an even greater toll on radio. Radio network revenues steadily declined and prime-time offerings decreased. To survive, more and more radio stations turned to deejay formats, thus presaging the reprogramming of the entire radio industry. Captain Video and His Video Rangers An early television hit among youngsters was this low-budget wonder, one of a number of innovative creations that materialized on the perpetually financially troubled Dumont Network. The show began in 1949, lasting until the network itself folded in 1955. It was aired live but its scripts were so short of material that good chunks of its daily 30-minute episode were filled with clips from some old B movie, usually a Western. Although no one should ever query the logic void in programming geared for children, this show stretched the boundaries of credulity. Besides the usual shortcomings with narratives dealing with alien beings {they persist in having humanoid form; hold similar values and emotions as earthlings'; often go by a single name; their leaders command an entire planet rather than nation-states), Captain Video's aliens, with technology advanced enough for space travel at the speed of light, rely on shields and swords as their weapons, wear first-century Roman outfits, and rely on paper-written communications transported by rocket ships. And yet this pre-civil rights era show would frequently interrupt its dramatic action to air spots promoting justice, brotherhood, and tolerance of others who might not look exactly like us. 1952 On April 14, 1952, the FCC issued its now-famous Sixth Report and Order, finally resolving the matters it had begun considering in 1948 when, pending their resolu- tion, it had imposed a freeze on applications for any new television stations. The Sixth Report and Order solved some of the problems but created others. The freeze was lifted, and hundreds of TV stations rushed to get on the air. The UHF band was estab- lished to provide for the growth of television, which otherwise would be stymied because of an insufficient number of VHF channels. At first, UHF had channels NBC and CBS attract a growing audience with their nightly news shows. en 0. Ln ,...;.I :::::> 1.1.; 0: c:::( LIJ LL w :c: 137 "'"' dvertisers' may have ing a total ::)ne factor pin price: 11s were in [stribution 'e a usable ) in rural d 150,000 11 the door 50% of its grew, too: tional FM, Broadcasting and Blacklisting-A Decade of Shame Elvis Presley debuts on The Ed Sullivan Show, his performance is censored from the waist down. Troops sent to enforce desegregation in Little Rock, Arkansas. 458 commercial Tv; and 12 noncommercial educational TV stations were on the air in 1955. While most of the economy was growing, however, radio was suffering. From billings that accounted for 11% of all advertising in the country in 1950, radio dropped to 6% in 1955 (from more than $600 million to less than $550 million); during the same period television's share rose from 3% to 11% (from only $171 million to more than $1.5 billion). The expanding economy was reflected in programs.ln the 1930s a popular audi- ence participation quiz show was The $64 Question, in which a contestant could double the amount of money won by answering each subsequent question correctly, to a total of $64.A television version of that program, which became one of the most popular TV shows in America, made its debut in 1955, but now it was The $64,000 Question. At the other end of the programming scale, NBC's color telecast of Peter Pan, starring Mary Martin, was seen by an estimated 65 million viewers, the largest audience for a TV program up to that time.At the other side of the continent-New York was the center of television production-the first major movie studio decided to join rather than fight the television competition, and Warner Brothers broke the general ban on offering movies to TV by making TV series based on some of its famous films. Programming breakthroughs were too late to help the DuMont network, how- ever, the resources of which were simply not enough to compete with NBC and CBS, and in 1955 it folded. ABC barely survived. Radio tried to survive on whatever new approaches it could find. One such approach came to the fore in 1955, although few in radio would guess its ultimate impact. A recording by a pop music group called Bill Haley and His Comets became the number-one radio play. The song, called "Rock Around the Clock," ushered in the era of rock music on radio and, with it, a new audience that would prove to be radio's economic salvation. Around this time two radio programming innovators, Todd Storz and Bill Stewart, introduced the Top 40 format in Omaha, Nebraska. This would mark the intensification of the long and intimate relationship (some would call it a marriage) between the radio medium and the recording industry, as both relied on each other for their well-being and contin- ued prosperity. The recording industry manufactured the popular, youth-oriented music radio wanted and needed, and the latter provided the exposure that created a market for this product. From the perspective of the recording industry, radio was the perfect promotional vehicle for showcasing its established, as well as up-and- coming, artists. FM radio, struggling to remain afloat, used a different kind of music to bring in some money. The FCC's Subsidiary Communications Authorization (SCA) permitted FM to use its subcarrier to transmit so-called "elevator" (and other kinds of) music to dentist's offices, supermarkets, waiting rooms, and, of course, elevators. A national event that was to catapult television into a political and social change agent occurred in 1955. On the heels of the 1954 Supreme Court Brown v. Board Nat King Cole becomes the first black performer to host his own network show. ;...( :::::::> U;. 0:: st territory - the circumstances of the payola-<:ase - it seems unlikely that they would pursue the option of changing the selection system, unless all other options had failed. Dominant incumbents would likely have resources that were well adapted to the current selection system and be loath to risk the value of these resources (Chandy and Tellis 1998). The fourth option would be much more attractive to outsiders and non- dominants, for instance, the members of the Impressionist movement as described in Wijnberg and Gemser (2000). However, these actors usually lack the resources to pursue the fourth option successfully - most revolutions fail. Finally, there are interesting implications for related theoretical approaches, such as population ecology, that have also been used to analyze media industries (Greve 1996; Boone, Carroll, and Witteloostuijn 2002) Population ecologists have stressed the importance of legitimation processes in the formative years of an industry (Hannan and Carroll 1992; Aldrich and Fiol 1994). A new industry effectively means new products, usually new competitors, and a new selection system, including a set of selectors and a set of most significant product characteristics. Rao (1994) showed how in a young industry firms could attain a competitive advantage by engaging effectively in the competitive process in which the early selectors legitimize their own position and make explicit the most significant product characteristics. He illustrated this by showing how yardstick competitions are organized. As industries mature, the composition of the set of selected - the firms in the industry - may change, but also of the set of selectors. Changes in this set may resemble what Hannan and Freeman (1977) refer to as "environmental change." Shifting alliances between particular groups of the selected and particular groups of selectors, could explain much of the longevity or mortality rates in the industry. Precisely these issues, concerning legitimation processes and shifting alliances of selected and selectors in uncertain and rapidly changing environments are highly significant for the present state of the music industry. The dominant position of the majors is once again threatened by new forms of reproduction, distribution and retail made possible by the internet, as well as important changes in the ways in which consumers, especially young consumers, are informed about the music products, their quality and authenticity. This content downloaded from 141.161.38.45 on Tue, 21 Jul 2015 20:56:29 UTC All use subject to JSTOR Terms and Conditions Competition, Selection and Rock and Roll 713 References Ackerman, Frank. "Consumed in Theory: Alternative Perspectives on the Economics of Consumption." Journal of Economic Issues 31, 3 (1997): 651-664. Akerlof, George A. "The Market for 'Lemons': Qualitative Uncertainty and the Market Mechanism." American Economic Review 72, 3 (1970): 388-400. Aldrich, Howard E., and C. Marlene Fiol. "Fools Rush In? The Institutional Context of Industry Creation." Academy of Management Review 19 (1994): 645-70. Armstrong, Edward G. "Eminem's Construction of Authenticity." Popular Music and Society 27, 3 (2004): 335-355. Boone, Christophe, Glenn R. Carroll, and Arjen van Witteloostuijn. "Resource Distributions and Market Partitioning: Dutch Daily Newspapers, 1968 to 1994." American Sociological Review 67 (2002): 408-431. Bourdieu, Paul. Distinction. Cambridge, MA: Harvard University Press, 1984. Brewster, Bill, and Frank Broughton. Last Night a DJ Saved My Life; the History of the Disc Jockey. New York: Grove Press, 1999. Campbell, Colin. The Romantic Ethic and the Spirit of Modern Consumerism. Oxford: Basil Blackwell, 1987. Caves, Richard E. Creative Industries; Contracts between Art and Commerce. Cambridge, MA: Harvard University Press, 2000. Chandy, Rajesh K., and Gerard j. Tellis "Organizing for Radical Product Innovation: the Overlooked Role of the Willingness to Cannibalize." Journal of Marketing Research 35 (1998): 474-87. Chanan, Michael. Repeated Takes: A short History of Recording and its Effects on Music. London and New York: Verso, 1995. Clarke, Donald. The Rise and Fall of Popular Music. New York, St. Martin's Press. 1995 Clay, Andreana. "Keepin' It Real." The American Behavioral Scientist 46, 10 (2003): 1346-58. Coase, Ronald H. "Payola in Radio and Television Broadcasting." Journal of Law and Economics 22, 2 (1979): 269-328. Conlan, Michael F. "Professionalism or Payola?" Drug topics 138, 19 (1994): 98. Darby, Michael R., and Edi Karni. "Free Competition and the Optimal Amount of Fraud." Journal of Law and Economics 16 (1973): 67-88. Denisoff, R. Serge. Solid Gold: The Popular Record Industry. New Brunswick: Transaction Publishers, 1975. DiMaggio, Paul. "Classification in Art." American Sociological Review 52 (1987): 440-55. Dolfsma, Wilfred. 'The Consumption of Music and the Expression of VALUES: A Social Economic Explanation for the Advent of Pop Music." The American Journal of Economics and Sociology 58, 4 (I 999): 1019-46. "Mediated Preferences - How Institutions Affect Consumption." Journal of Economic Issues 36, 2 (June 2002): 449-458. Eberly, Philip K. Music in the Air: America's Changing Tastes in Popular Music. New York: Hastings, 1982. Frith, Simon. Sound Effects: Youth, Leisure and the Politics of Rock & Roll. New York: Pantheon, 1986. --. Performing Rites. Oxford: Oxford University Press, 1996. Gilmore, Jonathan. The Life of a Style. Ithaca: Cornell University Press, 2000. Greve, Henrich R. "Patterns of Competition: the Diffusion of a Market Position in Radio Broadcasting." Administrative Science Quarterly 41 (1996): 29-61. Hannan, Michael T., and John Freeman. "The Population Ecology of Organizations." American Journal of Sociology 83 (1977): 984. Hannan, Michael T., and Glenn R. Carroll. Dynamics of Organizational Populations: Density, Legitimation and Competition. New York: Oxford University Press, 1992. Hirsch, Paul M. The Structure of the Popular Music Industry; The Filtering Process by which Record.s Are Preselected for Public Consumption. Ann Arbor, Ml: Institute for Social Research, University of Michigan, 1969. --. "Processing Fads and Fashions: An Organization Set Analysis of Culturallndustry Systems." American Journal of Sociology 77, 4 (1972): 639-59. Hyland, William G. The Song Is Ended: Songwriters and American Music, 1900-1950. New York: Oxford University Press, 1995. This content downloaded from 141.161.38.45 on Tue, 21 Jul 2015 20:56:29 UTC All use subject to JSTOR Terms and Conditions 714 ]oeri M. Mol and Nachoem M. Wijnberg Keightley, Keir. "Reconsidering Rock." in The Cambridge Companion to Pop and Rock edited by Simon Frith, Will Straw, and John Street, pp. 109-142. Cambridge: Cambridge University Press, 2001. Kretschmer, Martin, George M. Klimis and Chong Ju Choi "Increasing Returns and Social Contagion in Cultural industries." British Journal of Management 10 (1999): 561-72. Leblebici, Huseyin, Gerald R. Salancik, Anne Capay, and Tom King. "Institutional C hange and the Transformation of lnterorganizational Fields: An Organizational History of the U.S. Radio Broadcasting Industry." Adminimative Science Quarter!, 36 (1991): 333-363. Leibenstein, Harvey. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand." The Quarter!, Journal of Economics 64 (1950): 198-207. McLeod, Kembrew. "Authenticity Within Hip-Hop and Other Cultures Threatened with Assimilation. "Journal of Communication 49,4 (1999): 134-50. Millard, Andre. America on Record: A History of Recorded Sound. Cambridge. Cambridge University Press, 1995. Mol, Joeri M., Wijnberg, Nachoem M. and Charles Carroll. "Value Chain Envy: Explaining New Entry and Vertical integration in Popular Music." Journal of Management Studies 42, 2 (2005): 251-276. Nelson, Phillip. "Information and Consumer Behavior." Journal of Political Econom, 78, 2 (1970): 311-29. Peterson, Richard A. "Why 1955? Explaining the Advent of Rock Music." Popular Music 9 (1990): 97-116. --. Creating Country Music: Fabricating Authenticity. Chicago: University of Chicago Press, 1997. Peterson, Richard A., and David G. Berger. "Entrepreneurship in Organizations: Evidence from the Popular Music Industry." Administmtive Science Quarter!, 16 (1971): 97-106. --. "Cycles in Symbol Production: The Case of Popular Music." American Sociological Ret~iew 40 (197 5): 158-73. Priem, Richard L. "A Consumer Perspective on Value Creation" Academy of Management Review (2007, forthcoming). Rao, Hayagreeva. "The Social Construction of Reputation: Certification Contests, Legitimation, and the Survival of Organizations in the American Automobile Industry: 1895 -1912." Strategic ManagementJournali5 (1994): 29-44. Rothenbuhler, Eric W. "Programming Decision Making in Popular Music Radio." Communication Research 12, 2 (1985): 209-32. --."Commercial Radio and Popular Music." In Popular Music and Communication, edited by J. Lull, pp. 78-84. Newbury Park, NJ: Sage, 1987. Roy, William G. '"Race Records' and 'Hillbilly Music': Institutional Origins of Racial Categories in the American Commercial Recording Industry." Poetics 32 (2004): 265-279. Sanjek, Russell, and David Sanjek. American Popular Music Business in the 20th Century. New York: Oxford University Press, 1991. Segrave, Kerry. Payola in the Music Industry; a History, 1880.1991. Jefferson, NC: McFarland and Company, 1994. Vogel, Harold L. Entertainment Industry Economics: A Guide for Financial Analysis. Cambridge: Cambridge University Press, 1998. Wicke, Peter. Rock Music: Culture Aesthetics and Sociology. Cambridge. Cambridge University Press, 1990. Wijnberg, Nachoem M. "Selection Processes and Appropriability in Art, Science, and Technology" Journal of Cultural Economics 19, 3 (1995): 221-35. --. "Innovation and Organization: Value and Competition in Selection Systems" Organization Studies 25, 8 (2004): 1469-1490. Wijnberg, Nachoem M., and Gerda Gemser. "Adding Value to Innovation: Impressionism and the Transformation of the Selection System in Visual Arts." Organization Science II , 3 (2000): 323-9. EXHIBIT D Adam D. Renhoff, THE CONSEQUENCES OF “CONSIDERATION PAYMENTS”: LESSONS FROM RADIO PAYOLA (2010) Rev Ind Organ (2010) 36:133-147 DOI 10.1007/s11151-010-9239-7 The Consequences of “Consideration Payments”: Lessons from Radio Payola Adam D. Rennhoff Published online: 4 February 2010 © Springer Science+Business Media, LLC. 2010 Abstract The prohibition of radio payola in 1960 gives us an opportunity to exam- ine the effect that “consideration payments” had on the record labels that used them and on overall product variety. Using a historical Billboard chart data, we find that the prohibition of payola reduced musical variety and overall record sales, but may have helped increase access for smaller record labels. These findings support the theory that payola payments, which may impose a non-trivial financial burden on the record label, serve to reduce the radio station’s risk. Keywords Payola · Radio · Regulation · Slotting allowances 1 Introduction and Background In many consumer-product industries, such as groceries, pharmaceuticals, and electronics, the use of “consideration payments” is commonplace. The term “consid- eration payment” refers to payments that upstream firms (manufacturers) make to downstream firms (retailers) in order to obtain favorable treatment for the upstream firm’s product(s). This favorable treatment encompasses things like improved shelf or display space or prominent in-store promotion.1 Academics and government agencies, such as the Federal Trade Commission (FTC), have been concerned about the welfare implications of such payments. 1 The term “consideration” is courtesy of the Financial Accounting Standards Board (FASB). The FASB uses the term in their rules on accounting for payments like slotting allowances, pay-to-stay fees, and merchandising allowances. A. D. Rennhoff (B) Economics and Finance Department, Middle Tennessee State University, P.O. Box 27, Murfreesboro, TN 37132, USA e-mail: rennhoff@mtsu.edu 13 134 A. D. Rennhoff Specifically, they are concerned about the impact these payments have on downstream retail prices and the variety of product offerings. In general, the exact implication of these payments is difficult to decipher. Given the widespread use of these payments and the secrecy of the practice, it is difficult to conceive of an empirical test that would conclusively determine the welfare effect.2 This has contributed to a lack of consensus on the welfare implications (see, for example, Bloom et al. 2000). Fortunately, there is an historical event that may help us shed light on the subject: the radio payola scandal of the late 1950s. As noted in a recent Department of Justice (DoJ) / FTC hearing on firm conduct, radio payola-which is the practice of paying disc jockeys for radio play-has much in common with the current system of consid- eration payments (Sullivan 2006). In the case of radio payola, record labels (upstream firms) make payments to radio stations or to the disc jockeys that are responsible for selecting the music that is played at these radio stations (downstream firms) in return for favorable treatment: more “spins” or airplay for their records. Given that radio sta- tions have a fixed or limited amount of time in which to play music, payola is designed to influence the disc jockeys’ music selections. From a welfare perspective, one might be concerned with the way in which payola alters the variety of music played. Also, if payola were used consistently by larger labels as a way of squeezing out smaller labels, this might raise barriers to entry and reduce competitive vigor. In this research, we examine the impact that payola and its eventual prohibition had on the variety of music played by radio stations using a unique index of musical variety. We construct a unique historical data set of music airplay and sales for 25 record labels from Billboard’s record charts. This data set is then used to examine the impact that payola had on product variety and on the record labels’ ability to place singles on the charts. Our findings indicate that payola increased the variety of musical styles on the record charts, but it may also have restricted access to radio stations for smaller record labels. The post-payola period, therefore, is characterized by decreased musical vari- ety but an increased presence by smaller record labels. A simple descriptive regression suggests that the prohibition of payola led to lower record sales.3 References to forms of radio payola date back to the late 1930s, but it was not until radio stations shifted overwhelmingly to playing recorded music, as opposed to the airing of live “big band” programs, in the 1950s that the practice of paying disc jockeys for airplay became commonplace.4 Though becoming increasingly widespread over time, the use of payola did not attract significant attention or scrutiny for most of the 1950s. Indeed, it was not until late 1959 that government officials and agencies began publicly commenting and engaging in payola inquiries. There are numerous reasons cited for the eventual reg- ulatory interest in payola. Perhaps the most prominent reason involved the renewed 2 Thanks to access to confidential data, Bronsteen et al. (2005) and Wright (2007) are able to look at the effect that slotting allowances have on price. Both studies conclude that slotting allowances do not result in higher retail prices. 3 We discuss the implications of our findings in the broader context of slotting allowances in Sect. 5. 4 A detailed history of radio payola is beyond the scope of this paper. We refer the interested reader to more thorough descriptions of radio payola, including Coase (1979); Segrave (1994); Sanjek (1996). 13 Lessons from Radio Payola 135 focus on truth, disclosure, and fraud brought about by the recent revelations that the outcomes of several popular television quiz shows were rigged (Coase 1979). Whatever the reasons may have been, in the final months of 1959, government agen- cies like the Federal Communications Commission (FCC) and the FTC, along with the US Congress, began actively trying to curtail payola. These interests culminated with the September 1960 Amendments to the Communications Act, which effectively outlawed payola.5,6 2 Data The data used in this study come from several sources. The primary data source is the Billboard Hot 100 Singles Chart. The Billboard Hot 100 Singles Chart, which is published weekly, tracks the top songs (or “singles”) in popular music. Rankings in the chart are based on both airplay and sales. Given the interest in examining how payola affected radio station disc jockeys, it would be preferable to utilize information that is drawn solely from airplay. Unfortunately, Billboard discontinued the “Most Played by Jockeys” rankings prior to the introduction of payola legislation or enforcement. Other potential airplay rankings, such as Billboard’s Hot 100 Airplay rankings, were not introduced until after the desired sample period. The end result is that the only ranking that covers both pre- and post-payola regulation/enforcement and incorporates information on radio airplay is the Hot 100 chart.7 The Billboard Hot 100 chart has historically been considered the definitive list of popular music. For the three-year (156-week) period from January 1, 1959, to December 31, 1961, a number of measures were collected from each of the weekly Billboard Hot 100 charts.8 These measures allow us to characterize the impact that payola had on differ- ent chart “activity level” variables. These activity measures are meant to capture the “survivability” of songs and/or the amount of “churn” on the charts (Bhattacharjee et al. 2007). Among the measures collected were: • Whether there is a new “number one” single in a given week • The average “age” of the top five and top 20 singles on the chart during a given week. This “age” measure captures the average number of weeks that each of the songs has been ranked in the Hot 100. • The number of new songs appearing in the Hot 100 during a given week (“turn- over”). 5 The Communications Act amendments technically prohibited the use of payola unless disc jockeys explicitly (on-air) disclosed any compensation that they received for playing a particular song. This caveat aside, the Communications Act amendments are typically described as a “law prohibiting payola” (Coase 1979), and we therefore use this terminology throughout the current paper. 6 Although outlawed in 1960, payola re-emerged in headlines in 2004 when New York Attorney General Eliot Spitzer successfully investigated four record labels and two radio companies that were accused of engaging in payola. 7 While most practitioners generally believe that there is a positive correlation between airplay and sales, Liebowitz (2004) has shown that while sales of an individual song may benefit from radio play, aggregate per-capita record sales are not positively affected by increased radio airplay. 8 The 1960 Amendments to the Communications Act became effective as of September 13, 1960 (Coase 1979). This means that the data include 89weeks prior to the formal prohibition of payola and 67weeks post. 13 136 A. D. Rennhoff Recall that the primary variable of interest in this study is variety. To allow us to address potential changes in variety, we construct a weekly variety index that represents the degree to which artists in each week’s top 20 are similar musically. This variety index is a continuous variable between 0 and 1. Values of the variety index closer to zero indicate that variety is low (i.e., that the artists in a week’s top 20 have similar musical styles), while values closer to one indicate higher variety. We construct this index using information on the identity of each artist in the Billboard top 20 along with information from the All Music Guide database, which labels musical artists as being associated with specific musical styles. The specific details of the construction of this index appear in the Appendix. The detailed nature of the Billboard Hot 100 also makes it possible to construct a disaggregated data set with which the outcomes for individual record labels can be examined. To do so, the following information is collected for the top 25 record labels during the 156week sample period:9 • The identity of the record label that distributed each week’s number one hit on the Hot 100 chart. • The number of top 20 hits that each record label distributes on each week’s Hot 100 chart. • The number of top 100 hits that each record label distributes on each week’s Hot 100 chart. These measures help determine the effect that payola had on each record label’s prob- ability of landing top singles. As discussed in greater detail in Sect. 2, observed and unobserved record label heterogeneity can be controlled for, thanks to the panel nature of the data. While the primary focus of this research is the determination of the effect that payola had on product variety, the 1960 Amendments to the Communications Act is not the only relevant limitation on payola during the sample period. Prior to the passage of the Communications Act amendments, the FTC began citing numerous record labels and disc jockeys for the use of payola, which the FTC claimed violated consumer protec- tion laws on deceptive practices in interstate commerce (Blair 1959). These citations began in December 1959 and continued through the end of July 1960.10 Articles in the New York Times and Broadcasting, published between December 1959 and July 1960, contain lists of which record labels were cited by the FTC for payola and when these citations were issued. In total, our sample includes 13 record labels that were cited by the FTC. This observed “enforcement,” which affected different record labels at different times, adds an element to the panel regressions discussed in Sect. 3.2. Summary statistics for the collected measures are presented in Table 1 below. The first column in Table 1 shows the overall summary statistics for the entire 156-week sample period, and columns 2 and 3 present statistics for the pre- and 9 The top 25 record labels is determined by counting the number of times that each record label is repre- sented on the Hot 100 during the 156week sample period. In other words, these 25 record labels had the most appearances on the Hot 100 charts from January 1, 1959 to December 31, 1961. All 25 labels were in operation for the entire sample period, creating a balanced panel (Hoffman 2005). 10 July 1960 marks the end of FTC payola citations prior to the Communications Act amendments. Over the years, additional citations have been issued, although none during the remainder of the sample period. 13 Lessons from Radio Payola 137 Table 1 Summary statistics Total sample Pre-amendment Post-amendment T -stat on difference Number of weeks 156 89 67 Mean variety index 0.8045 (0.05) 0.8210 (0.04) 0.7820 (0.04) 3.1141*** New #1? 35.25% (0.48) 29.21% (0.46) 43.28% (0.50) −1.8286* Mean age (top 5) 9.069 (1.52) 9.254 (1.47) 8.823 (1.55) 1.7681* Mean age (top 20) 8.740 (0.81) 8.905 (0.73) 8.521 (0.86) 3.0033*** Turnover 11.910 (2.94) 11.090 (10.55) 13.000 (3.04) −4.2354*** Percentage of #1 hits Top 10 labels 57.05% 64.04% 47.76% 2.0481** Top 25 labels 71.94% 74.16% 68.66% 0.7523 Labels 16-25 5.77% 1.31% 13.43% −3.6923*** Percentage of top 20 hits Top 10 labels 42.02% 44.21% 39.10% 3.5285*** Top 25 labels 63.43% 61.24% 66.34% −1.4769 Labels 16-25 9.55% 6.34% 13.80% −7.9023*** Percentage of top 100 hits Top 10 labels 37.84% 41.18% 33.40% 9.4326*** Top 25 labels 57.47% 58.49% 56.11% 3.3853*** Labels 16-25 9.51% 8.16% 11.33% −9.2449*** Standard deviation values in parentheses. T -test based on 154degrees of freedom ∗∗∗ Significant at the 1% level ∗∗ Significant at the 5% level ∗ Significant at the 10% level post-amendment periods, respectively.11 The final column in Table 1 shows the t- statistics (and significance) on a test of whether the pre-amendment mean for each variable is different from the post-amendment mean. The majority of the sample differ- ences are statistically significant. These summary statistics illustrate some interesting trends. First, variety is higher in the pre-amendment time period, and the decrease in the post-amendment period is statistically significant. As for the other aggregate measures: Turnover increases; there is a new number one song more frequently; and songs disappear from the charts faster in the post-amendment period. The survivability of songs appears to go down in the post-amendment time period. The bottom half of Table 1 organizes the composition of songs on the chart by record label size. The noticeable trend is that the larger record labels are losing share on the charts to the smaller record labels. 3 Empirical Models We divide the empirical models into two categories: aggregate regressions (Sect. 3.1) and panel data regressions (Sect. 3.2). We discuss each type separately. 11 We treat the week ending September 19, 1960, as the first week in the post-amendment time period. As a sensitivity analysis, we removed the 16-week period from August 1, 1960, through November 14, 1960, from our data and re-estimate all models in this paper. Our conclusions were unaffected. These results are available on request. 13 138 A. D. Rennhoff 3.1 Aggregate Regressions The aggregate time series regressions examine how aggregate measures of variety and survivability are related to payola. If Yt is used to represent the outcome measure of interest, then the aggregate regression model can be expressed as: Yt = β1 ∗ 1 [ Payola Law in Effect ] + β2 ∗ Timet + β3 ∗ Time2t + ∑ m Month fixed effects + ∑ y Year fixed effects + εt . (1) The indicator variable 1 [ Payola Law in Effect ] , which accounts for the period of payola prohibition, takes the value 1 after September 13, 1960, and 0 prior. Time and time-squared terms are included to capture general trends, which cannot be captured by other observed measures. Month fixed effects are included to capture monthly dif- ferences (for example, Christmas-themed songs were prominent on the November and December charts), and year fixed effects capture annual differences.12 The five outcome measures used, which were noted in Table 1, are (1) the weekly variety index, (2) weekly turnover, (3) the average age of the top 5 singles in a given week, (4) the average age of the top 20 singles in a given week, and (5) a binary variable indicating whether there was a new number one single during a given week. The time series nature of the data requires more attention than simply running OLS on Eq. (1).13 We first conduct an Augmented Dickey-Fuller test to determine whether the series are stationary. We are able to reject the null hypothesis of non- stationarity (unit root) at the 1 percent significance level for all measures. We then estimate Eq. (1) using OLS and test for autocorrelation in the error terms using the Breusch-Godfrey Lagrange Multiplier test. The test indicates the presence of autocor- relation (for measures 1-4). To correct for autocorrelation, Eq. (1) is estimated using Prais-Winsten regression, which estimates the degree of autocorrelation (ρ) and then uses this estimate in a GLS regression. The treatment of time series binary variables is less standardized than for continu- ous variables. We follow the methodology proposed by Beck et al. (1998) and estimate a logit model that is augmented to account for temporal dependence, which allows the number of weeks since the last number one single to affect the probability of a new number one single today. It is likely that a simple (static) probit or logit model would violate necessary independence assumptions. 3.2 Panel Data Regressions Panel regression techniques enable us to examine the effect that payola had on record labels, while controlling for observed and unobserved heterogeneity.14 The effect 12 With the time trend variables included, the year fixed effects add little to the analysis, but we keep them for completeness. Excluding these year fixed effects does not affect the primary coefficient of interest (that of the payola law). 13 The discussion that follows pertains to aggregate measures 1-4. Issues regarding the fifth measure, which is a binary variable, are addressed separately. 14 Models of this type have also been termed “time-series-cross-section models” (Beck 2006) because the time-series length of the panel raises the possibility of time series issues that are not present in standard panel data sets with relatively few time periods. 13 Lessons from Radio Payola 139 of payola is examined for three observable measures: (1) the number of top 100 singles that each label had on the Hot 100 in a given week, (2) the number of top 20 singles that each label had on the Hot 100 in a given week, and (3) whether a label had the number one single during a given week. These three measures serve as the dependent variables in panel regressions. Using Yl,t to denote the dependent variable for record label l during time t, then the panel regression model can be exp- ressed as: Yl,t = β1 ∗ 1 [ Payola Law in Effect ] + β2 ∗ [ Time Since FTC Complaintl,t ] +β3 ∗ [ Time Since FTC Complaintl,t ]2 + β4 ∗ [ Major label fixed effect ] + ∑ l Record label fixed effectsl + ∑ l Record label fixed effectsl ∗ T imet + ∑ m Month fixed effects + ∑ y Year fixed effects + εl,t. (2) In Eq. (2), both the payola law and the FTC payola citations are allowed to affect the dependent variable. Given the somewhat dubious nature of payola methods, it is not safe to say with certainty that the record labels that were not cited by the FTC did not use payola. However, it does seem reasonable to assume that those firms that were cited by the FTC were among the most likely to be using payola. For this rea- son, we include the FTC citation information to determine the effect of prohibiting record labels from using payola. We adopt an approach similar to Wolfers (2006) study of divorce laws and allow the impact of FTC complaints to change over time. The time-varying impact of being cited by the FTC is captured through coefficients β2 and β3. In terms of the controls used, fixed effects for each record label are included to help account for unobserved heterogeneity, as well as record label-specific time trends. As in the aggregate regressions, month and year fixed effects are also included. Given the length of our sample, we follow the same basic approach used in the previous section: We test for stationarity and then autocorrelation (for our continuous measures). The Im-Persaran-Shin Unit Root test tests whether a variable has a unit root for each record label in the panel. The data strongly rejects non-stationarity. We again find evidence, however, of autocorrelation in the error terms.15 Based on these findings, we again employ an estimation strategy to account for autocorrelation. In order to account for left-censoring in our dependent variables, we estimate a panel Tobit model with Newey-West adjusted standard errors.16, 17 Our binary model is again estimated using the approach of Beck et al. (1998). 15 We use the Wooldridge Panel Serial Correlation test (Drukker 2003). 16 An approach for estimating consistent standard errors in Tobit models with serially correlated errors is described in Busse and Bernard (2003). 17 We also estimated the panel regressions treating the dependent variable as continuous and uncensored (Prais-Winsten GLS regression) and as count data (negative binomial regression). The results were quali- tatively identical. 13 140 A. D. Rennhoff 4 Results 4.1 Aggregate Regression Results The aggregate regression results are presented in Table 2. We begin by examining the variety index results, as this is our primary outcome variable of interest. The coefficient on “Payola Law” is negative and statistically sig- nificant at the 5% level, indicating that variety falls in the post-payola period. This finding reinforces the t-test result in Table 1, but is more robust because we now con- trol for a variety of factors. The final row in Table 2 shows the F-value on a Chow test. The Chow test, as used in this study, is a test of whether the model coefficients are (statistically) different if we estimate the model using the pre- and post-amendment samples separately.18 The result of the Chow test, which is statistically significant at the 1% level, indicates that there is a difference between the pre- and post-amendment coefficients.19 The remainder of the results are not particularly strong, perhaps due to the low- ered variation among the aggregated measures. In the turnover regression (column 2), the coefficient on the payola law is positive and significant at the 10% level. The Chow test is also significant for turnover. There are no statistically significant results in column 3 (age of top 5 songs), although the payola law coefficient does have the expected sign. The payola prohibition coefficient is negative and significant in the top 20 age regression. The payola prohibition coefficient is negative in both of the age regressions, indicating that songs stayed at the top of the charts for shorter periods of time when payola was outlawed. The likelihood of a brand new number one single in a given week goes up by approximately 40 percentage points once payola is pro- hibited. This estimate is significant at the 5% level. The joint test on the significance of the grouped duration dummies, which account for the temporal dependence in the logit model, is significant at the 1% level. This suggests that simple (static) binary logit estimates are biased. Collectively the results provide support for the theory that prohibiting payola decreased the survivability of songs and lead to increased churn. 4.2 Panel Regression Results The panel regression results are presented in Tables 3, 4, 5. The dependent variable in Table 3 is the number of top 100 hits record label l has during week t. Column 1 shows estimates of Eq. (2) using the full sample of 25 record labels. The coefficient on our main variable of interest (“Payola Law”) is negative, but not statistically significant. Because of heterogeneity among labels, it may be the case that the effect of the payola law is different for large labels than it is for smaller labels. To allow for this possibility, we also separately estimate Eq. (2) for the ten 18 The Chow tests exclude the “Payola Law” variable as it cannot be identified when the model is estimated using the divided sample. 19 Oaxaca decompositions of the estimates in Table 2 reveal that differences in the pre- and post-amendment coefficients are due primarily to payola and not to differences in other observable factors. 13 Lessons from Radio Payola 141 Ta bl e 2 Pa yo la la w im pa ct re gr es si on s V ar ie ty in de xa T ur no ve ra A v. ag e of to p 5a A v. ag e of to p 20 a N ew #1 b, d Pa yo la la w in ef fe ct (= 1) −0 .0 48 (0 .0 24 )* * 1. 62 2 (0 .8 30 )* −0 .6 83 (0 .6 27 ) −0 .4 09 (0 .2 14 )* 0. 40 2 (0 .1 70 )* * T im e −0 .1 47 (0 .0 12 ) −0 .0 18 (0 .1 76 ) 0. 01 3 (0 .0 72 ) 0. 01 9 (0 .0 29 ) T im e sq ua re d −1 .9 6E -0 6 (4 E -0 5) −6 .6 7E -0 5 (1 E -0 4) 1. 90 E -0 4 (1 E -0 4) 2. 19 E -0 5 (8 E -0 5) C on tr ol s M on th fix ed ef fe ct s F = 1. 83 * F = 0. 96 F = 1. 24 F = 2. 29 ** F= 6. 74 Y ea r fix ed ef fe ct s F = 0. 89 F = 0. 40 F = 0. 61 F = 0. 34 F = 2. 13 G ro up ed du ra tio n du m m ie s F = 17 4* ** R -s qu ar ed 0. 73 24 0. 22 84 0. 15 4 0. 35 24 0. 12 06 C ho w te st c F = 4. 42 ** * F = 1. 84 ** F = 0. 96 F = 1. 27 F = 1. 16 R ho (c or re la tio n) 0. 44 −0 .2 33 0. 58 3 0. 59 6 N um be r of O bs er va tio ns = 15 6 a Pr ai s- W in st en lin ea r re gr es si on us in g G L S to ac co un tf or se ri al co rr el at io n b L og it m ar gi na le ff ec ts ar e sh ow n. Ps eu do R -s qu ar ed va lu e pr es en te d c C ho w te st of w he th er co ef fic ie nt s ar e eq ua li n th e pr e- an d po st -p ay ol a la w ch an ge sa m pl es (F 14 ,1 28 ) d C ho w te st is ca lc ul at ed us in g lin ea r pr ob ab ili ty m od el ,n ot th e lo gi te st im at es ∗ S ig ni fi ca nt at th e 10 % le ve l ∗∗ Si gn if ic an ta tt he 5% le ve l ∗∗ ∗ S ig ni fi ca nt at th e 1% le ve l 13 142 A. D. Rennhoff Table 3 FTC Complaint and payola law panel regressions: number of top 100 hits Full samplea Top 10 labelsa Labels 16-25a Time since complaint 0.004 (0.015) 0.005 (0.013) −0.029(0.023) Time since complaint squared −1.10E-04 (7E-05) −8.68E-05 (6E-05) 5.52E-05 (1E-04) Payola law in effect (=1) −0.103(0.178) −0.567(0.177)*** 0.446 (0.227)** Controls Record label-specific time trend F = 306*** F = 182*** F = 75.6*** Month fixed effects F = 12.66 F = 55.84*** F = 45.93*** Year fixed effects F = 0.95 F = 0.97 F = 2.04 Chow testb F = 2.13*** Pseudo R-squared 0.2702 0.2786 0.1619 Number of observations 3900 1560 1560 a Panel Tobit regression with Newey-West adjusted standard errors b Chow test of whether coefficients are equal between the top 10 labels and labels 16-25 (F36,3048)∗∗∗ Significant at the 1% level ∗∗ Significant at the 5% level ∗ Significant at the 10% level Table 4 FTC Complaint and payola law panel regressions: number of top 20 hits Full samplea Top 10 Labels 16-25a Labelsa Time since complaint −0.002(0.022) −0.006(0.026) 0.013 (0.029) Time since complaint squared 1.28E-04 (2E-4) 1.20E-04 (2E-04) −1.11E-04 (1E-04) Payola law in effect (=1) −0.058(0.253) −0.262(0.143)** 0.287 (0.250) Controls Record label-specific time trend F = 102*** F = 74.3*** F = 41.8*** Month fixed effects F = 8.14 F = 26.23*** F = 24.65*** Year fixed effects F = 0.53 F = 0.81 F = 0.91 Chow testb F = 0.86 Pseudo R-squared 0.2413 0.1926 0.2038 Number of observations 3,900 1,560 1,560 a Panel Tobit regression with Newey-West adjusted standard errors. b Chow test of whether coefficients are equal between the top 10 labels and labels 16-25 (F36,3048). *** significant at the 1 % level. ** significiant at the 10 % level. largest and ten smallest labels in our sample, as ranked by the number of top 100 hits during the sample period.20 These estimates are presented in columns 2 and 3. Using the partitioned samples we see that the payola law had a negative and statistically 20 We would like to thank an anonymous referee for this suggestion. 13 Lessons from Radio Payola 143 Table 5 FTC Complaint and payola: number 1 hit (logit marginal effects) Full sample Top 10 labels Labels 16-25 Time since complaint 9.25E-04 (0.001) 9.16E-04 (0.008) 3.13E-04 (3E-04) Time since complaint squared −8.21E-06 (1E-05) 3.07E-06 (3E-05) −2.98E-06 (4E-06) Payola law in effect (=1) −0.062(0.031)** −0.071(0.071) 0.108 (0.052)** Controls Month fixed effects F = 16.8 F = 6.93 F = 18.49*** Year fixed effects F = 8.56** F = 5.81* F = 4.30** Grouped duration dummies F = 167*** F = 97.8*** F = 16.2*** Chow testa,b F = 1.35*** Number of observations 3900 1560 1560 a Chow test of whether coefficients are equal between the top 10 labels and labels 16-25 (F172,2776) b Chow test is calculated using linear probability model, not the logit estimates ∗∗∗ Significant at the 1% level ∗∗ Significant at the 5% level ∗ Significant at the 10% level significant impact on the number of top 100 hits for larger labels, while there is a positive and statistically significant impact for smaller record labels. It is important to note that these results control for time trends and other unobserved factors. A Chow test of the hypothesis that the coefficient estimates are the same for the largest and smallest labels is rejected at the 1% significance level. It is interesting to note that the effect of the FTC complaints is far overshadowed by the effect of the payola law itself. Table 4 shows the results of replicating Table 3 using the number of top 20 hits as the dependent variable. We again present the estimates for the full sample and for the two subsamples. The coefficient on “Payola Law” is negative and statistically significant for the large label subsample. The estimate is insignificant for the bottom 10 labels, however. A Chow test fails to reject the hypothesis that the coefficients are equal for the two subsamples. This result may, at least partially, be due to the fact that it is more difficult to predict the number of top 20 singles (note the R-squared in Tables 3 and 4). The final set of results is for the binary dependent variable: Whether record label l has the number one hit in week t. Recall that we account for temporal dependence by estimating a panel logit with grouped duration dummy variables. Also included are controls for the month and calendar year. Estimated marginal effects from the panel probit appear in Table 5. The marginal effect of the payola law is negative for both the full sample (signif- icant) and the subsample of large record labels (not significant). The marginal effect is positive and significant for the small label subsample. Given the strong positive effect for small labels and the weak negative effect for large labels, it must be the case that medium-size labels (labels 11-15) experienced a notable decline following payola prohibition. It seems reasonable to infer that the gains of the small labels came at the ex- pense of the average-sized labels. The impact on large labels was negligible. The FTC citations appear to have had no impact as they are insignificant in all specifications. 13 144 A. D. Rennhoff 5 Discussion and Conclusion In this paper we have investigated the effect that payola had on radio airplay vari- ety and turnover during the three years surrounding the 1960 Amendments to the Communications Act. Empirical estimates account for monthly effects, general time trends, and, where applicable, record label-specific time trends. The main finding is that payola did result in greater musical variety. This implies that, perhaps, payola was used to induce radio stations to “take a chance” and play a wide variety of musical styles.21 The greater variety was accompanied by less churn on the charts, with songs lingering for longer time periods. A series of panel regressions illustrate that larger record labels were the greatest beneficiaries of payola, perhaps due to their ability (at least relative to smaller record labels) to make the necessary financial payments. An implication is that payola was an effective instrument in gaining radio airplay for those labels that were willing to pay. These findings help give us a greater understanding of the role that payola played in the vertical channel. We now discuss how this role, as characterized by our empiri- cal findings, relates to economic theories of consideration payments (namely slotting allowances). A number of views on both the role and impact of slotting allowances have emerged in the growing literature on slotting.22 Two things make direct comparison difficult: First, the slotting literature has focused primarily, although not exclusively, on under- standing the effect that slotting allowances have had on retail prices. In broadcast radio, listeners are able to “purchase” the product at zero monetary cost. Studies of radio listenership-for example, Mooney (2009)-assume that listeners receive disutility from hearing radio advertisements and that this is the “price” of listening. Examining the amount of on-air advertising might allow us to address this price issue. Unfor- tunately, detailed information regarding the amount of on-air advertisement does not exist for the time frame of this study. The second detail that makes direct compari- son difficult is that many of the slotting models assume either homogenous products (Shaffer 1991, for example) or that the downstream firm offers only one product to consumers (Chu 1992, for example). Given our focus on variety, these models do not seem particularly applicable. Our findings do, however, confirm some of the roles of slotting allowances that were outlined in previous papers. For example, Sullivan (1997) argues that slotting allowances are likely to emerge in areas where the growth in new products outpaces the growth in available retail space. In this context, slotting allowances serve to equate supply and demand. While we do not have precise evidence of this for the 1959-1961 time period, it is generally acknowledged that radio plays only a small fraction of the music available, making the supply/demand explanation seem applicable. In addition to this role, others (Chu 1992) have argued that slotting allowances may be used when there is asymmetry regarding the quality of the products. In such models, slotting 21 Rossman et al. (2008) develop a model of diffusion that explains how radio stations adopt new songs for their playlists. Their findings indicate that this pattern of adoption is notably different when payola is used. 22 For an up-to-date summary of the literature on slotting, please see Deltas (2006) and Klein and Wright 2007. 13 Lessons from Radio Payola 145 allowances (or payola in our case) are used by the upstream firm to signal their strong belief in the quality or popularity of their product. Record labels using payola did not provide uniform support for all of the songs they released, indicating they may have been selectively promoting “higher quality” songs. While we find that variety increased because of payola (or, equivalently, decreased because of its prohibition), we have thus far avoided linking this finding to any conclu- sions regarding consumer welfare. The simple reason for this is that variety changes, on their own, do not allow us to draw conclusions regarding welfare. This fact can be illustrated simply using a standard Hotelling model of horizontal differentiation. In the duopoly case with fixed prices, the efficient locations are 1/4 and 3/4. Starting from maximum differentiation (both firms located at the endpoints), a move to [1/4,3/4] would decrease variety by reducing differentiation but would increase welfare. On the other hand, starting from minimum differentiation (both firms located at the midpoint), a move to the efficient locations would increase variety and increase welfare. Wright (2007) argues that to get an accurate picture of the welfare impact, one needs a measure of aggregate product category performance. For example, Wright examines the welfare consequences of slotting allowances by determining whether category sales, as opposed to sales of specific brands, changed with the introduction of slotting allowances. The equivalent measure in our model might be total radio lis- teners or total record sales. We were unable to find detailed radio listenership data: however, we were able to find annual record sales information through the Recording Industry Association of America (RIAA).23 While aggregate annual record sales is less than ideal for such a short time period, it does allow us to make at least a small step towards identifying the welfare effect. Using annual sales from 1950 through 1966, we estimate a simple regression.24 We acknowledge that constructing a data set that allows one to estimate record sales as a function of demographic changes, for example, is preferable. We, nevertheless, proceed with our tentative attempt at addressing welfare measurement. In our regres- sion, the dependent variable is logged annual record sales, which we filter using the Hodrick-Prescott filter to remove all time trends in the raw data. The results are pre- sented in Table 6 below. The results suggest that overall record sales were lower in the post-payola periods, after controlling for time trends. The payola law dummy and the time trends explain record sales well. The coefficient estimates suggest that the banning of payola reduced not only variety, but also overall record sales and thus (arguably) consumer welfare. To make strong predictions regarding the welfare effect, however, we believe that future research is necessary beyond this simple descriptive regression. At a minimum, how- ever, this research has shown that banning payola may have increased access to radio stations for smaller record labels, but the ban led to reduced variety and an apparent reduction in total record sales, hinting at a reduction in consumer welfare. 23 The RIAA figures are reprinted in Harvey Rachlin’s Encyclopedia of the Music Business, published in 1981 by Harpercollins. 24 After 1966 the RIAA’s sales figures include both records and cassette tapes. To make the comparison easier, we restrict our sample to the pre- 1967 period. 13 146 A. D. Rennhoff Table 6 Payola law and annual record sales Logged record sales (in millions) Constant 5.976 (0.452)*** Payola law in effect (=1) −0.113 (0.063)** R-squared 0.7638 Number of observations=17 Prais-Winsten linear regression using GLS to account for serial correlation. The dependent variable is logged annual record sales, filtered using the Hodrick-Prescott filter. *** significant at the 1% level. ** significant at the 5% level. Appendix: Constructing the Variety Index The variety index is the primary variable of interest in the aggregate regressions. We constructed this index based on the average degree of similarity between artists on the charts in a given week. Each artist appearing in the Billboard Top 20 during the sample period was researched using the All Music Guide database (http://www.allmusic.com). In total, there were 291 artists. For each artist, the All Music Guide lists a genre and a set of musical styles. While typical genre labels, such as “Pop/Rock” or “Jazz”, provide very little information regarding the style of music, the All Music Guide’s musical style listings are intended to capture the true characteristics of each artist’s music. Examples of these musical styles include “Rockabilly”, “Nashville Sound/Country- politan”, “Doo Wop”, “Traditional Folk”, and “Dixieland Jazz”. For each of the 291 artists in the sample, we construct of a 31 × 1 vector of dummy variables that indicate which of the 31 music styles are attributed to the artist by the All Music Guide. Artists have, on average, around three musical styles listed in their database profile. Using these vectors, we calculate the percentage of overlap or similarity between each pair of artists in a given week’s Top 20.25 To illustrate this process, consider the following simple example: Suppose that there are two artists (A and B) and three possible musical styles (X,Y, and Z). Artist A is associated with musical style X, but neither of the other two styles. Artist B, on the other hand, is associated with musical styles X and Y, but not Z. The degree of similarity between A and B would be 0.50 because Artist A only shares one of Artist B’s two possible musical styles. This process is repeated for each pair of artists in the week’s Top 20. We then average these similar- ity percentages across all artist pairs to get a weekly average. This weekly average is then subtracted from 1 to yield our variety index. In this context, “variety” measures the average dissimilarity in the musical styles of the artists in each week’s Billboard Top 20. 25 Multiple chart appearances by the same artist in a given week are treated as if they were separate individuals. 13 Lessons from Radio Payola 147 References Beck, N., Katz, J. N., & Tucker, R. (1998). Taking time seriously: Time-series-cross-section analysis with a binary dependent variable. American Journal of Political Science, 42, 1260-1288. Beck, N. (2006). Time-series-cross-section methods. New York University, Mimeo. Bhattacharjee, S., Gopal, R. D., Lertwachara, K., Marsden, J. R., & Telang, R. (2007). The effect of digital sharing technologies on music markets: A survival analysis of albums on ranking charts. Management Science, 53, 1359-1374. Blair, W. M., (1959). FTC files suits to prevent payola. New York Times, Dec 3, 1. Bloom, P., Gundlach, G., & Cannon, J. (2000). Slotting allowances and fees: Schools of thought and the views of practicing managers. Journal of Marketing, 36, 203-216. Bronsteen, P., Elzinga, K. G., & Mills, D. E. (2005). Price competition and slotting allowances. Antitrust Bulletin, 50, 267-284. Busse, M. R., & Bernard, A. B. (2003). Consistent standard errors in panel Tobit with autocorrelation. Dartmouth College, Mimeo. Chu, W. (1992). Demand signaling and screening in channels of distribution. Marketing Science, 11, 327-341. Coase, R. H. (1979). Payola in radio and television broadcasting. Journal of Law and Economics, 22, 269-328. Deltas, G. (2006). Slotting allowances: An assessment of the literature. University of Illinois, Mimeo. Drukker, D. M. (2003). Testing for serial correlation in linear panel-data models. The Stata Jour- nal, 3, 168-177. Hoffman, F. (Ed.). (2005). Encyclopedia of recorded sound. New York: Routledge. Klein, B., & Wright, J. D. (2007). The economics of slotting contracts. Journal of Law and Econom- ics, 50, 421-454. Liebowitz, S. J. (2004). The elusive symbiosis: The impact of radio on the record industry. Review of Economic Research on Copyright Issues, 1, 93-118. Mooney, C. T. (2009). A two-sided market analysis of radio ownership caps. University of Oklahoma, Mimeo. Rossman, G., Chiu, M. M., & Mol, J. (2008). Modeling diffusion of multiple innovations via multilevel diffusion curves: Payola in pop music radio. Sociological Methodology, 38, 201-230. Sanjek, R. (1996). Pennies from heaven: The American popular music business in the twentieth century. New York: Da Capo Press. Segrave, K. (1994). Payola in the music business: A history, 1880-1991. Jefferson, NC: McFarland & Co. Shaffer, G. (1991). Capturing strategic rent: full-line forcing, brand discounts, aggregate rebates, and maximum resale price and maintenance. Journal of Industrial Economics, 39, 557-575. Sullivan, M. W. (1997). Slotting allowances and the market for new products. Journal of Law and Economics, 40, 461-493. Sullivan, M. W. (2006). Slotting allowances and payola: Do they deserve different regulatory treatment?. (Presented at Department of Justice/Federal Trade Commission Hearings on Single-Firm Conduct). Wolfers, J. (2006). Did unilateral divorce laws raise divorce rates? A reconciliation and new results. Amer- ican Economic Review, 96, 1802-1820. Wright, J. D. (2007). Slotting contracts and consumer welfare. Antitrust Law Journal, 74, 439-472. 13 EXHIBIT E Marc Eliot, ROCKONOMICS: THE MONEY BEHIND THE MUSIC (1989) ( ROCKONOMIC The Money Behind the Music Marc Eliot A CITADEL PRESS BOOK Published by Carol Publishing Group -------, I I Copyright© 1989, 1993 by Marc Eliot All rights reserved. No part of this book may be reproduced in any form, except by a newspaper or magazine reviewer who wishes to quote brief passages in connection with a review. A Citadel Press Book Published by Carol Publishing Group Citadel Press is a registered trademark of Carol Communications, Inc. Editorial Offices: 600 Madison Avenue, New York, N.Y. 10022 Sales & Distribution Offices: 120 Enterprise Avenue, Secaucus, N.J. 07094 In Canada: Canadian Manda Group, P.O. Box 920, Station U, Toronto, Ontario M8Z 5P9 Queries regarding rights and permissions should be addressed to Carol Publishing Group, 600 Madison Avenue, New York, N.Y. 10022 Carol Publishing Group books are available at special discounts for bulk purchases, for sales promotions, fund-raising, or educational purposes. Special editions can be created to specifications. For details contact: Special Sales Department, Carol Publishing Group, 120 Enterprise Avenue, Secaucus, N.J. 07094 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 Library of Congress Cataloging-in-Publication Data Eliot, Marc. Rockonomics : the money behind the music I Marc Eliot. p. em. "A Citadel Press book." ISBN 0-8065-1457-4 Bibliq::raphy: p. Includes Index 1. Rock music-History and criticism. 2. Rock music-Economic aspects. 3. Music trade. I. Title. ML3534.E44 1993 784.5 4-dc 20 89-5282 CIP MN Eighteen From an economic point of view, 1971 was a terrific year for rock, ushering in a decade of nearly uninterrupted profits. The widespread acceptance of prerecorded tape became a reality with the introduction of the Muntz eight-track car- tridge and later that year, cassettes, breathing a second sales life into record company backlists. General Recording Tape was the first of several companies to license the catalogs of record companies. GRT struck a deal with RCA for exclusive duplication rights to its entire catalog for a five-year period, beginning in 1972, for $7.5 million. With the combined sales of tapes and albums a factor for the first time, the U.S. recording industry racked up sales totaling $1.2 billion, twice the gross of 1960. The greatest concentration of sales was by a relatively few acts. One method initiated by the industry to expose the audience to as much new product as possible was rack jobbing, which resulted in the demise of one of the last remaining independent operations in the business of music: independent distribution. The average rack capacity in a department store was about a hundred albums and the top 40 singles. To get on the racks, it was necessary to be on the charts. In order to be on the charts, it was necessary to have rack space. The only way onto this ever-revolving carousel was radio, which became an Part Two/ Dear Landlord 173 increasingly critical factor in the manufacture of hits. In the Fillmore era, a hit record could still be broken without benefit of major exposure on the airwaves. In the seventies, radio once again became the definitive make-it-or-break-it route to the charts. The one-time "enemy" had become its most vital promoter. Independent program directors became the newest power brokers within the industry, replacing the independent rec- ord distributors of the early sixties. Bill Drake, one of the first to develop the radio network concept for rock, converted independent stations to "Drake" stations, supplying identical format and preprogrammed music; mixing oldies, album cuts, hits, and new up-and-coming singles; eliminating the local deejays. Becoming a Drake station was a very attractive package for station owners, reducing what was their major expense, the salary packages of in-house "personalities." The advantage to the record industry was the opportunity the Drake system offered to instantly expose new product to a national audience. So effective was radio's ability to capture its target audience, that the combined revenues of American radio reached approximately $1.4 billion in 1971, a figure that more than doubled itself by the end of the decade. Another way record companies sought to increase sales was through the support of tours. Although festivals had died with Altamont, and the Fillmore ballroom circuit was mori- bund, there was still a market for live rock. While tours could not, by themselves, create hit records, the combined radio support and label promotions created an "event" out of new releases, which helped to launch them into the commercial arena. Live concerts became the best way to maintain au- dience interest in a successful act and a key factor in breaking a new one. Virtually every rock group eagerly toured behind the release of a new album, with record companies assuming all expenses, paying the acts nothing more than per diems. Touring reverted to what it had been before the days of the ballrooms, less a function of performance than promotion. EXHIBIT F Ronald H. Coase, Payola in Radio and Television Broadcasting, 22 J.L. & ECON. 269 (1979) The Journal of LAW~ ECONOMICS VOLUME XXII (2) OCTOBER 1979 PRICE $6.00 Keynes and Chicago By DoN PATINKIN Transaction-Cost Economics: The Governance of Contractual Relations 213 By OLIVER E. WILLIAMSON 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 233 On Economism By G. WARREN NuTTER............................................ 263 Payola in Radio and Television Broadcasting By R. H. COASE 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 269 The Northern Pacific Case By F. JAY CuMMINGs AND WAYNE E. RuHTER . . . . . . . . . . . . . . . . . . . . . . 329 The International Salt Case By JOHN L. PETERMAN 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 351 Self-Interest, Ideology, and Logrolling in Congressional Voting By JAMES B. KAu AND PAUL H. RuBIN . . • . . . . . . . . . . • . . . . . . . . . . . . . . . 365 Indivisibility, Decreasing Cost, and Excess Capacity: The Bridge By JoRA R. MINASIAN . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 A Decentralized Method for Utility Regulation By MARTIN LOEB AND WESLEY A. MAGAT . . . . . . . . . . . . . • • . . . . . . . . . . . 399 A Decentralized Method for Utility Regulation: A Comment By w. w. SHARKEY 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 405 THE UNIVERSITY OF CHICAGO LAW SCHOOL PAYOLA IN RADIO AND TELEVISION BROADCASTING* R. H. COASE University of Chicago Law School I. INTRODUCTION PAYOLA in radio and television broadcasting may be defined as undis- closed payments (or other inducements) which are given to bring about the inclusion of material in broadcast programs. 1 The making of such payments has become a crime as a result of amendments to the Communications Act in 1960,2 and is now prohibited by regulations of the Federal Communications Commission (FCC). 3 The aim of this paper is (1) to discover why these payments came to be made, (2) to consider whether the results of allowing such payments should be regarded as beneficial or harmful, and, in the light of this, (3) to evaluate the worth of the 1960 amendments to the Communica- tions Act and of the FCC's regulations. To understand why payola became so common in the broadcasting indus- try it should be realised that payola became a feature of the broadcasting industry not in the late 1950s, when the practice received considerable pub- licity in the press and was investigated by a congressional committee, but in the 1930s and that it entered the broadcasting industry simply as a continua- * I am greatly indebted to Mrs. Clara Ann Bowler who, as research assistant, showed considerable enterprise in unearthing information on payola from a wide variety of sources. I am also grateful for financial assistance to the Law and Economics Program of the University of Chicago Law School and the Foundation for Research in Economics and Education. I have to thank officials of both the Federal Communications Commission and the Federal Trade Commis- sion for their help in providing me with information. They are not, of course, ~esponsible in any way for the use which I have made of this information. It is pleasant to recall that I started to write this paper at Stanford University in 1977 while a Senior Research Fellow at the Hoover Institution. In revising this paper, I have greatly benefited from comments made by participants at seminars at UCLA and the Hoover Institution and by written comments by Professors Edmund W. Kitch, John H. Langbein, H. Douglas Laycock, Bernard D. Meltzer, and Geoffrey R. Stone of the University of Chicago Law School and by Professor Earl A. Thompson of UCLA. 1 The term "payola" is generally said to have been introduced by the trade periodical Variety and its popularity resulted from its use in that periodical. In Webster's Third New International Dictionary, payola is defined as "an undercover or indirect payment for a commercial favor (as to a disc jockey for plugging a song)." 2 See P.L. 86-752, 74 Stat. 895-97. 3 See Applicability of Sponsorship Identification Rules (Public Notice), 40 Fed. Reg. 41936 (1975). 269 270 THE JOURNAL OF LAW AND ECONOMICS tion of business practices which were normal in the popular music industry. Section II gives an account of the history of payola (or its equivalent) in the popular music industry. This shows not only why such payments were made but also why it was to be expected that payola would ultimately make its appearance in the broadcasting industry. Nor should it be supposed that the 1960 amendments to the Communications Act represented the first attempt to regulate payola. As is demonstrated in Section III, numerous attempts had been made over a long period before 1960 to do this. The main propo- nents of such regulation were the music publishers and their arguments in support of their position make clear the effects such regulation was expected to produce. The 1960 amendments were, however, brought about by a combination of events which took place in the 1950s. These events are described in Section IV. An account is given in Sections V and VI of the resulting change in the law and of its implementation by the FCC. In Section VII, I consider, in the light of the historical materials in the earlier sections, what effects the 1960 amendments are likely to produce and I attempt to assess whether the situation brought about by the change in the law repre- sents, on balance, an improvement in the situation. II. PAYOLA IN THE POPULAR MUSIC INDUSTRY Payola in connection with radio programs seems first to have been noticed in the press in the late 1930s. It was then reported that dance band leaders and performers were given gifts by music publishers to induce them to include certain songs in their programs. 4 This was the period of the "big bands" and their performances in hotels and ballrooms were regularly broadcast by radio stations. The popularity of a song and therefore the sales of sheet music as well as performance royalties (and therefore the profits of the firm that published the song) depended, so it was thought, on its "expo- sure" by the "big bands" and it was therefore understandable that music publishers should endeavour to get them to play their pieces. Given the inefficiency of barter, direct money payments were no doubt often made. Another arrangement said to be common was for a dance band leader to be given a financial interest in the publishing house or in the copyright of a song. 5 Such payola was merely a continuation of practices which had long existed in the music industry. About a hundred years before payola became a feature of the radio broadcasting industry, it has been recorded of the London music publishing house, Novello, that members of the Novello family used to sing songs published by the firm with a view to increasing the sales of the firm's sheet music: 4 See Variety, Feb. 9, 1938, at 1; and id., Feb. 23, 1938, at I. s See Variety, Feb. 23, 1938, at 1 & 48. PAYOLA IN RADIO AND TELEVISION BROADCASTING 271 The sisters, Cecilia, Clara, and Sabrina Novello, either as singers or as teachers, ... assisted directly and indirecly to further the love for music . . . and to augment the fortunes of the house, by bringing its publications into notice. This valuable form of help, highly appreciated by Alfred Novello [the head of the firm], together with his own exertions as a vocalist, mitigated the cost of advertisement, which in those days was burdened with a heavy duty, and was oppressed by a capricious mode of estimat- ing the amount. 6 The Novello firm also organized choral concerts and the motive was no doubt in part to increase the demand for music published by Novello since it is not to be expected that music published by the sponsoring firm would be neglected. For example, we are told that in 1867, "Mad·ame Arabella God- dard played at the Monday Popular Concert, for the first time in public, Book Eight of Mendelssohn's 'Lieder ohne Worte,' a few days before its publication by the firm."7 There is no mention of musicians being paid to perform music at concerts not organized by the Novello firm although on occasion this may have been done. According to the head of the Boosey music publishing firm, this was certainly the practice of British music pub- lishers late in the nineteenth century: In the old days the leading singers ... received a royalty for a term of years upon all new songs introduced by them .... There was a special reason for giving the leading singers royalties because if a leading soprano, contralto, tenor or baritone introduced a new song at the ballad concerts, all the smaller singers, according to their voices, would take up the ballads made popular by the star artists. After a while, however, a certain W. H. Hutchinson appeared on the horizon, and he saw at once, being publisher and composer, that he could never get his songs advertised through con- certs under the big ballad concert system. He therefore approached all the smaller singers, and paid them so much a time for so many concerts, provided they sang one of the songs that he was pushing .... I was the first of the leading publishers to understand immediately that this new system was going to deal a severe blow to our old system, so, although we still paid the big singers royalties, I set to work at once subsidizing the small singers in the same way that Hutchinson did. 8 Similar practices were also common in the United States. Books relating to the history of popular music in America are filled with accounts of the activities of song-pluggers, whose exploits often outshine those of the per- formers. Such books are not normally scholarly publications and lack de- tailed references to sources, and, indeed, are probably not accurate in all their particulars. But the general picture they paint is clear. Isaac Goldberg has described the efforts made in the 1880s and 1890s to switch the al- 6 See Joseph Bennett, A Short History of Cheap Music 31 (1887) (at University of Chicago Library). 7 /d.atlll. 8 See William Boosey, Fifty Years of Music 26-27 (1931). 272 THE JOURNAL OF LAW AND ECONOMICS legiance of a performer from one music publisher to another. "Pay his board bill .... Buy him a suit of clothes .... Promise her a glittering stone .... Present him with a trunk .... Subsidize his act with a weekly pourboire. The performer heard but one refrain: 'Sing our song!' "9 Edward B. Marks, a leading American music publisher, has written of this same period as fol- lows: The best songs came from the gutter in those days. Indeed, when I began publishing in 1894, there was no surer way of starting a song off to popularity than to get it sung as loudly as possible in the city's lowest dives .... When a number was introduced from the stage of one of the more pretentious beer halls, that was a plug! And a plug ... is any public performance which is calculated to boost a song .... In the nineties, a young music publisher had to know his way about the night spots. It was important to get his wares before the bibulous public; so he had to spend a large part of his time making the rounds for plugs, and more plugs .... Sixty joints a week I used to make. Joe Stern, my partner, covered about forty. What's more, we did it every week. 10 Later, he remarked that the "train of association whereby 'Annie Rooney' eventually appeared on the piano in a small town banker's house would have shocked many a fine community." 11 Isaac Goldberg says this of the song-plugger: "The Plugger . . . is the publisher's lobbyist wherever music is played. He it is who, by all the arts of persuasion, intrigue, bribery, mayhem, malfeasance, cajolery, entreaty, threat, insinuation, persistence and whatever else he has, sees to it that his employer's music shall be heard." 12 Services mentioned as being provided to performers by music publishers include free copies of sheet music, 13 orches- tral arrangements, 14 and rehearsal rooms. 15 In addition, gifts and money were given to performers as an inducement to sing particular songs. It is reported of the Shapiro-Bernstein firm that from its inception (in the 1890s), it "instituted a policy of getting stage stars to sing their songs by means of tactful, though not always inexpensive, bribes. Lottie Gilson, for .example, was once presented a diamond ring valued at $500. "16 And we are told that (also in the early 1890s) a composer-publisher, Charles K. Harris, was "able to place his song ('Mter the Ball) in Charles Hoyt's fabulous extravaganza A 9 Isaac Goldberg, Tin Pan Alley 112 (1930). 10 Edward B. Marks, They All Sang 3-4 (1934). 11 /d. at 18. 12 Isaac Goldberg, supra note 9, at 203. 13 Edward B. Marks, supra note 10, at 209. 14 David Ewen, The Life and Death of Tin Pan Alley 59 (1964). 15 /d. at xii. 16 /d. at 66. PAYOLA IN RADIO AND TELEVISION BROADCASTING 2 i 3 Trip to Chinatown by the simple expedient of paying the singing star, ]. Aldrich Libbey, $500 in cash and a percentage of the song's royalties."17 Isaac Goldberg tells us that in the middle 1890s, an attempt was made to eliminate such payments. The music publishers "banded together and agreed to give up the practice of buying singers to plug their works." How- ever, the agreement was not successful. "Publishers began to make secret arrangements with headliners; the duplicity was discovered, and the lid blew off. "18 By the early 1900s, such song-plugging arrangements seem to have been commonplace. "To get a musical comedy star or vaudeville headliner to use a song was ... the surest way a plugger knew to launch a song success- fully and keep it alive for years .... Before long, performers were beginning to get a regular weekly stipend from a publisher." 19 Of Al ]olson in the 1910s, the same author says that he made "more song hits than any other single performer of his generation. Along Tin Pan Alley, it became a truism that to get ]olson to sing a song was to have a big hit on your hands. Publishers used cajolery, flattery, the intercession of }olson's closest friends to get him to sing their numbers. When these failed, bribery was called upon. One publisher gave him the gift of a race horse; others got him a cut in a song's royalties; still others listed him as collaborating lyricist or com- poser."20 Al }olson provides but a spectacular example of a common prac- tice. The position as it existed in 1912 was described in Variety: A few seasons ago the vaudeville singer selected the song wanted, and blithely asked the publisher for a weekly salary to sing it. Not all did but the great majority. The publisher paid the price, as other competitors stood ready to bid .... They "put on" a number one week, and "took off" the next, using someone else's song instead. To hold singers, publishers advanced the "plugging scale" somewhat. Then another kind of money-paying publisher appeared. He offered to make the "production," plunged heavily on gowns for "woman singles," supplied "special drops," did almost every- thing possible. The "act-making" publisher says he doesn't pay money, but that statement is accepted doubtfully. 2 1 In May, 1916, the practice of publishers making payments to performers was again noted in Variety when it was reported that some music publishers were threatening legal action against performers who had taken money to sing the publishers' songs but who, after receiving payment in advance, had failed to do so (or had not done so to the extent agreed). This report makes clear both that paying performers was an accepted part of the music pub- 17 /d. at 17. 18 Isaac Goldberg, supra note 9, at 206. 19 David Ewen, supra note 14, at 133. 20 Id. at 117. 21 Variety, Dec. 20, 1912, at 32. 274 THE JOURNAL OF LAW AND ECONOMICS lishers' business and that no serious doubts were entertained about its legal- ity. The report adds that, "there is a large possibility of [the publishers] combining their complaints for individual and collective protection."22 Whatever arrangements may subsequently have been made to check on the compliance of performers with the terms of their agreements, it is certain. that the practice of paying performers continued. Of course, its character changed. As Isaac Goldberg said in 1930: "Plugging methods have simply followed the transformation of the mechanical agencies for publicity. Once it was Libbey's fac~and figur~that shone from the sheets on the piano racks. Now it is Rudy Vallee's. Nor is it an accident that Libbey was a singer, while Vallee is a band-leader. We have become band-minded. The big names . . . are no longer . . . purely singers. . . . They are Paul Whiteman, Ted Lewis, Ben Bernie, Vincent Lopez, Paul Ash. For plugging certain numbers these leaders collect-'cut in'-on payments and royalties, even as did the Libbeys of 1893. There is little philanthropy in Tin Pan Alley. If you scratch my back, I must scratch yours--or your palm. "23 It is therefore hardly surprising to learn that, when the "big bands" became an important part of radio programming, payola entered the broadcasting in- dustry. It was a normal business practice in the popular music industry in the United States. 24 III. EARLY ATTEMPTS TO REGULATE PAYOLA Although payments to performers by music publishers, in one form or another, continued right through the 1930s, it should not be concluded that there were no attempts to stop the practice. An unsuccessful attempt by music publishers in the 1890s to make an agreement to ban payola was noted in the previous section. 25 A more serious attempt was made late in 1916. Earlier in that year, a report in Variety seemed to suggest that the music publishers were trying to establish some general scheme for checking 22 Variety, May 26, 1916, at 5. 23 Isaac Goldberg, supra note 9, at 210. 24 It was at the same time, and for the same reason, that payola entered broadcasting in Britain. "Plugging had existed in the music market long before the appearance of broadcasting, and speci~ payments to singers and musical directors by publishers and writers had long been a recognized means of ensuring public performance of new works. Faced with a broadcasting monopoly, the only means of directly influencing the content of music programmes was for the publisher or song writer to pay dance band leaders for playing selected items. Those who were unable to make such payments were simply left out. To satisfy the large number of complaints about plugging, the BBC prohibited dance band leaders from using announcing microphones." Alan Peacock & Ronald Weir, The Composer in the Market Place 65-66 (1975). They add in a footnote: "Whilst plugging has always involved special payments, it was also, until about 1930, regarded as a legitimate form of advertisement in the music trade ... . "/d. at n.2. 25 See p. 273 supra. PAYOLA IN RADIO AND TELEVISION BROADCASTING 275 whether performers carried out the terms of their agreements. 26 But when the collective action came, it had a very different character. It aimed to abolish what we now call payola, but was, at that time, called the "payment system." The first move had a somewhat unusual character. In October, 1916, it was reported in Variety that the head of a "5-and-10-cent store syndicate" was attempting to bring the music publishers together "to eliminate the existing evils of the business, the principal one being the payment system." Under his plan, publishers would promise to "discontinue paying profes- sional singers for 'popularizing' their numbers." A committee "composed of outside men would decide whether the publisher was guilty of a violation of the rules." If found guilty, "the 5-and-10-cent stores would discontinue sale of the violator's products." Although "several of the larger firms had tenta- tively agreed to combine under such arrangements," many were clearly unwilling to do so. They were suspicious of the motives of the organizer. "It is gossip among the music men that the syndicates always advocated the payment of moneys to professional singers, they claiming a better service was assured and the songs popularized more quickly and a demand for copies simultaneously created. Just why the syndicate people should become suddenly interested in organizing the publishers seemed a problem to the veterans of the trade and they began looking around for the 'friendly rea- son."' Some publishers seem to have thought that the scheme might enable the store syndicates to secure "complete control of the selling end of all popular music." In any case, it would be "quite as simple for the publishers themselves to reorganize independently of the syndicates and after forming an association, appeal to the syndicates for their cooperation." It was clear that the scheme of the 5-and-10-cent storeman would not succeed. But the report in Variety concluded that some such arrangement was needed since the "'payment system' is slowly but surely tearing large chunks into [the publishers'] reserve bank rolls." But nothing would be done "until some disinterested party takes the initiative," since "everyone is sus- picious of his competitor." But there was hope. "It is understood another attempt will be made by an outsider to bring the publishers together."27 This account is disingenuous. The outsider was none other than John J. O'Connor, business manager of Variety, and he actively set about organizing an association of music publishers. He secured the cooperation of vaudeville theater operators (or certain of them) and persuaded music publishers to join. He became the first chairman of the association and Edward B. Marks, 26 See pp. 273-74 supra. 27 Variety, Oct. 6, 1916, at 3. 276 THE JOURNAL OF LAW AND ECONOMICS whose exploits as a song-plugger we have already noticed, 28 became its first president. The name given to the association was the Music Publishers' Protective Association (MPPA). 29 Preliminary moves to establish the associ- ation were reported in Variety late in 1916.30 By May, 1917, the MPPA was formed, the headline to the report in Variety giving this news being, "Song Payments End This Week." In the same issue of Variety, there was an advertisement which gave the aims of the MPPA: The primary and main object of this association just formed shall be to promote and foster clean and free competition among music publishers by eradicating the evil custom of paying tribute or gratuities to singers or musicians employed in theatres, cabarets and other places to induce them to sing or render music, which custom has worked to the detriment of the theatre management and the public through the rendition of music, not because of its merits, but because those singing or rendering it received gratuitit>:; in some form for so doing. Such practices have tended to discour- age and retard the work of music writers, whose labors have not had a free field for competition. 31 During 1917, Variety reported with enthusiasm on the success of the MPPA. Immediately after its formation, Variety reported: "The payment system to singers automatically became a thing of the past this week when the publishers notified their clients that in future all dealings would necessar- ily have to be conducted without the cash propositions. As far as could be ascertained, there has not been a .single instance where the singer has not agreed to do all in his power to cooperate with the publishers, the majority recognizing the future good to be attained by the abolition of payments. "32 At the end of 1917, an article in Variety summed up what had been accom- plished. The MPPA had "wiped out the most insidious curse ... the 'pay- ment system' ... the [MPPA] has not only lived, but has strengthened itself beyond the fondest dreams of its organizers. "33 These accounts which appeared in Variety about the success of the MPPA were inaccurate. Isaac Goldberg, after stating that the MPPA "ostensibly put a stop to [the 'payment system')," adds: "It is optimistic to believe that the practice has been eliminated. "34 Hazel Meyer says this of the formation of the MPPA: "Within twenty-four hours, the overt payola to vaudeville 2s See p. 272 supra. 29 For accounts of the formation of the Music Publishers' Protective Association, see Edward B. Marks, supra note 10, at 134-35, David Ewen, supra note 14, at 135, and Hazel Meyer, The Gold in Tin Pan Alley 158-62 (1958). 30 Variety, Nov. 3, 1916, at 5; id., Nov. 24, 1916, at 5. 3t Variety, May 4, 1917, at 4. 32 Variety, May II, 1917, at II. 33 Variety, Dec. 28, 1917, at 8. 34 Isaac Goldberg, supra note 9, at 206-7. PAYOLA IN RADIO AND TELEVISION BROADCASTING 277 performers stopped. Within another twenty-four hours, payola was under- ground. "35 David Ewen says this: "It did not take long for now one pub- lisher, now another, to devise devious ways of influencing performers to use their songs. The most effective way, and the hardest to pin down as a violation of the rules, was to give a star a share in the song's royalties .... The fact that the performer thus profited from the future success of the song made him more partial to including it in an act or show. "36 Even Edward B. Marks, who was president of the MPPA and was no doubt inclined to magnify its accomplishments, states: "We got rid of the flagrant evil of paying acts, but the sub rosa practice never entirely ceased. "37 It is abun- dantly clear, not only from these opinions, but from other evidence, that "the payment system" or what we would now call "payola" continued after the formation of the MPPA. This outcome would not have surprised most music publishers since there seems to have been considerable scepticism about the possibility of abolish- ing the "payment system" when the idea of an association was first broached. 38 But if this was so, why did all the important music publishers join the MPPA? Some (but certainly not all) undoubtedly thought they would be better off if this restraint on competition were instituted. This would also be true of those few popular music publishers who did not use the "payment system" to promote their own properties or who were not adept in using it. Edward B. Marks may have been one of those. He said this of the "payment system": "Stern and I stood out against the thing, because we sensed that it would ruin the houses that spent the most money. It took will power to stay out of the procession-just a little more than I had. One day I authorized our professional manager ... to go ahead and see to it that our numbers got a few breaks. In two days he came back disappointed. 'Boss,' he said, 'I can't give your money away. Every team worth a damn is signed to sing for other publishers."'39 It was apparently shortly after this experi- ence that Marks agreed to become MPPA's first president. But even those who would benefit from the abolition of the "payment system" might well have hesitated to join if they thought their competitors would not abide by the rules, as many no doubt did. It seems that O'Con- nor's success in securing the cooperation of some of the vaudeville theatre operators was decisive in inducing the hesitant (or hostile) to join. It is said 35 Hazel Meyer, supra note 29, at 162. 36 David Ewen, supra note 14, at 135-36. 37 Edward B. Marks, supra note 10, at 135. 38 When Edward B. Marks was first approached, he states that, "At first, I demurred." Edward B. Marks, supra note 10, at 134. See also the statements in Variety, Dec. 28, 1917, at 8. 39 Edward B. Marks, supra note 10, at 134. 278 THE JOURNAL OF LAW AND ECONOMICS that O'Connor was able to enlist their aid by taking an executive of the Keith-Albee-Orpheum circuit to a show in which the same song ("I Didn't Raise My Boy to Be a Soldier," an antiwar song of the day) was used in a whole series of acts: the melody served as background music for the opening animal act, accompanied a dramatic sketch, was sung first by a duo and later by a quartet, was used in a "pepped-up" version to introduce the comic, while the melody was again used to accompany (in waltz time) the acrobatic troup which closed the show. It was a song-plugger's triumph. 40 Whether or not this incident really took place, it is clear that, even though there may not have been great hostility to the "payment system" among vaudeville theatre operators (it would obviously lower the amounts that had to be paid to artists), there was some concern that the use of vaudeville theatres for song~ plugging might affect the popularity of the shows. 41 What the manager of the Keith-Albee-Orpheum circuit apparently did was to refuse to allow music to be performed unless the publisher of the music was a member of the MPPA. 42 At first, three prominent firms, Feist (publisher of "I Didn't Raise My Boy to Be a Soldier"), Remick, and Harms, declined to join the MPPA, but after the announcement of the ban on the music of publishers not mem- bers of the MPPA they did so. 43 The reasons why the music publishers joined the MPPA seem fairly clear. But why did O'Connor undertake the task of organizing the association? Was it an example of that philanthropy which is apparently so rare in the popular music industry? According to Hazel Meyer, it was not. She states that O'Connor drew the attention of the management of Variety to the negative relationship between payola and Variety's advertising revenues and was then given authority to act as that "disinterested party" who, according to Variety, was needed to bring the publishers together. 44 The view that the "payment system" might have been dampening Variety's advertising reve- nues is not illogical. Paying a singer to popularize a song is a form of promotional expenditure and therefore competitive with other promotional activities, including paying for an advertisement for the song in a trade periodical. But whatever O'Connor's motives may have been, the results achieved by the MPPA must have been a disappointment. What seems to 40 See Hazel Meyer, supra note 29, at 160-61. This tale is repeated in David Ewen, supra note 14, at 135. 41 Compare Hazel Meyer, supra note 29, at 158. In Variety, Dec. 3, 1915, at 5, the general booking manager for the Loew Circuit was reported as objecting to an agent who was directing his acts what songs to sing. The music publisher involved was Leo Feist. The agent denied that he had required his acts to sing Feist songs but "stated he felt under obligation to the Feist firm for furnishing the small time with such a large number of new tunes." /d. 42 See Hazel Meyer, supra note 29, at 161. 43 /d. at 162. 44 /d. at 155 & 158. PAYOLA IN RADIO AND TELEVISION BROADCASTING 2 i9 have happened is that at first the "payment system" simply became, in Edward B. Marks's words, "sub rosa," but, as time went by, the need for concealment was less acutely felt. The MPPA, by its rules, had authority to fine members who used the "payment system," but we are told that these rules were "unenforced and ineffective."45 An opportunity to correct the situation came with the establishment of the National Recovery Administration (NRA) in June, 1933.46 The act creating the NRA empowered members of an industry to draw up a code which, once approved by the NRA-code authorities and signed by the president, became binding on the whole industry. The first draft of such a code for the music publishing industry was submitted to the NRA on September 1, 1933.47 The initiative in formulating this code was taken by the MPPA, and its chair- man, Mr. John G. Paine, was the driving force in the negotiations. 48 The popular music publishers (that is, the members of the MPPA) made it clear that Section 8 of the code, which consisted of "Trade Practice Rules," and was largely designed to prohibit "payola," was for them the most important part of the code. In the official case history of the music publishers' code, it is stated that "representatives of [the popular music publishers] ... said, from time to time, that they were willing to agree to any other provisions in the Code that the Government desired if they might be granted these Trade Practice Rules."49 The standard music publishers (broadly speaking, those who published classical music) expressed no interest in the Trade Practice Rules, and the task of justifying these provisions was assumed by the popu- lar music publishers. In the hearing on the proposed code in July, 1934, Mr. Paine explained that the MPPA ... was organized 17 years ago in an endeavor to put a stop to ... unfair trade practices which are in the nature of bribes paid to orchestra leaders, radio performers and to other artists who appear in public, to induce those artists to perform the copyrighted composition of one publisher in competition or in opposition to their selecting ... the composition of another publisher .... These practices run into enormous sums of money annually and are extremely costly to the industry. We have tried as an association, to put a stop to them. We cannot very readily do that because we cannot 45 Sidney Shemel & M. William Krasilovsky, This Business of Music 97 (rev. ed. 1971). • 6 48 Stat. 195 (1933). 47 See P. A. Markland, Case History of the Code of Fair Competition for the Music Publish- ing Industry, Code No. 552, Oct. 12, 1935, at Sf, contained in Approved Code Histories, Division of Review, Records of the National Recovery Administration (Record Group 9, National Archives, Washington D.C.). 48 See the Report of H. Brewster Hobson, Asst. Deputy Administrator, June 22, 1935, at 2, contained in Appendix I of Case History of the Code of Fair Competition for the Music Publishing Industry, supra note 47. 49 Id. at 11. 280 THE JOURNAL OF LAW AND ECONOMICS control the whole industry but only the members of the Association, and that is one of the reasons we have felt the need of the code because by having it, we would be able to control these activities and practices in connection with the entire industry .... [The code] is protective ... of the small publisher who does not have the money, does not have the capital, to go out and buy this talent .... We feel [that] the exploitation should be ... solely on the merit of the musical composition which is offered. If I go to Mr. Rudy Vallee ... with my musical composition I think he should decide whether he will include that in his repertoire solely on the merit of my . . . composi- tion and not because I happen to be a wealthy publisher and can pay him a substan- tial sum of money to put mine in to the exclusion of somebody else's whose musical merit might be even greater than mine. We feel that the competition should be solely on the basis of the merit of the composition and not on any extraneous induce- ments.50 Other provisions in the code were justified by Mr. Paine on the ground that they were necessary to prevent evasion. For example, the prohibition on the supply of special arrangements was needed because, in practice, it would merely be a means of evading the ban on payola: We go to an orchestra leader and we say" ... We would like very much to have you use this musical composition." He looks it over and says he is not particularly in- terested in that musical composition, that it does not quite fit his particular band; ... and then we say to him" ... You make a special arrangement ... and we will pay you whatever that cost is" ... [T]hat is just a subterfuge for paying directly to the orchestra leader because in . . . practically all instances, the orchestra has its own arranger who arranges the music for the particular and peculiar instrumentation of that orchestra, and that arranger is on a salary. 51 The effect of the code, according to Mr. Paine, would be to prevent public performance being "dominated completely and absolutely by those pub- lishers that have substantial bankrolls to the utter exclusion of those pub- lishers who may have meritorious compositions, good writers, and yet no money for exploitation. "52 What the NRA code did was to impose on the music publishing industry the regulations which the MPPA had attempted unsuccessfully to introduce in 1917. Section 8 of the music publishers' code is reproduced in Appendix A. There was also a section in the radio broadcast- ing code which prohibited payola and this will also be found in Appendix A. so Testimony of John C. Paine, Chairman, Board of the Music Publishers Protective Ass'n in The Music Publishing Industry: Hearings on a Code of Fair Practices and Competition before the National Industrial Recovery Administration 158-61 Guly 26, 1934), contained in Vol. III, Code of Fair Competition for Music Publishing Industry, Transcripts o£ Hearings, 1933-1935, Records of the National Recovery Administration (Record Group 9, National Archives, Wash- ington D.C.). 51 /d. at 162. 52 /d. at 164. PAYOLA IN RADIO AND TELEVISION BROADCASTING 281 According to a representative of the National Association of Broadcasters this provision was inserted in the radio broadcasting code at the request of the music publishers. 53 The chairman of the Code Authority for the Music Publishing Industry was Mr. Paine, who was also chairman of the MPPA. Although the original draft of the music publishers' code had been submitted on September 1, 1933, owing to bureaucratic delays the code was not finally approved until March 4, 1935, to become effective March 18, 1935. How- ever, on May 27, 1935, the Supreme Court declared the act establishing the NRA unconstitutional; as a result the NRA code for the music publishing industry was only in operation for about two months. 54 In a letter dated June 18, 1935, sent to an NRA official, Mr. Paine stated that the Supreme Court decision had removed "the most valuable aid to the [music publishing] industry which we have had ever in our history .... Should some method be devised which would again give to our industry a code effective upon the whole industry, which would be aimed only at eliminating the practices set out in Article 8 ... of the Code ... we feel that ... the savings ... will be so beneficial to our industry that we can undoubt- edly solve most of the commercial problems which lie before us. "55 The method which Mr. Paine had in mind to ensure that the industry continued to abide by the Trade Practice Rules of the NRA code was soon to be revealed. About four months after the NRA ac~ had been declared uncon- stitutional, on September 20, 1935, the MPPA submitted to the Federal Trade Commission (FTC) Trade Practice Rules for the music publishing industry. In a memorandum sent to the Trade Practices Board of the FTC by a staff member it was noted that the rules proposed "were taken practi- cally verbatim from the [NRA] Code of Fair Competition for the Music Publishing Industry." This approach to the FTC by the MPPA was quite proper. The FTC could approve rules of fair trade practices for an industry, once it has determined that to grant the industry's request would not sanc- tion practices contrary to law or be in some way inimical to the public interest. Such rules are divided into two groups. The FTC took the position that group I rules were legally binding and took appropriate action to en- force them. Group II rules were advisory. Their observance was considered desirable but their nonobservance was not per se a violation of the law. However, if it was determined that nonobservance would result in unfair 53 Letter from Oswald F. Schuette, Nat') Ass'n of Broadcasters, to Dr. Lindsay Rogers, Deputy Administrator, National Recovery Administration, Dec. 15, 1933, contained in Music Publishing Industry, Code No. 552, Consolidated Approved Code Industry File, Records of the National Recovery Administration (Record Group 9, National Archives, Washington D.C.). 54 Report of H. Brewster Hobson, supra note 48, at 2. ss Letter from John C. Paine to H. Brewster Hobson, June 18, 1935, contained in Consoli- dated Approved Code Industry File, supra note 53. 282 THE JOURNAL OF LAW AND ECONOMICS competition or unfair deceptive acts or practices, the FTC might take the same action as it would for group I violations. 56 This application of the MPPA was to have a difficult passageY While there was some support for the proposed rules within the FTC, reservations were expressed about the legality of the provisions and their desirability. Lengthy negotiations followed with Mr. Paine and his legal counsel, Joseph V. McKee (a former mayor of New York City). The character of the obsta- cles to FTC approval may be gathered from a memorandum sent by the Trade Practices Board to the Commission in June, 1937. The memorandum first describes the situation of the popular music industry: "The products of the industry consist of popular songs, orchestrations and musical composi- tions. To induce members of the public to buy it is necessary to afford them the means of hearing the tune of the musical composition, for it is only when they are attracted by the tune that they are induced to buy. Thus in promot- ing the sale of their products the members of the industry constantly strive to have their songs and musical compositions accepted by those providing public entertainment and played or performed over the radio, in theaters or by orchestras or singers in hotels, restaurants and other places of public amusement." It then explains that the "practice has grown up of publishers paying so-called bribes or making gifts of money, articles or favors to or- chestra leaders, singers and other artists to play or sing their songs .... it is the purpose of the proposed trade practice conference to provide rules pro- hibiting it." It notes that "the employers of such musicians, singers or artists, for the most part at least, have no objection to such professional employees receiving such payments or gifts. It is proposed, however, to prohibit the practice when indulged in either with or without such employer's consent. Except for this the practice has much similarity to commercial bribery. Our ordinary commercial bribery rule is limited to cases where the bribe is paid without the knowledge or consent of the employer."58 The drafting problem as seen by the staff of the Trade Practices Board is then described but hardly resolved: The [MPPA] desires that the rules prohibit the practice "with or without" the knowl- edge or consent of the employer and moreover, that they be placed in Group I as 56 See Federal Trade Commission, Control of Unfair Practices through Trade Practice Con- ference Procedure of the Federal Trade Commission (TNEC Monograph No. 34, 1941). 51 The following account of the attempt to secure the FTC's approval for a Code of Fair Competition for the Music Publishing Industry is based on memoranda and various other material made available to me by the Federal Trade Commission. These materials have been collected as U.S. Federal Trade Commission, Materials on the Popular Music Industry used in Preparation of R. H. Coase's Payola in Radio and Television Broadcasting (available at Univer- sity of Chicago Law School Library). The pagination on the following notes refers to the bound volume of materials at the University of Chicago Law School Library. 58 /d. at 242-44. PAYOLA IN RADIO AND TELEVISION BROADCASTING 283 compulsory. Otherwise, it is claimed, the rules would mean little and would be ineffectual and not worthwhile. Under the circumstances therefore the rules will have to be phrased so as to prohibit practices which are contrary to law and no more. In our study of the proposed rules thus far we have not been fully convinced that they prohibit only that which is illegal. On the other hand, however, we are likewise not yet fully convinced of the impossibility of making such rules eligible for Group I, although thus far we have not been able to devise appropriate language which would, in our judgment, bring the rules wholly within the law and at the same time meet the situation which the applicant desires, namely, complete and compulsory prohibition of such "song plugging" practices. While strict legal construction . . . of the rules [submitted by the MPPA] would seem to bring them within the Group I category, proof of a case thereunder would appear to be next to impossible. 59 The memorandum next alludes to the antitrust suit pending against the American Society of Composers, Authors, and Publishers (ASCAP), of which the popular music publishers were, of course, members. The existence of this suit seemed to some in the FTC enough to bar approval of the rules even though the Department of Justice had stated in a letter that the "proposed rules . . . do not affect the issues in the antitrust suit. "60 The memorandum also referred to a charge by an independent music publisher-one, that is, not affiliated with a motion picture company-that the proposed rules would inflict great harm on such independent publishers. He said that many independent publishers "signed the petition unwillingly because of threats that their songs would be boycotted by orchestra leaders and artists under the control of the dominant music publishers." The harm this publisher had in mind was recounted in the memorandum: Through using the songs and orchestrations of their own publishing subsidiaries in their motion pictures and their large chains of theaters throughout the country, such affiliated publishers, who are competitors of the independents, have means for exploiting their songs and orchestrations in public performances without the neces- sity of resorting to "song plugging." ... The independent publisher claims that not having such motion picture outlets, it is necessary for him to induce orchestras and singers in hotels, restaurants and in other non-controlled places of entertainment to play his music in order that the public may hear his tunes and thus become interested in buying his sheet music. It should be remembered that it is only when the buying public are attracted by the tune that they can be induced to buy. And the tune can, of course, only be imparted audibly. The opponents, therefore, claim that if these rules should deprive the independent publishers of the privilege of paying orchestra leaders or other artists to sing, play or perform their compositions, their means of bringing their tunes to the attention of the public would be cut off and the business would be monopolized by the motion picture corporations and their subsidiaries who have 59 /d. at 244. 60 /d. 284 THE JOURNAL OF LAW AND ECONOMICS control of the use of songs and music in motion pictures and in motion picture theaters throughout the country. The chief examiner of the FTC reported that it "appears from the record so far made, that at least some of the independent publishers under duress or threat of injury to their business agreed to the Proposed Trade Practice Conference rules as submitted to the Commission by the Industry" and that it was the opinion of his investigating attorney that the proposed rules "would mean the elimination of the independent publisher."61 The position was further complicated by the fact that the MPPA an- nounced in the press that it had already put the trade practice rules into effect and in terms which gave the impression that this had been sanctioned by the FTC. "The applicant's committee has expressed fear that unless the Commission grants the conference promptly, violations of the rules will increase because members of the industry are beginning to realize that the rules, although put into effect by the association, have not as yet been sanctioned or approved by the Commission and therefore may not be en- forceable. "62 The Trade Practice Board's conclusion was as follows: ". . . we do not believe the trade practice conference matter should be postponed to await conclusion of further investigation ... if, under all the circumstances, the Commission ... feels that a trade practice conference is not feasible or desirable, the application should. be denied forthwith .... On the other hand, we do not see how material harm could come from holding a confer- ence and allowing all sides to be heard in an effort to thrash out the whole matter. "63 Given the divergent views within the FTC, it is hardly surprising that the commission, on July 13, 193 7, denied the application for a confer- ence. However, following representations from the industry and modifica- tion of their proposed rules, the FTC rescinded this decision on July 30, 193 7 and agreed to hold a trade practice conference. 64 Mter this conference, held on October 4, 193 7, the FTC received a letter from the Southern Music Publishing Company, New York City, which said that the conference proceedings "represented only an expression of the wishes and desires of the motion picture owned publishers and a few long established independent houses." The rules were, however, tentatively ap- proved by the FTC and an oral hearing was set for January 4, 1938. 65 In the meantime, the commission had received a letter from Mr. Albert 61 /d. at 245-46. 62 /d. at 245-48. 63 /d. at 248. 64 /d. at 254, 262. 65 /d. at 289, 276. PAYOLA IN RADIO AND TELEVISION BROADCASTING 285 Bader, President, Independent Music Publishers, U.S.A., claiming that the proposed rules were "concocted under the influence of the ASCAP and the MPPA, the representative organizations of the Music Publishers Monopoly. "66 The Trade Practice Board recommended approval of the rules. The chief counsel of the FTC, however, noted the pending antitrust suit and the charges of monopoly against members of the MPPA. He concluded: "I be- lieve that the approval of the Trade Practice Rules should be considered as the grant of a privilege and that in no event should it be extended unless the sponsors come before the Commission with absolutely clean hands and un- questioned honesty of purpose and intent." He therefore recommended that approval of the rules be denied, leaving it open to the MPPA to make a new application "as soon as all pending charges against the members of this industry have been disposed of."67 On May 25, 1938, the FTC rejected the proposed trade practice rules for the music publishing industry. 68 One more attempt was to be made in the 1930s to eliminate payola. In 1939, the song-pluggers formed a union, affiliated with the American Feder- ation of Labor, the Music Publishers' Contact Employees Union. From the reports, in November, 1939, about the contract to be signed between the union and the music publishers, we learn that one of its main provisions was intended to prevent payola. Billboard had this to say: "Basic element in the contract (and likewise in the original formation of the union) is the abolition of the evil of bribery for song plugs, contact men feeling that the situation was growing to a point where a publisher's checkbook would finally obviate the necessity of maintaining a plugging staff." The contract provided for a fine for any publisher found guilty by an arbitration board of resorting to payola, plus the posting of a $1,000 bond to be retained by the union if the publisher repeated the offense. 69 The account in Variety gave more detail about the practices which would subject a publisher to such penalties: "The unfair practice clause ... bars publishers from giving or offering any form of gratuity or reward for a plug, including cut-ins, or the making of special arrangements or extractions but prevents them from having their employees attending band leaders' 'command performances' or special nights, unless the consent of the union has been obtained. "70 There would have been little difficulty in the music publishers and the 66 /d. at 312. 61 ld. at 332. 68 I d. at 325. 69 Billboard, Nov. 25, 1939, at 15. 70 Variety, Nov. 22, 1939, at 39. "Cut-ins" refer to the practice of making a band leader or performer a part-composer of a song and therefore giving him a share in the copyriglit royalties. 286 THE JOURNAL OF LAW AND ECONOMICS union coming to an agreement to restrict payola. The publishers wanted to impose these regulations on the industry; the song-plugger employees of the publishers would see the abolition of payola as leading to an in- creased demand for their services. The American Federation of Musicians (AFM), some of whose members received the payola, did not welcome this development. Although indicating that they would cooperate, they were, in fact, reluctant to help the new union. The president of the New York local of the AFM is reported to have said that if payola is to be abolished, "the music men must do it for themselves." And Billboard added: "AFM officials are ... known to regard the bribery angle as not in their province and they do not care to deter a leader from picking up a little extra money in this way."71 There is no reason to suppose that the Music Publishers' Contact Employ- ees Union was able to stop payola. It was reported in Variety in 1944 that the contact men's salaries had risen so high that they were making payments to broadcasters and performers out of their own pockets. 72 And in 1945, payola was apparently so widespread that some publishers threatened to make open payments for broadcasting plugs for their songs. 73 It is clear that the union had not been able to stop payola. Up to the end of World War II, all attempts to stop payola seem to have failed. IV. THE SITUATION IN THE 1950s Until the end of World War II, payola, although it affected the radio programs broadcast, did not normally involve directly either the radio sta- tions or their employees. It consisted of payments by music publishers to performers. By the 1950s, its character had changed radically. The predom-. inant form of payola became payments by record companies (who were often also music publishers) to disc jockeys. Whether because of a change in tastes in music, a change in the composition of the potential audience of radio stations following the advent of television, an improvement in the quality of recordings, or more probably a combination of all these factors (and others), "big band" radio programs disappeared and there emerged as an important form of programming on radio stations the disc jockey who played record- ings, interspersed with comments and commercials. At first, record com- panies (or some of them) had resisted such programming, no doubt believing that listening to records on the radio would reduce the demand for records to be played at home. 74 But it soon became apparent that the playing of a 71 Billboard, Nov. 25, 1939, at 15. 72 Variety, Aug. 2, 1944, at 31. 73 Variety, Nov. 21, 1945, at 49. 74 At the Hearings on a Code of Fair Practices and Competition for the Radio Broadcasting Industry, Vol. 1, at 149 (Sept. 2 7, 1933), RCA-Victor made a request, which was supported by PAYOLA IN RADIO AND TELEVISION BROADCASTING 287 record by a disc jockey increased the sales of that record and the desire of record companies to have their records played on disc jockey programs led naturally to payola. In the trade press throughout the 1950s there are re- peated references to record companies making gifts or money payments to disc jockeys to play their records. 75 However, it was not until late in 1959 that payola came under congressional scrutiny. In the meantime, the broadcasting industry was the subject of several congressional investigations. At first, it was corruption within the FCC itself which attracted attention. Commissioner Mack was alleged to have been given money to obtain his support for the award of a television channel to a particular applicant (who was in fact successful). This resulted in the resig- nation and later indictment of the commissioner. 76 It was a continuation of this concern about improper relations between the FCC and the industry that in 1960 led to the resignation of the chairman of the FCC, Commis- sioner Doerfer, following his acceptance of hospitality from a broadcast- station operator. 77 Attention, however, soon shifted from corruption within the FCC to corruption within the broadcasting industry itself and to the need to give the FCC additional powers to regulate the industry. In 1958, Senator Smathers introduced a bill which provided that no one engaged in music publishing or the manufacture and distribution of musical records could hold a license to operate a broadcasting station. This bill seems to have been an outcome of the rivalry between two organizations control- ling musical copyrights, the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). Broadcasting sta- tions and the networks (who also owned recording companies) were stock- holders in BMI. It was alleged that broadcasting organizations favoured the playing by disc jockeys of records in which they had an interest. It is easy to see that this practice would have affinities with payola. However, in the course of the enquiry, there were many references to payola, one witness Mr. H. A. Huebner of the American and Brunswick Record Corporation, to put a provision in the code which would make it a violation "to broadcast records without prior written consent of the manufacturer of such records." Later Mr. Huebner indicated that he would support a provision to ban "all use of records for broadcasting," id. at 15 7. The hearings are contained in Transcript of Hearings, 1933-1935, Records of the National Recovery Administration (Record Group 9, National Archives, Washington, D.C.). 75 See, for example, the articles mentioned in Investigation of Television Quiz Shows: Hear- ings before a Subcomm. of the House Comm. on Interstate & Foreign Commerce, 86th, 1st Sess. at 1142-47 (1959) [hereinafter cited as Investigation of Television Quiz Shows]; and Meyer, supra note 29, at 154-85. 76 See Investigation of Regulatory Commissions and Agencies: Hearings before a Subcomm. of the House Comm. in Interstate & Foreign Commerce, 85th Cong., 2nd Sess., pt. 4 (Feb.- March, 1958). Mack was indicted, but criminal charges were dropped in August 1961. New York Times, Aug. 31, 1961, at 41, col. 1. 77 For the circumstances surrounding Doerfer's resignation, see Broadcasting, March 14, 1 960, at 31-40. 288 THE JOURNAL OF LAW AND ECONOMICS stating that it was paid to disc jockeys to induce them to play BMI songs. 78 But these payments to disc jockeys do not seem to have occasioned any great concern at that time. Senator Pastore likened the practice to paying "a headwaiter $5 to get a desirable table."79 The bill never passed. It was part of the case against BMI, with Mr. Vance Packard as the principal proponent, that the disc jockeys had filled their programs with "whining guitarists, musical notes put to a switchblade beat, obscene lyrics about hugging, squeezing and rocking all night long," which they substi- tuted for the music of such composers as Cole Porter, Richard Rodgers, and Irving Berlin (who were members of ASCAP). It was clear to Mr. Packard that "something more than artistic judgment or poll results was going into the decision to feature rock and roll, or rhythm and blues" and in support of this statement he referred to an article which appeared in Billboard in 1951 which stated that "the 'payola' situation is worst among the rhythm and blues spinners." According to Mr. Packard, the "rock and roll surge" really got going when RCA-Victor made a contract with a "pallid, sullen young man named Elvis Presley."80 Although no legislation resulted from these hearings, the idea that the demand for "rock and roll" music was created by the broadcasters through playing records of such music on disc jockey pro- grams and that this was in some way connected with payola was to remain a factor influencing congressional attitudes. The next congressional enquiry arose out of charges in 1958 that the popular television quiz shows, which had been presented as honest contests, had in fact been rigged, that the contestants were groomed before the pro- grams, knew the questions that were to be put to them and how they should answer and that the contestant who would win was arranged in advance. The contests were the subject of a New York grand jury investigation. After completion of this investigation, the testimony given to the grand jury was made available to the Subcommittee on Legislative Oversight of the House of Representatives, which then held its own hearings. The proceedings of the subcommittee left no doubt that the charges were true. But payola did not make its appearance until the proceedings were nearing their end. It was then disclosed that t~e owner of a department store, Mr. Hess of Allentown, Pennsylvania, had paid $10,000 so that an employee, Mr. Hof- fer, would be a contestant on the most popular of the quiz programs, the "$64,000 Question." It had been expected by Mr. Hess that the contestant, in the course of being introduced, would be asked where he was employed 78 Amendment to Communications Act of 1934: Hearings before the Subcomm. on Com- munications of the Senate Committee on Interstate & Foreign Commerce, 85th Cong., 2nd Sess. at 208. 79 ld. at 209. 80 /d. at 138. Mr. Vance Packard's testimony is at 106-41. PAYOLA IN RADIO AND TELEVISION BROADCASTING 289 and in fact this happened. The transaction offended the moral sensibilities of some congressmen as the following extracts from the hearings show: MR. ROGERS: Did you feel what you were doing was wrong, Mr. Hess? MR. HESS: I thought it was a terrific promotion for the store. MR. FLYNT: So basically as far as you were concerned the whole idea of getting Mr. Hoffer on there was to plug your store. We will say it was deceitful, at the very least. MR. HEss: I thought it was a good promotion. MR. FLYNT: Yes, but you were not trying to promote an honest quiz show. You were trying to plug your store. MR. HEss: I didn't know whether he could answer the questions or not. 81 Following a statement by Mr. Hess that he had appeared on a TV show with Kate Smith for a payment, he explained, under questioning by Mr. Lishman, counsel to the subcommittee, that such payments were common: MR. LISHMAN: Do you think this was a common practice in order to get these plugs that a person would have to pay? MR. HEss: It was not "was"; it is a common practice. MR. LISHMAN: It is. Isn't it a fact that the sponsor buys the time and unbeknownst to the sponsor ostensibly somebody gets a free ride by paying some side money to a producer. Is that the case? MR. HEss: This is considered a business today. There are plenty of people-- MR. LISHMAN: It is considered a business? MR. HESS: Yes. MR. LISHMAN: Wouldn't this closely approach commercial bribery, in your opinion? MR. HEss: Commercial what? MR. LISHMAN: Commercial bribery. MR. HEss: No, sir. This is a recognized business. There are certain people in New York that do just nothing but plug words. MR. LISHMAN: Are these people commonly known as "schlukmeisters" that you are referring to? "Schlukmeisters," masters of making a sharp bargain on the side? Is that what they are known as in the trade? You say it is a business. I am trying to find the business name for them. MR. HEss: These people are in the business like everybody else and it is a recognized thing with them. MR. LISHMAN: Don't you think it is a fraud on the sponsor who pays the big sum of money to get the program format established and buys the time of the network and then someone comes along and for a comparatively small amount of money gets a free ride on the sponsor's program? MR. HEss: I think it is a terrific thing for a little business to be able to get on some of those big network shows. 8 2 81 Investigation of Television Quiz Shows, supra note 75, at 964 & 970. 82 /d. at 959. 290 THE JOURNAL OF LAW AND ECONOMICS Mr. Hess also pointed out that his store also made payments to newspaper columnists. He mentioned the names of Jack O'Brien, Bob Considine, and John Hall. Mr. Levine, public relations manager at the Hess store, gave more particulars of these transactions. He provided the subcommittee with a list of TV shows on which a mention of the Hess store or its activities had been obtained by a payment of money in the 1950s. They included the Steve Allen "Tonight" show and "Name That Tune."83 In his testimony, he added the Dave Garroway "Today" show and the "Garry Moore Show."84 He also mentioned that in a television film with the locale in New York City, one of their trucks had been spotted. 85 Mr. Levine also added the names of Hal Boyle and Earl Wilson to the names of newspaper columnists mentioned by Mr. Hess. When Congressman Bennett started to question Mr. Levine about the columnists, the chairman (Mr. Oren Harris) intervened to say that "that gets into the newspaper business" and Mr. Bennett said "I withdraw the question about the newspapers because I guess that is out of our field. "86 In statements issued after this testimony, Earl Wilson denied that he had re- ceived money from Hess while Jack O'Brien denied that he had mentioned the Hess store. Other columnists (Bob Considine, Stanley Delaplane, and Hal Boyle), who had mentioned the store in their columns, explained that the payments they received were for "personal appearances" or "travel ex- penses." But the question of payments to newspaper columnists seems to have attracted very little attention compared to that accorded payments to disc jockeys. 87 The members of the subcommittee showed great interest in the way in which Mr. Hess made his payments. 88 Who actually received the $10,000 paid (in cash) to secure Mr. Hoffer's appearance on the "$64,000 Question" was never revealed. A Mr. Schwartz who, it was said, was handed the money by an employee of the Hess store, claimed that his testimony might "tend to defame, degrade or incriminate some person" and his testimony was in consequence taken in executive session and was not published. 89 Mr. Hess, mindful no doubt of the presence at the hearings of a representative of the district attorney of New York, showed considerable circumspection in his answers on this subject. What is apparent, however, is that this particu- lar transaction was very unusual. Normally the payment was made by check 83 Id. at 1008. 84 Jd. at 1007 & 1009. 85 ld. at 1010. 86 /d. at 1012. 87 See the New York Times, Nov. 5, 1959, at 28; id., Nov. 6, 1959, at 16; id., Nov. 13, 1959, at 12; and Time, Nov. 16, 1959, at 65. 88 Investigation of Television Quiz Shows, supra note 75, at 967. 89 Id. at 1024. PAYOLA IN RADIO AND TELEVISION BROADCASTING 291 and to a public relations firm. How the public relations firm obtained these "mentions" for the Hess store, whether by payment or in some other way, was not disclosed. The heads of two of the networks were questioned about Mr. Hess's transactions. Mr. Kintner, President of the National Broadcasting Company (NBC), said that the showing of some fashions from the Hess store on the "Today" show, probably arose because the show wants to have interesting people on it and "apparently some public relations firm told the Hess De- partment Store that they could get some interesting person on 'Today."'90 This, he thought, was not objectionable. Asked about the practice of pro- ducers or employees of NBC being paid to insert plugs into programs, Mr. Kintner said that it was not "general," was "reprehensible," and would lead to dismissal if discovered. However, he added a qualification: "You under- stand the operation of all these types of shows, for example--and this is just a theoretical example--if Miami wants the 'Today' show to come to Florida, in order to boom for tourists, the program, itself, may be paid some of the costs of transportation, but it does not go to the individuals or staff, and it is part of the budget of the show. I would not consider the example I gave as reprehensible. "91 Mr. Stanton, President of the Columbia Broadcasting Sys- tem (CBS), said that the practices disclosed by Mr. Hess's testimony were "deplorable." But he did not "quarrel with the idea that personalities and institutions retain agents, public relations people, to try to get as much public attention as possible. The place where I draw the line is the passing of money from the act or from the personality to the person who writes the column or does the show or plans the display window, or whatever that might be."92 At the end of the hearings into the television quiz programs, there were introduced into the record a letter and memorandum from Mr. Burton Lane (composer of the musical score for "Finian's Rainbow" and a number of popular songs) in his capacity as president of the American Guild of Authors and Composers. The letter stated in part that the "practices of audience deception in broadcasting which have been revealed in the testimony ad- duced before your committee, is by no means limited to quiz programs. It has a counterpart in the promotion of music, and in music products. There is no doubt that commercial bribery has become a prime factor in determining what music is played on many broadcast programs and what musical records the public is surreptitiously induced to buy."93 The memorandum gave ex- 90 !d. at 1045. 91 ld. at 1046. 92 /d. at 1106. 93 /d. at 1142. 292 THE JOURNAL OF LAW AND ECONOMICS amples of payola, mainly taken from the trade press. According to Variety, it was Burton Lane's letter which led to the payola enquiry. 94 Whether this is true or not, the great payola enquiry followed. The hearings on "payola and other deceptive practices"95 opened with a statement by the chairman of the subcommittee, Representative Oren Har- ris, in which he referred to the Hess testimony and to Burton Lane's letter. He continued: "Since that time, the subcommittee has been flooded with complaints ... about ... the selection of material sent over the airwaves [being] influenced by undisclosed economic inducements. When this hap- pens, we are told, the public interest suffers in many ways. The quality of broadcast programs declines when the choice of program materials is made, not in the public interest, but in the interest of those who are willing to pay to obtain exposure of their records. The public is misled as to the popularity of the records played. Moreover, these practices constitute unfair competition with honest businessmen who refuse to engage in them. They tend to drive out of business small firms who lack the means to survive this unfair compe- tition. "96 Mr. Harris said that the subcommittee had not "prejudged any of these matters,"97 although this was not evident from the questioning which followed. The first witness was Mr. Norman Prescott, who had been a disc jockey with WBZ, Boston, and who had accepted from record distributors, over approximately a three-year period, payments totaling about $10,000. He had been reluctant to testify (apparently because he did not wish to incriminate others) but had agreed to cooperate with the subcommittee, according to its counsel, after they confronted him "at every turn" with "documentary proof' collected by the subcommittee's investigators. Mr. Prescott explained that he left WBZ in July, 1959, because, among other things, he was "disgusted with the payola conditions in the industry; and I walked away from it for that reason." (There is some conflict about this in the testimony-the man- ager of WBZ said that Mr. Prescott was fired.) Mr. Prescott testified that he considered payola to be bribery and explained that it comes about because "it is impossible to play the big percentage of the output of the manufactur- ers. That is why payola is functioning today and will continue to function if something is not done about it." Payola led to the playing of "rock and roll" records: 94 Variety, Nov. 11, 1959, at l. 95 Responsibilities of Broadcasting Licensees and Station Personnel: Hearings before a Sub- comm. of the House Comm. on Interstate & Foreign Commerce on Payola and Other Decep- tive Practices in the Broadcasting Field, 86th Cong., 2d Sess. (1960). 96 /d. at l. 97 /d. at 2. PAYOLA IN RADIO AND TELEVISION BROADCASTING 293 MR. BENNETT: Well, do you think without payola that a lot of this so-called junk music, rock and roll stuff, which appeals to the teenagers would not be played, or do you think that kind of thing would be played anyway, regardless of the payola? MR. PRESCOTT: Never get on the air. MR. BENNETT: Do you think payola is responsible for it? MR. PRESCOTT: Yes; it keeps it on the air, because it fills pockets. 98 The effect of Mr. Prescott's testimony was to suggest that payola was widespread, that it was immoral, that it prevented the broadcasting of "good music," and that it should be stopped by new legislation. Mr. Harris com- plimented Mr. Prescott on his "frank and forthright" testimony. "Even though you were at first, understandingly so, reluctant to provide informa- tion or talk about it to the investigators or our staff, after you got into it and found out what the situation was, you have been very helpful, explaining for the record just how this business operates from the standpoint of an experi- enced man."99 Later witnesses, record manufacturers and distributors who made the payments and the disc jockeys who received them, denied, when pressed by members of the subcommittee, that the payments were wrong or improper. Indeed they usually denied that these payments were "payola," in the sense that the disc jockeys agreed to play records in return for the payments. The payments were made for taking charge of record hops (dances at which the records were played), for consultation, for advice, for listening to records, or were gifts. The congressmen, as was to be expected in men of their experi- ence, expressed scepticism or outright disbelief at these explanations. Nor need we doubt that whatever the ostensible reason for these payments, the aim was to increase the likelihood that the records of the suppliers would be played. But the fact that the transactions might be held to constitute com- mercial bribery in New York State, where many of the transactions took place, doubtless made many witnesses reluctant to be completely candid about them. The remainder of the hearings were largely devoted to the affairs of Dick Clark, who was responsible for an ABC network television show on which he played records while teenagers danced and also another show on which the performers sang the songs they had recorded. Until late in 1959, when, under pressure from ABC, Mr. Clark disposed of most of his outside inter- ests, he had been an owner or part owner of several music-publishing and record-manufacturing corporations and also of a record-pressing corpora- 98 I d. at 39. 99 I d. at 42. Mr. Norman Prescott's testimony is found in id. at 3-45. The testimony of Mr. Paul O'Friel, general manager of WBZ, denying that Mr. Prescott left WBZ voluntarily is found in id. at 1548-49. 294 THE JOURNAL OF LAW AND ECONOMICS tion. It was implied that Mr. Clark received payola in an indirect form, that individuals or firms who had their music published by or recorded by or pressed by one of the corporations in which he had an interest were more likely to have their records played or music performed on his programs. Mr. Clark denied that he had ever agreed to play records or select songs in return for business given to his corporations or that he had ever taken payola. The closest Mr. Clark ever came to an admission that his outside interests may have influenced him in his choice of records was the following: "The truth, gentlemen, is that I did not consciously favor such records. Maybe I did so without realizing it." The questioning by members of the subcommittee and its counsel was unable to shake Mr. Clark's contention that he had not accepted payola in any form. too Nonetheless, the testimony made it clear that the acceptance of payola by disc jockeys was widespread, a conclusion confirmed by information uncov- ered by the FTC. The FTC started its investigations late in 195 9 after receiving "a letter of complaint ... dated about November 2, from a record manufacturer who offered to supply some names, dates, and places."101 The publicity given to payola by the congressional committee also brought com- plaints "from the public ... in unprecedented volume." 102 The investiga- tions of the FTC revealed the pervasive character of payola and the many forms that it assumed. In his testimony to the subcommittee, Mr. Earl W. Kintner, Chairman of the FTC, said that the investigations had revealed 255 disc jockeys or other employees of broadcast licensees and 7 broadcast licens- ees as having received payola. Payola took the form of cash payments (which might be on a regular weekly or monthly basis), royalties on the sales of records, a share in a record company, advertisements in the disc jockeys' hit sheets, the reimbursement of recording stars' fees for appearances on the disc jockeys' programs or at record hops which they organized, expensive gifts, and mortgage loans on disc jockeys' homes. The FTC also investigated what had come to be known as "plugola," the kind of activity in which Mr. Hess had been involved and found that there were firms which regularly engaged in securing such "plugs" on broadcast programs. That such "plugola" was extremely common was made evident by published reports about performers who received payments or gifts for mentioning certain products in the course of their programs. 103 The FTC seems to have taken 100 /d. at 1182. Mr. Clark's testimony will be found in id. at 1168-233. 101 /d. at 658. 102 1960 FTC Annual Report 52. 103 Mr. Kintner's testimony is in Responsibilities of Broadcasting Licensees, supra note 95, at 640..66. For a published report about the prevalence of "plugola," see Time, Nov. 23, 1959, at 63-66. PAYOLA IN RADIO AND TELEVISION BROADCASTING 295 no legal action to deal with "plugola," no doubt because the change in the law in 1960 made the FCC the agency primarily responsible for regulating these activities. The FTC issued many complaints against record manufac- turers and distributors and, in most cases, these firms entered into a consent decree whereby they agreed not to give "without requiring full public disclo- sure" money or other material consideration to anyone to select and broad- cast records in which they had "a financial interest of any nature" or to influence the employee of a broadcasting station or anyone else to do so. 104 The basis for this action by the FTC seems to have been that the "conceal- ment of such payments is a deceptive act within the meaning of Section 5 of the Federal Trade Commission Act since listeners are misled into believing that the recordings played are selected strictly on their merits or public popularity."105 These payments were also likened to "push money" (paid to the employees of retail stores to "push" certain products) and constituted unfair competition since the records of those who paid payola would be played more frequently than "those who made no such contribution or re- fused to pay tribute."106 The congressmen on the subcommittee were consistently hostile to payola. It was "bribery," "immoral," "wrong," "reprehensible," and so forth. Rec- ords were played because of undisclosed economic inducements rather than because it was in the public interest. These feelings were undoubtedly en- hanced by the press accounts of a convention of disc jockeys held in Miami Beach, Florida in June, 1959, at which the record manufacturers and dis- tributors seem to have attended to the disc jockeys' every need with a lack of restraint which recalled Rome under the emperors. 107 And in the back- ground of the questioning was a hostility to "rock and roll" (the music played by many disc jockeys), defined as "raucous discord" by Congressman Moss, who argued that "good music did not require the payment of payola."108 As has been said, in these hearings there was "an assumption that rock was 'bad' music . . . and that it could only have been forced on the public by illegal business activities." 109 The upshot of these deliberations was that the subcommittee recommended, among other things, amendments to the Communications Act which would make payola a crime in the broadcasting industry. These amendments became law on September 13, 1960. 104 Supra note 102, at 52-53. 10s Supra note 95, at 641. 106 Supra note 102, at 52. 1°7 See Time, June 9, 1959, at 50. 108 Responsibilities of Broadcasting Licensees, supra note 95, at 869. 109 Charles Belz, The Story of Rock 109 (1969). 296 THE JOURNAL OF LAW AND ECONOMICS V. THE 1960 AMENDMENTS TO THE COMMUNICATIONS ACT Up to September, 1960, the only authority which the FCC had to regulate payola came from Section 317 of the Communications Act of 1934. It read as follows: "All matter broadcast by any radio station for which service, money, or any other valuable consideration is directly or indirectly paid, or promised to or charged or accepted by, the station so broadcasting, from any person, shall, at the time the same is so broadcast, be announced as paid for or furnished, as the case may be, by such person." This section, which was taken, substantially unchanged, from the Radio Act of 1927, had apparently been based on a section of the Postal Appropriations Act of 1912 under which editorial and other published material appearing in newspapers re- ceiving second-class mailing privileges had to be clearly marked "advertise- ment" if money or other valuable consideration had been paid in return for publication. 110 Until 1959, the administration of Section 317 does not appear to have created any great difficulty for the FCC. 111 However, the situation revealed by the congressional enquiries presented the FCC with a new problem. Section 317 referred to the disclosure of payments or other valuable consid- eration made to the station. But payola in the 1950s did not, generally speaking, involve payments to stations; rather they were made to disc jock- eys. It was presumably this fact that led to the FTC being the administra- tive agency which took action to stop payola rather than the FCC. However, in December, 1959, as a result of the publicity given to payola, the FCC sent an enquiry to all broadcast licensees and the answers received led the FCC to conclude that broadcast stations were not complying with Section 317. In March, 1960, the FCC issued a public notice in which it explained what, in its view, compliance with Section 31 7 implied. The playing of free records should be accompanied by an announcement indicating that the station had received consideration for playing them and stating from whom the consid- eration had been received. All mentions of, or the playing of records to be featured at outside activities, such as "record hops," where a profit would be derived or where broadcast exposure is provided in exchange for payment of a performer's fee or the donation of records, prizes, or the use of a hall should 110 See the discussion at 67 Cong. Rec. 5488. 111 Only two policy statements seem to have been issued by the FCC before 1960: one related to how a sponsor should be identified and the other to "teaser" announcements. 40 FCC 2 ( 1950); 40 id. 60 (1959). Only one incident seems to have called for extensive FCC action. When the National Association of Manufacturers supplied broadcast stations with a film of the Senate Hearings on the Kohler labor dispute, the FCC intervened to require that an announcement be made stating that the film had been made available by the association. KSTP, Inc., 17 Radio Reg. (P. & F.) 553 (1958); Storer Brodcasting Co., id. at 556a; Westinghouse Broadcasting Co., id. at 556d. PAYOLA IN RADIO AND TELEVISION BROADCASTING 297 be accompanied by an announcement. This would identify those who ben- efited financially from the activity "as well as other parties providing con- sideration in any form whatsoever in exchange for ... broadcast exposure." Announcements were also required when transportation, accommodation, and other expenses were paid for in "remote" pickups as an inducement to broadcast material about "a place, product, service or event." This was required because otherwise "the public may reasonably believe that the licensee considered the place, event, etc., to be of sufficient news or enter- tainment value so as to justify extraordinary expenditures in order to provide broadcast coverage when, in fact, consideration offered by a party or parties other than the licensee or commercial sponsor of the program was responsi- ble, to a degree, for the decision to broadcast the particular program mate- rial. "112 The commission rejected the argument that no announcement is called for because these are normal business practices and the press are regularly given such favors, since special requirements have been imposed on broadcasting stations. The commission also explained that "plugola" and "sneaky commercials" violated Section 317. 113 The FCC's interpretation of Section 317 brought protests from the broad- casting industry, protests which became part of the discussion of the amendments to the Communications Act which were then being considered in Congress. There was general agreement that change in the law was re- quired to deal with payola. Late in 1959, the attorney general sent a report to the president on "Deceptive Practices in Broadcasting Media." The attorney general argued that when a broadcast license is awarded the broadcaster "enters into an agreement with the government to serve the public interest in return for the valuable privilege he is granted."114 In particular, program- ming should not be determined by "naked commercial selfishness. "115 A disc jockey receiving payola "does not disclose that he is being paid to play the record and creates the impression that it is being broadcast because of its merit. "116 Given his view that the government could impose extensive regu- lation in return ·for the license, it is not surprising that the attorney general concluded that the FCC and the FTC "appear to have authority adequate under existing law to eradicate most, if not all, of the deceptive and corrupt practices in broadcasting which have been disclosed-particularly if the agencies are accorded the full cooperation of the broadcasting industry. "117 Ill 40 FCC 73 (1960). 113 Jd. at 69-75. 114 U.S. Dep't of Justice, Report to the President by the Attorney General on Deceptive Practices in Broadcasting Media iii (1959). 115 ld. at iv. 116 Id. at 9. 117 Id. at v. 298 THE JOURNAL OF LAW AND ECONOMICS However, since the FCC's authority was limited to the actions of stations and did not extend to employees, "Legislation should be enacted which would make it a criminal offense for employees of stations to accept payola for material which is broadcast without making arrangements with the broadcaster for an appropriate sponsorship announcement. "118 The problem was to devise a wording (and interpretation) of the new law which would secure "the full cooperation of the broadcasting industry." In testimony to the subcommittee, it was argued on behalf of the industry that the FCC's interpretation of Section 317 was too restrictive. Mter this tes- timony, the staff of the subcommittee submitted draft amendments to the Communications Act to representatives of the industry, including the Na- tional Association of Broadcasters and the networks ABC, CBS, and NBC. There followed several meetings with the staff of the subcommittee, at which representatives of the FCC were present. Later, the conclusions of the broadcasting industry, about how the Communications Act should be amended, were sent to Representative Oren Harris, who was both chairman of the subcommittee and of the main committee on Interstate and Foreign Commerce. These conclusions set out not only what the law should be but also a series of illustrations on how the 'law should be interpreted. 119 The sections in the act relating to payola substantially followed the pro- posals of the broadcasting industry. To the old Section 317 was added a proviso: "Provided, That 'service or other valuable consideration' shall not include any service or property furnished without charge or at a nominal charge for use on, or in connection with, a broadcast unless it is so furnished in consideration for an identification in a broadcast of any person, product, service, trademark, or brand name beyond an identification which is rea- sonably related to the use of such service or property on the broadcast." 120 The effect of this proviso was to allow broadcasting stations to accept prod- ucts or services without charge for use in broadcasting without any an- nouncement being required provided that its use was reasonably related to the program. The illustrations, which were reproduced in the report of the committee recommending that the amendments be passed, and which there- fore became part of the legislative history, indicate what this proviso was intended to accomplish. 121 For example, if a Coca-Cola distributor fur- nished a Coca-Cola dispenser for use in a drugstore scene, no announcement was required. And, of course, it was made clear that the playing of free records would no longer require an announcement (unless more were 118 /d. at 52. 119 Communications Act Amendments: Hearings before a Subcomm. of the House Comm. on Interstate & Foreign Commerce, 86th Cong., 2d Sess. 157-63 (1960). 120 H.R. Report No. 1800, 86th Cong., 2d Sess. at 20 (1960). 121 /d. at 1-26. PAYOLA IN RADIO AND TELEVISION BROADCASTING 299 supplied than were needed for broadcast purposes), thus reversing the previ- ous legal position, at any rate as the FCC believed it to have been. (The complete list of illustrations will be found in Appendix B.) Other parts were added to Section 317. In the case of "any political pro- gram or any program involving the discussion of any controversial issue," subsection (a) (2) provided that the FCC could require an announcement if films, records or other materials or services were provided free or at a nominal charge "as an inducement to the broadcast of such program." It should be noted, however, that "news releases" furnished to stations by government, business, labor unions, or similar organizations or by private persons did not require any announcement even though "editorial comment therefrom is used on a program" (illustration 11). By subsection (d), the FCC was empowered to waive any requirement of the section if this would serve "the public interest, convenience, or necessity." A new section, 508, was added to deal with payments which were made not to the stations but to employees of the station or program producer. It was provided that the station's employee who received payments to include material in programs and also the person who made them had to inform the station about them, and, in the case of payments to a program producer's employee, disclosure had to be made to the employer, or to the person for whom the program was being produced or to the licensee of the station over which the program was to be broadcast. A supplier of a program had to disclose any information about such payments of which he had information to the person to whom it was supplied for broadcasting. In Section 317, an obligation was placed on the station to make an appropriate announcement when there were such payments and also to "exercise reasonable diligence" to obtain this information. The proviso to Section 317 also applied to Section 508. Violation of Section 508 could result in a fine of $10,000, imprisonment for one year, or both. VI. IMPLEMENTATION OF THE 1960 AMENDMENTS TO THE COMMUNICATIONS AcT With the passage of the amendments to the Communications Act, im- plementation of the law prohibiting payola became the responsibility of the FCC. The FTC stopped issuing complaints against record manufacturers and distributors and dismissed several complaints which were still outstand- ing (these appear to have been cases in which the FTC complaint had been contested). The basis for these dismissals was that the public interest was now fully protected by the amendments to the Communications Act and that continued prosecution by the FTC would be "an unnecessary expenditure of 300 THE JOURNAL OF LAW AND ECONOMICS time, effort and funds." 122 Some firms which had earlier entered into consent decrees attempted to have them set aside but, although Commissioner Elman thought this should be done, mainly because not to do so would mean that only those firms which had cooperated with the FTC would be subject to decrees, the rest of the commission decided to let their earlier orders stand. 123 The FCC, in its enforcement of the new law, had been given illustrations by the House Committee on Interstate and Foreign Commerce, worked out in cooperation with industry representatives, indicating how the amend- ments should be interpreted. In short, the aim was to prevent "extreme types" of payola while avoiding "some of the hardships" which would have resulted from the FCC's interpretation of the old sponsor identification pro- vision as set out in its public notice of March 16, 1960. 124 These con- gressional illustrations made it clear that payments in cash or in kind to bring about the inclusion of material in programs required that an an- nouncement be made but that, when it came to the provision of free material without any agreement for identification beyond its use on the program, the law was to be liberally interpreted. In particular, the provision of free rec- ords for playing on a program did not require an announcement (illustration 1). We have seen that the supply of a Coca-Cola machine for use in a drugstore scene did not require an announcement (illustration 11). Similarly, the supply of an identifiable automobile to be driven by a detective to chase the villain did not require an announcement (illustration 17). In the same way, the supply of a refrigerator for a kitchen scene did not require an announcement (illustration 15), but this would be required if the actress made a reference to the brand (illustration 22). However, if the refrigerator is furnished as a prize on a give-away show and the brand name, cubic capac- ity, and the particulars are mentioned, no announcement was required be- cause "the costly or special nature of the prizes is an important feature of this type of program" (illustration 23a). Again, if an aircraft manufacturer fur- nished free transportation to the cast of a show and the arrival of the cast is shown on the program (the name of the manufacturer being identifiable on the fuselage), no announcement was required, although it would be if an extra close-up of the insignia was shown (illustration 24). (The full list of illustrations will be found in Appendix B.) The FCC was soon to add two more illustrations of its own. The networks 122 See, for example, Chess Record Corp., 59 FTC 361 ( 1961). Other cases will be found at 58 FTC 1016 (1961); and in 59 FTC 166, 209, 230, & 302 (1961). 123 See Bernard Lowe Enterprises et al., 59 FTC 1485 (1961). However, in at least one case (involving the Radio Corporation of America), an earlier order was set aside, 62 FTC 1291 (1963). 124 See pp. 296-97 supra. PAYOLA IN RADIO AND TELEVISION BROADCASTING 301 and the National Association of Broadcasters submitted to the FCC in De- cember, 1960, new illustrations relating to automobiles and hotels. These were accepted by the FCC with some minor changes in wording and became illustrations 28 and 29. The effect was to broaden the previous exemptions. FCC illustration 28 amended illustration 17 to allow the supply of automo- biles "for other business purposes in connection with the production of the programs, such as transporting the cast, crews, equipment and supplies from location to location or transporting executive personnel to business meetings in connection with the production of the programs." Similarly, congressional illustration 14 had allowed a hotel to originate programs on its premises without an announcement. FCC illustration 29 allowed a hotel also to provide room and board for "cast, production and technical staff' and to provide other services such as electrical and cable connections without an announcement being required. The other illustrations of the FCC (30 to 36) did not significantly change the position from what it had been before the 1960 amendments. lllustration 33 made clear that the regulations against payola applied to political broad- casts and required that "the true identity of the person or persons by whom and in whose behalf payment was made" should be disclosed. 125 In illustra- tion 35, the FCC reaffirmed its earlier opinion (made in connection with the supply of a film of the Senate Kohler hearings by the National Association of Manufacturers) that an announcement of the name of the supplier of a film was required. The full list of the FCC's illustrations will be found in Appen- dix c. The waiver from the payola regulations which the FCC granted for fea- ture films produced initially for theater showing should also be noted. The early negotiations about the interpretation of the 1960 amendments had been carried out with representatives of the broadcasting industry. The film in- dustry does not appear to have become aware of the possible effect of these amendments on its operations until later, and it was not until the final debate in the Senate that serious questions were raised about their impact on the industry. It was then stated that these amendments could be interpreted in such a way as to make illegal many of the normal business arrangements of the film industry. 126 Shortly after the new law came into effect, the FCC held a conference with representatives of the film industry. 127 Following this, in October, 1960, the Alliance of Television Film Producers filed a petition with the FCC asking for a ruling that the old law applied to all films produced before the date of the new law and for the issue of a waiver for 125 This requirement was to cause some difficulty for the FCC. See 52 FCC 2d 701 (1975). 126 106 Cong. Rec. 17625-26 (Aug. 25, 1960). 127 See 34 FCC 829, 832 (1963). 302 THE JOURNAL OF LAW AND ECONOMICS films produced after that date. That the amendments did not apply to films produced before September 13, 1960, when the new law came into effect, was readily conceded by the FCC. The problem that remained concerned films produced after this date. The FCC proposed to issue a regulation stating that all such films would "in the absence of an adequate showing to the contrary, be presumed to have been intended for television exhibi- tion,"128 and therefore subject to its regulations on payola. The FCC's view, which it buttressed with facts it had gathered about the film industry, was that "one of the purposes behind the production of virtually all 'feature' films produced today is eventual television exposure."129 The film industry argued that FCC regulations concerning payola should not be applied to films produced for theater distribution, even though they might be broadcast in future years. They claimed that the film industry was commonly supplied with "props" such as automobiles for use in films or for other corporate purposes without payment and that to require "credit lines" would greatly reduce the value of such films for second-run syndication, since sponsors making products competitive with those mentioned in the "credits" would not use the films. This would reduce the number of films available for broadcast purposes and/or would lower the quality of those produced. 130 Although the FCC continued to claim that it had the right to regulate feature films, it did not adopt the subsection under which all films would be presumed to be "intended for television exhibition," and it also decided to waive the requirements of the new Section 317 for feature films produced initially for theatrical exhibition. To justify this action, the FCC stated that its "prior experience with respect to the administration and enforcement of Section 31 7, of course, contains nothing which would indicate that the theat- rical motion picture industry has engaged in practices which were felt to be contrary to the public interest as it relates to broadcasting." This is under- standable since the previous law did not call for the FCC to look into the practices of the motion picture industry. The FCC continued: "Lacking any such indications in our own experience, we next turn to the ... proceedings before the Special House Subcommittee on Legislative Oversight. A thorough ov~rview of the proceedings . . . similarly fails to indicate the existence of practices in the motion picture industry" similar to those which had been found to exist in the broadcasting industry. This again is hardly surprising since the subcommittee was largely concerned with the broadcast- ing industry and particularly with the activities of disc jockeys. After acting 128 /d. at 833 & 834. 129 /d. at 838-39. 130 /d. at 833. PA VOLA IN RADIO AND TELEVISION BROADCASTING 303 in a manner which recalls Nelson placing a telescope to his blind eye, the FCC is able to conclude that "we are aware of no public interest con- siderations which dictate the immediate adoption of a rule similar to that proposed ... before we adopt a rule which might have some disruptive and dislocating economic effects and which might inhibit program production ... we believe that we should have evidence indicative of a need for such a rule." 131 There is something paradoxical about the contrast between the consider- able efforts made by the film industry to avoid being subject to the new law and the opinion of the FCC that there did not appear to be any practices in the industry which would justify the enforcement of the anti-payola provi- sions. There can be no doubt that if these feature films had been produced to be shown first on television, the business arrangements involved in their production would have required special announcements. Perhaps what the FCC had in mind was that the film industry did not appear to engage in the cruder forms of payola, such as were disclosed in the 1959 congressional enquiry. But, as the Begelman affair indicates, the film industry is not without employees capable of engaging in them. 132 It is hard to believe that the business arrangements in making feature films are not essentially the same as those found in making films for the broadcasting industry (and which have been held to require regulation). The House Committee on Interstate and Foreign Commerce explained that the 1960 amendments only dealt with payments in cash or their equiva- lent. They did not cover indirect benefits which accrued to licensees and their employees, and which might affect the selection of program material, such as stock ownership or other interests in the production of programs or program material. However, the committee added that "disclosure of such benefits may be required by the commission under its general rulemaking powers." 133 In 1961, the FCC published proposed rules covering indirect benefits (with examples). 134 All comments filed with the commission opposed the proposed rules. Some argued that the FCC lacked the authority to make such rules. The FCC issued a new notice setting out proposed new rules in 1970. The FCC maintained that the selection of program material, such as the records to be played on a radio program should be made "on its merits-- i.e., not on the basis of what will further the non-broadcast financial inter- 131 /d. at 841-42. 132 In February 1978, David Begelman resigned as president of Columbia Pictures Industries Inc. amid allegations of a cover-up within the company involving forgery charges. The Begelman affair brought on investigations of financial practices throughout the film industry. See the New York Times, Feb. 7, 1978, at 1, col. 2; and N.Y. Times Index 1978, at 221. 133 See H.R. Report No. 1800, supra note 120, at 19-20. 134 40 FCC 119 ( 1961). 304 THE JOURNAL OF LAW AND ECONOMICS ests of the licensee or someone else involved in the selection process. "135 To make this possible, persons having such a financial interest should be insu- lated from the selection process and if this could not be done, steps should be taken to ensure that such financial interests were not a factor influencing the selection of program material. To the extent that this was done, no an- nouncement would be required. However, if such insulation was not possi- ble, and where such financial interests were, or might be, a factor influenc- ing the selection of program material, an announcement should be made except where the financial interest was "readily apparent." The FCC, in a series of examples, dealt with the practical problems that would be faced by licensees and others in conforming to such rules. Up to the present time, the FCC has not issued rules relating to indirect benefits. According to the House Committee on Interstate and Foreign Commerce, reporting on the 1960 amendments, their main purpose was to stop the "extreme types" of payola and in particular the cash payments (and other favors) given to disc jockeys by record producers and distributors. 136 What has been the effect of the change in the law? Those writers on the record industry who deal with the subject state that payola has continued. 137 Re- ports in the press tell the same story. 138 The FCC's own investigations confirm the essential accuracy of these accounts. In 1964, the FCC an- nounced that it had received "allegations from many sources indicating the continued existence of 'payola,' 'plugola' and other related practices by broadcast licensees,'' 139 and, as a consequence, the FCC, starting in 1966, conducted non-public hearings on the subject. These hearings left little doubt that payola had not been stopped by the change in the law. 140 Starting in 197 3, the Department of Justice (assisted by the Internal Reve- nue Service and the FCC), as well as four grand juries, investigated payola in the record industry for two years, as a result of which they concluded that payola had been received by radio station employees in sixteen cities. Sixteen 135 35 Broadcast Announcement of Financial Interest, Fed. Reg. 7983 (released May 18, 1970). 136 H.R. Report No. 1800, supra note 120 at 19. 137 See Arnold Passman, The Deejays, 242-43 & 258-59 ( 1971); R. Serge Denisoff, Solid Gold: The Popular Record Industry 232, 260, & 273-79 (1975); Paul Hirsch, The Structure of the Popular Music Industry 54 (Survey Res. Center, Inst. for Soc. Res., Univ. of Michigan, n.d., c. 1967); and Steve Chapple & Reebee Garofalo, Rock 'n' Roll Is Here to Pay 183 (1977). 138 See Jack Anderson, New Disc Jockey Payola Uncovered, Washington Post, March 31, 1972; and Disc Jockey Play-for-Drugs Outlined, Washington Post, Apri121, 1972; The Specter of Payola '73, Newsweek, June 11, 1973, at 74 & 79. 139 See "Payola," "Plugola," and Other Related Practices (FCC 64-1101) 29 Fed. Reg. 16220 (released Nov. 27, 1964). 140 I was given permission by the FCC to read most of the transcript of the non-public hearings (Docket No. 16648) at the Washington office of the FCC. PA VOLA IN RADIO AND TELEVISION BROADCASTING 305 individuals and six corporations were indicted by grand juries in Newark, Philadelphia, and Los Angeles for "violating the federal statute banning under-the-table payoffs for playing records, as well as for travelling between states to commit bribery, for mail and wire fraud, for filing false income tax returns and for perjury." In addition, a fourth grand jury, in New York City, indicted a former president of the CBS/Record Group and a former director of artist relations for CBS Records, for income tax evasion. Both had earlier been fired by CBS after allegations that they had engaged in payola. 141 In April, 1976, four executives of the Brunswick Record Com- pany were fined and given prison terms, after a trial in which radio station music directors (who had been granted immunity), gave testimony that they had received cash payments from representatives of the company. The law- yers for the executives had argued that "cash payments were a way of life in the record industry and part of the promotion end of the business," to which the judge replied, "If this is true, then the record business is a dirty business indeed."142 It should be noted that although these cases are usually referred to in the press as "payola" cases and the headline in theN ew York Times said that the Brunswick executives were sentenced "for payola," the charge in such cases, whether because of plea bargaining or for some other reason, is usually income tax evasion, perjury, or some similar offense, rather than infringing the Communications Act. In the case of the Brunswick execu- tives, they were found guilty of a conspiracy to sell records for cash and not report the income and defrauding recording artists and song writers of their royalties. In December, 1976, the FCC announced that it had received "new information and new complaints from the public" and it resumed its pro- ceedings on payola. 143 The proceedings have not yet terminated. So far as I know, no action has ever been taken by the FCC to prosecute any licensees or their employees, using the 1960 amendments to the Com- munications Act. Even in the investigations of the Department of Justice in 1973-1975 the FCC seems to have played a minor role. The chief of the FCC's Complaints and Compliance Division has indicated that he lacks the resources for a full-scale investigation of payola. 144 However, in its regula- tion of individual licensees, the FCC does take into account any information which it uncovers about payola and imposes administrative sanctions when the licensee has not exercised "reasonable diligence" in preventing payola. 145 This has given the individual licensee an incentive to set up procedures 141 See Broadcasting, June 30, 1975, at 27-29. 142 See the New York Times, April 13, 1976, at 66; and Broadcasting, Feb. 23, 1976, at 53-54, and April 19, 1976, at 47. 143 FCC Notice (released Dec. 30, 1976). 144 See Broadcasting, June 30, 1975, at 27. 1•s I d. 306 THE JOURNAL OF LAW AND ECONOMICS which make the giving of payola more difficult. A common way in which this has been done is for the program director of the station to prepare play-lists from which disc jockeys are required to choose the records which they play on their programs. 146 Although, no doubt, payola is on occasion received by the man who prepares the play-list, the procedure must discour- age the making of such payments and has almost certainly had the effect of reducing the number of transactions involving payola and, very probably, the total amount paid. Other evidence points in the same direction. There is now said to be greater reliance by record companies on the promotion man (the equivalent in the record industry of the song-plugger) to do what is necessary to obtain "exposure" for their records. "With the diminuation of direct payola, the industry representative or promo man was restored to a position of impor- tance .... In part, this restored the majors to a place of competitive advan- tage over the [independents] since many of the smaller companies, having relied heavily upon payola, did not have a promotional apparatus of any magnitude. "147 Promotion includes advertisements in trade papers, mail- ings, personal appearances by recording stars, visits to radio stations, the supply of records, as well as other activities which build "goodwill" and which, if not payola, border on it. Although payola continues, there can be little doubt that its incidence has been reduced since 1960. The fact that there have been no prosecutions by the FCC does not mean that the 1960 amendments to the Communications Act have been without effect. VII. THE RATIONALE OF THE 1960 AMENDMENTS The payola enquiry by the House subcommittee which preceded the enactment of the 1960 amendments to the Communications Act was con- ducted as if everything that really mattered had already been discovered. The underlying purpose seems to have been to obtain confessions of guilt from the witnesses and to demonstrate the high moral standards of the congressmen. No attempt was made to understand the phenomenon under consideration, to enquire what would happen if the proposed legislation was passed, or to consider, if payola had adverse consequences, whether there were alternative ways of dealing with it. In the circumstances it is hardly surprising that widely held misconceptions about payola were perpetuated by the enquiry. In spite of the fact that payola is commonly referred to as commercial 146 SeeR. Serge Denisoff. s.u/Jra note 137, at 234; Paul Hirsch, supra note 137, at 63; Charles Belz, supra note 109, at 116. 147 R. Serge Denisoff, supra note 137, at 233. PAYOLA IN RADIO AND TELEVISION BROADCASTING 307 bribery, 148 most cases of payola do not involve commercial bribery as that term is generally understood. A person is guilty of commercial bribery, according to the New York Penal Law, "when he confers, or agrees to confer, any benefit upon any employee, agent or fiduciary without the con- sent of the latter's employer or principal, with intent to influence his conduct in relation to his employer's or principal's affairs."149 The victim of commer- cial bribery is the employer, whose employees are induced to perform acts inimical to his interest. It is obvious that payola would not constitute com- mercial bribery if the employer was aware that it was being given and did not object to its acceptance or even encouraged it. As was said by a judge in New York: "It would seem that there could be no violation of the [commercial bribery] statute if the principal or employer had knowledge and either ap- proved or condoned the act of his employee or agent." 150 What is apparent from the history of payola is that it has not been the employers who objected to the acceptance of payola by their employees. Nor can there be much doubt that in most cases they were aware of what was going on. It was the music publishers who wished to put a stop to the payments made to dance band leaders and singers rather than the hotels and dance halls in which they performed or the radio stations on which their programs were broadcast. When payola was banned in the NRA code for the broadcasting industry, this provision was inserted, not at the behest of the broadcasters, but of the music publishers. And later, when the music pub- lishers wanted the FTC to approve a code of fair practice which would make payola illegal, the Fair Practice Board of the FTC noted that "the employers of such musicians, singers or artists, for the most part at least, have no objection to such professional employees receiving such payments or gifts."151 Still later, in the 1950s, when payola was directed to disc jockeys, it was apparently a letter from Burton Lane, representing the American Guild of Authors and Composers, which led to the payola enquiry and it was a record company's complaint which set into motion the FTC's investigation of the payments which record companies made to disc jockeys. While all this was happening, the operators of radio stations remained passive. The inference that I draw from this conduct is that most of them did not consider the acceptance of payola by disc jockeys as particularly harmful to their interests. This inference is strengthened if we have regard to the actions of the FCC, which since the change in the law in 1960, has used fines and other administrative sanctions, to make sure that broadcast licenses 148 See, for example, the Attorney General's Report to the President, supra note 114, at 39-40. 149 N.Y. Penal Law, § 180 at 326 (McKinney). ISO June Fabrics v. Teri Sue Fashions, 194 Misc. 267, 270, 81 N.Y.S. 877 (1948). Is I See p. 282 supra. 308 THE JOURNAL OF LAW AND ECONOMICS show "reasonable diligence" in combatting payola. This is something which one would have supposed that they would do without FCC prodding if payola really harmed them. The lack of any serious effort on the part of the broadcasting industry in the 1950s to prevent payola suggests that there was a broad congruence of interest between the operators of radio stations and the disc jockeys. This was undoubtedly true. And the reason for this becomes clear if we compare the results of a system without payola with one in which payola is received by disc jockeys. Assume that the operator of a radio station (no doubt in the person of the music director or some similar officer) chooses the records to be played and there is no payola (although the records are supplied free). He would select records so as to attract as large an audience as possible, which would enable him to maximize the revenue obtained from the sale of com- mercial time. He may also be concerned about the composition of the audi- ence but this complication will be ignored for the time being. Now assume that the choice of records to be played is made by the disc jockey, who receives payola. That such payments are made does not necessarily imply that there has been a change in the records played from what it would have been without payola. Suppose, for example, that the disc jockey wished to play the same records as those the station operator would have chosen. The disc jockey would not be denied an income from payola. Record companies would be willing to pay the disc jockey to play these records since there would presumably be other records which could be substituted for them without any great loss of audience and for which payola could be obtained. The ability of disc jockeys to obtain payola would lower the salary for which they would be prepared to work for radio stations and would therefore increase station profits. But disc jockeys would receive a reward for the extra work in which they engaged to obtain payola and so their earnings would also rise. Payola would benefit both the operators of radio stations and the disc jockeys. Although it is unlikely that the records selected would remain exactly the same in the new situation, the claim of some disc jockeys that their accep- tance of payola had not affected their choice of records is not perhaps as far from the truth as might at first appear. To induce a disc jockey to play a particular record, a record company would be willing to pay up to the . increase in profits which would result from playing the record. But a disc jockey would not simply play those records for which he was offered the greatest payola. Like the radio station operator, he would also want to have a large audience since a fall in the rating of his show would lead both to a reduction in his salary and to a reduction in the amount which record com- panies would offer as payola for playing any given record. In assessing his PAYOLA IN RADIO AND TELEVISION BROADCASTING 309 gain from playing a record, a disc jockey would have to deduct from the payola he would receive from playing a less popular record both the fall in his salary and the loss of payola received from playing other records. This calculation would make a disc jockey reluctant to play less popular records. But even if there were some loss in revenue from commercials the station operator would not suffer since this would be offset by the reduction in the disc jockey's salary. Station profits would rise or, at the least, remain the same. The harmony between the interests of the broadcast licensee and the disc jockey is probably even greater than this analysis would indicate. It has been assumed that since a station operator (not receiving payola) would wish to maximize the size of the audience, to entrust the selection of records to a disc jockey (receiving payola) could not increase but could only reduce the sta- tion's audience. But this would not necessarily happen. It seems probable that disc jockeys, who are not part of management, would be able to see more representatives of the record companies, would be closer to their audi- ence, would be more aware of trends in popular music, and would also know better which records were suitable for their own particular programs. As a consequence, a transfer of the choice of records to the disc jockey need not entail a reduction in audience and may indeed lead to an increase. Payola is also likely to have some effect on the character of programming. Since record programs will become more profitable with payola, there may be a tendency for such programs to displace non-record programs. There may also be a change in the character of the record programs themselves. Up to now it has been assumed that the revenue from commercials depended solely on the size of the audience. But it is obvious that the composition of the audience may also be of importance since advertisers prefer an audience more heavily weighted with persons likely to buy their products. The addi- tion of payola as a source of income for the disc jockey (and, indirectly, for the station) would almost certainly mean that the records played would be such as to attract an audience which included more record buyers than if the aim of the program was simply to gather an audience for commercials for clothing, cosmetics, cameras, or whatever was advertised in the commer- cials. Such a change in audience would, of course, only come about if the gain from the additional payola offset the loss in revenue from the sale of commercial time. All in all, it is easy to see why the operators of radio stations were not in the forefront of those opposing payola and therefore why it is hard to regard payola as constituting commercial bribery. But the view that payola was commercial bribery was not the sole basis for objecting to it. It was also argued that it fosters deception. As the attor- ney general said in his report to the president: "A disc jockey who receives 310 THE JOURNAL OF LAW AND ECONOMICS such a payment does not disclose that he is being paid to play the record and creates the impression that it is being broadcast because of its merit. " 152 The FTC adopted a similar point of view except that the phrase it used was "merits or public popularity. "153 This deception, according to the attorney general and the FTC, comes about because listeners assume (in the absence of any disclosure that the disc jockey is receiving money from record com- panies) that a disc jockey has picked what he considered to be the best of the current records and they are therefore led to buy these records without checking or hearing others. The result is a disappointment for the pur- chasers, who become tired of playing the record sooner than they (although not necessarily their families) had hoped. Or they may discover that a record which they had been led to believe would be extremely popular is not and this may adversely affect the enjoyment they derive from playing the record. That this may happen is not open to dispute. But it seems improbable that such deception would occur on a large scale. Purchasers not only hear the disc jockey-they also hear the record before buying. And a disc jockey who receives payola would not wish to disappoint his listeners often since oth- erwise they would cease to take his recommendations seriously and his in- come would fall. It has been suggested to me that even though a disc jockey receiving payola would tend to play records which would appeal to his particular audience, deception would still exist in that, if there were disclosure of the fact that the disc jockey was being paid by record companies, the attitude of his listeners would be adversely affected and this would result in them being less willing to purchase the records played on his programs. As it is generally agreed that hearing a record is the most powerful factor bringing about its purchase, presumably this disclosure of payola would lead to a decline in the sales of records (as well as less pleasure from the programs). Whether listeners would be happier with disclosure is another matter. The prevalence of self-deception suggests that there are many truths that we prefer not to know. Unfortunately, those conducting the congressional inquiry thought it unnecessary to investigate what listeners thought the motives of the disc jockeys were or how they felt about them or what their record-buying habits really were, and so it is difficult to come to any conclusion on these ques- tions. One may, however, doubt whether the disclosure of the existence of payola would make much difference since disc jockeys are skilled in han- dling commercials, an art in which sincerity (or the appearance of sincerity) is generally considered important. The puzzle to be explained is why the stations did not make a direct 152 Supra note 114, at 9. 153 FTC Notice (released Dec. 6, 1959). PAYOLA IN RADIO AND TELEVISION BROADCASTING 311 charge for playing records and thus eliminate, at least to a large extent, the opportunities for payola. The sales staff of a station are expert in the pricing and selling of commercial time, and it would be surprising if they could not carry out this function more efficiently than most disc jockeys. There would appear to be three possible explanations for this failure to make a direct charge. First, payola is more difficult to trace and may therefore be omitted from an income tax return with less risk than a salary. Consequently, the amount by which the station could reduce the disc jockey's salary would be more than the amount of the payola (since income tax would be paid on his salary). Second, the amount which the stations could charge for playing records would be reduced to the extent that disclosure of these payments diminished the sales of records, a factor which obviously would not affect the payola received by disc jockeys. I am, however, inclined to lay more stress on a third explanation, namely that the obstacle to direct charges was the form of announcement which the FCC would have required the stations to make. I base this on the FCC's ruling in 1960 on the announcements required in connection with the broadcast use of "free records" and on the response to this of the stations, who regarded the FCC's requirements as completely unacceptable. They complained that the announcements which had to accompany the playing of each record turned a large part of the program into a commercial and imposed a great hardship on the listening public. 154 It is easy to see that such policies on the part of the FCC would discourage the stations from attempting to introduce a charge for broadcast- ing records. The FCC never seems to have thought that a charge for broadcasting records was desirable and was therefore never led to search for a form of announcement which would have been acceptable to the stations but which would let listeners know that payments were made by record companies. The objection to payola by the attorney general and the FTC should be differentiated from much that was said by congressmen in the payola en- quiry. Echoing what the music publishers had said about the choice of songs in the period before World War II, the congressmen argued that the records should be chosen because of their "merit" or because they served "the public interest." The attorney general and the FTC argued that since the disc jockey did not disclose that he had accepted payola he created the false impression that the records broadcast were chosen on their merit. Their objection would be removed if there were disclosure of the payments. The congressmen's objection would apply whether or not the payments were disclosed. However, it is an objection of little practical importance. The alternative in the United States to a system involving payola is not one in 154 See FCC File 13454, Original Vol. 3 (National Archives, Washington, D.C.). 312 THE JOURNAL OF LAW AND ECONOMICS which the choice of program depends on merit but one in which program content is determined by its success in assembling the right kind of audience for the commercials. The main effect on the programs of the abolition of payola would be to displace record programs which were attractive to record buyers by record programs which appealed to buyers of other goods and services. It seems difficult to argue that such programs would have more "merit" (considered as record programs). What undoubtedly caused the con- gressmen (and others) to think in this way was their belief that the records actually played (mainly rock and roll and similar music) lacked merit, were corrupting, and would not be played in the absence of payola. The music may have been corrupting, but the congressmen seem to have thought that the choice of "immoral" music was due to "immoral" business practices. But payola has always been a feature of the popular music industry. In times past, when the public enjoyed songs with music (and lyrics) very different from those of today, it was these songs which were promoted by payments to performers. What has been promoted by payola has always depended on what the public would buy (sheet music earlier and records more recently) after they had heard the music. And this has depended on the tastes of the period. But the congressmen were not wholly wrong. Although there has to be a receptivity to a type of music if it is to be successfully promoted, without promotional activity (which includes payola), the movement towards a new type of music would undoubtedly be slower (because the opportunity of hearing it would be less). So the abolition of payola, if it would not necessar- ily have stopped or reversed the trend towards rock and roll music, would have slowed it down and would therefore have resulted, at least for a period, in more "good music" being broadcast. Another factor would work in the same direction. Payola, by leading to the playing of records which appealed to record buyers rather than to consumers of the goods advertised in the commercials, would result in the audience containing relatively more teen- agers who are more likely than other age groups to enjoy rock and roll music. The FCC, in justifying the "sponsor identification" rule (under which payola is prohibited), has adopted a point of view similar to that of the FTC: " ... the public is entitled to know by whom it is persuaded." 155 In its notice about indirect benefits, the FCC added that "the public is no less entitled to know of the existence of such benefits and motivations as in the other kind of case where the inducement is created by payments or the furnishing of programs without charge." 156 Concealment of the fact that program mate- rial was broadcast because of a payment or other consideration constituted IB 40 FCC 105 (1961). 1s6 40 FCC 119 (1961). PAYOLA IN RADIO AND TELEVISION BROADCASTING 313 "deception."157 Of course there is usually no problem. A soap, automobile, drug, or cosmetics concern, which has paid for the expenses of a program will normally want everyone to know that it sponsored the program. But even if there is concealment, what prompted a supplier to provide program material may not matter to the radio and television audience. A consumer's ability to choose wisely between what is offered to him may not depend on knowing the "benefits and motivations" which prompted its supply. Of course, it was the FCC's contention that knowledge of whether a disc jockey received a payment from record companies helps the audience to appraise the worth of the disc jockey's opinions-and this may be true. But there are other pro- grams in which knowing who paid for it or the motivations of the supplier can influence even more the response to the program. For example, in the case of news programs and commentaries, knowledge of the source of finance and the political and religious doctrines and affiliations of the speaker is likely to influence the degree of confidence one has in the accuracy of the news and the responsibility of the comment. However, in this case full disclosure is not required. There need be no announcement when "[n]ews releases are furnished to a station by Government, business, labor and civic organizations, and private persons, with respect to their activities, and editorial comment therefrom is used on a program" (House committee illus- tration 11). It is not easy to reconcile this exemption in an area in which the case for disclosure is strong with the FCC's view of what the anti-payola provisions are intended to accomplish, or with the attitude taken towards the acceptance of payola by disc jockeys. On the other hand, it would not seem important in choosing between programs or in one's enjoyment of them to know how the salaries of the performers are determined. Among the House committee's illustrations of cases to which the anti-payola provisions did not apply was the following: "A well-known perfor:rper appears as a guest artist on a program at union scale because the performer likes the show, although the performer normally commands a much higher fee" (illustration 20). Philanthropy being rare in the entertainments industry, it is easy to imagine the circumstances which would lead a performer to like a show and to be willing to work at less than his normal fee. These include boosting the sales of his records, increasing the likelihood of obtaining concert engagements or roles in films and so on. A similar question has arisen in relation to performers whose normal fee is not much higher than the union rate. The FCC has held that it violates the anti-payola provisions for a performer, paid the union rate, to arrange for a recording company or_ other business to reimburse the producer for part or all of his fee, even though it is announced at the end of the program that 157 25 Fed. Reg. 2406 (1960). 314 THE JOURNAL OF LAW AND ECONOMICS "promotional assistance" has been received from that recording company or business. Similarly, it is a violation for a group to make a similar arrange- ment under which the producer is reimbursed for the difference between the union rate for a single performer and that for a group. Again, it is a violation for a performer to reimburse the producer for special expenses involved in his act. For example, it would violate the anti-payola provisions for a per- former "to reimburse the producer for the fees paid by the latter to musi- cians, not normally provided in the program, who accompanied the per- former."158 Payola, in effect, exists whenever an attempt is made to circum- vent union restrictions on methods of payment. The result is to allow well- known performers to take into account the other benefits which flow from appearing on a broadcast program but to restrict or deny this possibility to less well-known performers. The aim of this regulation, if we believe the FCC, is to prevent the public from being deceived. If we have regard not to what congressmen and government agencies have said about the purpose of the anti-payola provisions but to the business interests which, over the years, have sought to curb payola, it becomes easier to discern what these provisions were expected to accomplish. Up to World War II, there is no doubt about the businesses that wanted payola to be abolished. The music publishers tried to secure this on many occasions and for those of them still alive in 1960, the amendments to the Communications Act would have represented the final passage into law of the anti-payola provisions of the NRA codes. After the war, when payola was paid by record companies to disc jockeys, it was the suppliers of "good music" (the music, that is, of composers such as Oscar Hammerstein, Richard Rodgers, Irving Berlin, and Burton Lane) who objected to payola. This hostility to payola came to the fore in 1958 and 1959 and was, it seems clear, in large part a response to the changes which took place in the 1950s in the kind of music purchased. In the 1950s, particularly from 1955 on, "rock and roll" music became extremely popular. Many new record companies were formed, mainly con- centrating on the new music. The effect on the market shares of existing companies was dramatic. In the years 1948 through 1955, four companies (Capitol, Columbia, Decca, and RCA-Victor) had, on an average, 78 per cent of the records which were ever on Billboard's top ten Hit Parade, and the figure was never less than 71 per cent (in 1953). In 1956, the share of the hit records of these four companies was 66 per cent, in 195 7, 40 per cent, in 1958, 36 per cent, and in 1959, 34 per cent. 159 These changes in the popular- 158 23 FCC 2d 588-89 (1970). 159 See Richard A. Peterson & David G. Berger, Cycles in Symbol Production: The Case of Popular Music, 40 Am. Soc. Rev. 158, 160 (1975). PAYOLA IN RADIO AND TELEVISION BROADCASTING 315 ity of different kinds of music also affected the relative positions of the two major royalty collecting agencies, ASCAP and BMI. BMI was heavily con- centrated in country and western music and rhythm and blues while ASCAP was more evenly spread over all types of music. During the period 1948 through 1955, 68 per cent of the tunes which were number 1 on Billboard's top hits were controlled by ASCAP, and ASCAP's share was never less than 50 per cent (in 1951). In 1956, its share was 23 per cent, in 1957 and 1958, 25 per cent and in 1959, 31 per cent. 16o In the circumstances, it is hardly surprising to find that the suppliers of "good music" came to the conclusion that something was wrong with the economic organization of the popular music industry. In the 1958 hearings, it was argued that the networks and broadcasting stations, as a result of their ownership of BMI, had encouraged the playing of BMI-controlled pieces on disc jockey programs and that this was the main reason why "good music" had been displaced by "bad music." But it was also claimed that disc jockeys had been induced to play BMI records by means of payola. In the 1959 hearings, no reference was made to BMI and the growth in the popularity of rock and roll music was ascribed solely to payola. That payola in the late 1950s was used in the main to promote the playing of rock and roll and similar music is true. Indeed, as early as 1951, it had been reported in Billboard that "By universal agreement in the music trade, the payola situation is at its worst among the rhythm and blues spinners."l6t There can be no doubt that the new companies, which entered the business in the 1950s and succeeded in securing such an important share of the record market, relied on payola to obtain "exposure" for their records. In an article in Variety in January, 1958, dealing with the inroads which the "indies" [independents] had made into the markets of the major record companies, there is a barely disguised reference to the part played by payola in the operations of the independents: Another aspect of the indie breakthrough is its free-wheeling operation. Working without the problems of a fixed overhead and a 'loose' bookkeeping system, the indies have been able to knock the majors out of the box in key areas. Working with hustling freelance distributor setups, the indies have been able to kick off their product in the areas that serve as a springboard for nationwide prominence. It's on the local level, particularly, that the indies have been outscoring the majors with giveaway deals and 'special' considerations for deejays but this is all the start they ask. And, as has been evidenced by the mopup during the past year, it's all they need. Since it's open season in the disk business all year round, more small labels than ever before have been able to climb on the national hit lists. Some of the labels 160 I am grateful to Professor Richard A. Peterson, Vanderbilt University, who provided me with these figures. 161 Billboard, Jan. 13, 1951, at 1, col. 4. 316 THE JOURNAL OF LAW AND ECONOMICS weren't even around the year before. The market became wide open for such left field diskery entries as Keen, Phillips International, Cameo, Imperial, Chess, Aladdin, Roulette Sun, Speciality, Gone, Ember, Checker, Ebb, Lance, Paris, Class, Vee-Jay and Argo. 162 To sell music on a large scale it is necessary that people hear it. Payola is one way of inducing people to play it so that it can be heard. From a business point of view, the ban on payola is therefore simply a restraint on one kind of promotional or advertising expense. Before World War II, when it was the music publishers who wished to see payola abolished, their aim was to eliminate one dimension of competition and thereby to increase their total profits. What they wanted was similar to the more general bans on advertis- ing which have been instituted by various professional associations. After World War II, when opposition to payola came from those segments of the popular music industry which were hurt by the rise of the new music and the associated development of new record companies, the aim of the business interests which sought to curb payola seems to have been not so much to secure a general benefit for the industry as to hobble their competitors. 163 Mr. Paine, in justifying the anti-payola provisions of the NRA code, said that it would protect the small publisher, 164 and Congressman Oren Harris, in his introductory remarks to the payola enquiry, said that "we are told" that payola tends "to drive out of business small firms who lack the means to survive this unfair competition."165 Such statements convey a completely false impression. Although the music publishers' attempts to regulate payola do not seem to have been designed to harm the small publisher, it was, in fact, small firms which protested to the FTC in the 1930s about the harm they would suffer if payola was banned. 166 In the period after World War II, all record companies seem to have given payola to disc jockeys, but, as we have seen, the smaller companies thrived on it. These companies lacked the name-stars and the strong marketing organization of the major companies, and payola enabled them to launch their new records in a local market and, if success there was achieved, to expand their sales by making similar efforts in other markets. There is no reason to suppose that a ban on payola would, 162 Variety, Jan. 8, 1958, at 215. 163 Seep. 314 supra. Richard A. Peterson & David G. Berger state that "[in] an effort to curb the influence of the new independents, and protect their investment in the crooners they had promoted into stardom, the older established Tin Pan Alley-oriented companies 'exposed' the payola practices of these new entrepreneurs in 1958." Three Eras in the Manufacture of Popular Music Lyrics in The Sounds of Social Change 295-96 (edited by R. Serge Denisoff & Richard A. Peterson, 1972). This statement is in part based on confidential sources and cannot therefore be checked. But it is not inconsistent with what can be learnt from published sources. 164 See p. 280 supra. 16S See p. 292 supra. 166 See pp. 283, 284, 285 supra. PAYOLA IN RADIO AND TELEVISION BROADCASTING 317 in general, have helped the small music publishers or has helped the small record companies. Since the 1960 amendments to the Communications Act impose a restraint on a particular kind of advertising expenditure, it is to be expected that it would lead firms to increase other forms of promotional activity, trade press advertising, mailings, visits by salesmen, personal appearances by perfor- mers and, in general, all other forms of "plugging." And this appears to have happened. We have seen that shortly after payola became illegal, there was apparently an increased activity by the promotion departments of record companies. 167 An article in Fortune, published in April, 1979, by Peter W. Bernstein, indicates that this heightened activity has continued. It notes that record companies are "vastly increasing promotion expenses, while the most powerful form of advertising-radio play-remains free." At the same time the smaller companies have lost ground: " ... small record companies, and small divisions of big companies have been making deals with, or selling out to, their big competitors-principally because the majors have built up dis- tribution systems so powerful that smaller companies using wholesale mid- dlemen have lost their ability to compete in the retail marketplace .... Six major companies-CBS, Capitol, MCA, Polygram, RCA, and Warner Communications-now control more than 85% of the U.S. market." 168 This growth in concentration was probably largely a result of the larger companies adjusting to the new taste in music but the 1960 amendments, which made payola illegal, undoubtedly helped in the process. It is consistent with the view that a ban on payola would lead to an increase in other promotional activities that, in the past, support for curbing payola has come from those likely to benefit from this diversion of advertis- ing expenditures: Variety early in the century and the song-pluggers at the time their union was formed. What the song-pluggers then said that they feared was that the "publisher's check book would finally obviate the neces- sity of maintaining a plugging staff.''169 This makes clear one of the disad- vantages of the ban since, leaving aside its anti-competitive aspects, adver- tising is diverted from a form which, apart from the expenses involved in giving payola, does not use resources to a form that does. By leading to the employment of more resources in promotional activity, the ban on payola has a tendency to reduce the national product elsewhere. Of course, firms will only expand their other promotional activities up to the point where they yield sufficient additional net income to cover their 167 See p. 306 supra. 168 Peter W. Bernstein, The Record Business: Rocking to the Big-Money Beat, Fortune, April 23, 1979, at 59, 61. 169 See p. 285 supra. 318 THE JOURNAL OF LAW AND ECONOMICS cost, and it could be that the increase in the amount spent on these promo- tional activities would be less than the amount previously paid as payola. In this case industry profits would rise by the amount by which the payola previously paid exceeded the increase in expenditures on other promotional activities. This was presumably the belief of the music publishers before World War II. But the rise in profits inherent in this situation would have other effects. In the case of the record companies, such an increase in profits would lead to an increase in the supply of new records. Previously, record com- panies would have been deterred from expanding their output of new titles because they thought that the probable additional receipts would not war- rant increasing the additional cost. But in the new situation, the probable net income from producing a record would have risen. The effect would be for the output of new titles to expand. And this would lead to a decrease in the probable receipts from any given new title. When these probable receipts have fallen sufficiently to make it no longer worthwhile to incur the costs of producing additional records, the expansion in output would cease. If the records in the additional supply induced by the ban on payola were on average essentially the same as those already produced in terms of the plea- sure given to their audience, it seems clear that the expansion in the output of records would entail a waste of resources. What has been described as happening after the ban on payola is the normal result of a situation in which no price is exacted for the receipt of a valuable service. 170 Indeed, in the early days, what we now call payola was termed the "payment system," or, as economists would say, the pricing system. When a pricing system is not used and something of value is pro- vided for nothing, people are willing to incur costs up to its worth in order to secure the benefits of that service. One reason, among others, for pricing a service is to avoid this unnecessary use of resources. Normally we consider such pricing as natural without considering the advantages it brings. If locating stores on a particular street or in a particular section of a town enables those stores to achieve greater sales, we expect that the rent charged will reflect this. In the same way, if the playing of a record by a radio station increases the sales of that record, it is both natural and desirable that there should be a charge for this. If this is not done by the station and payola is not allowed, it is inevitable that more resources will be employed in the produc- tion and distribution of records, without any gain to consumers, with the result that the real income of the community will tend to decline. In addi- tion, the prohibition of payola may result in worse record programs, will tend to lessen competition, and will involve additional expenditures for 170 Susan Rose-Ackerman adopts a somewhat similar position in Corruption: A Study in Political Economy (1978). See esp. 204-05. PAYOLA IN RADIO AND TELEVISION BROADCASTING 319 regulation. The gain which the ban is thought to bring is to make the purchasing decisions of record buyers more efficient by eliminating "decep- tion." It seems improbable to me that this problematical gain will offset the undoubted losses which flow from the ban on payola. But no attempt was made, before the 1960 amendments were adopted, to estimate the gains and losses which would flow from the change in the law and an assessment of its effects must remain very imprecise. Futhermore, no attempt was made to discover whether it might be possible to devise a form of announcement which would alert listeners to the fact that payments were made by record companies whose records were played (so that "deception" could be pre- vented) without the clutter of announcements to which broadcasters ob- jected when the FCC wanted the stations to make announcements when free records were used. If this could be done, it would be possible to prevent the deception without bringing about those other disadvantages which result from the present regulations of the FCC. It is not enough to outlaw payments simply because they can be described as "improper." Some attempt should be made to discover why such pay- ments are made and what would in fact happen in the world as it exists if they were made illegal. APPENDICES APPENDIX A NRA Code of Fair Competition for the Music Publishing Industry No. 552 Article VIII Trade Practice Rules 1. No member of the Industry shall pay or give, directly or indirectly, or in any other manner present to any performer, singer, musician, or orchestra leader, em- ployed by or otherwise performing under contract for another, or to their agents or representatives, any sum of money, gift, rebate, royalty, favor, or any other thing or act of value, when the purpose is to induce such person to sing, play, perform, or to have sung, played, or performed, any works published, copyrighted, owned, and/or controlled by such member of the Industry. 2. No member of the Industry shall furnish without charge to any performer, singer, musician, orchestra leader, or other professional person, any copies other than regular professional copies of musical compositions published by such member or regularly published orchestrations of such musical compositions; it being intended that no member of the Industry shall furnish special arrangements of such profes- sional copies or such orchestrations to any performer, singer, musician, orchestra leader, or other professional person, or to any one designated by, or representing, or associated with such persons, nor pay such persons for the making of any such arrangements. If, howeve~, any member of the Industry permits such persons to 320 THE JOURNAL OF LAW AND ECONOMICS make a special arrangement, then no member of the Industry shall extract parts or otherwise copy such special arrangement thus made, either in whole or in part, nor pay for such extractions or copying; but nothing contained herein shall be deemed to limit the transposition of any musical work from one key to another. 3. No member of the Industry shall: (a) purchase tickets, or pay for any advertise- ment in the program, for any benefit, performance, dance, or si11,1ilar function, if the purchase is in effect a gift to, or a favor for, any performer; (b) pay for any advertise- ment in a catalogue of a mail-order house; (c) pay for any advertisement in a dealer's and/or distributor's catalogue or house-organ; (d) insert advertising in any trade paper, or other like periodical, if the advertisement is intended to "puff," flatter, compliment, or exploit any performer, singer, or orchestra leader. 4. No member of the Industry shall pay, present, or otherwise give any money, service, favor, or thing or act of value, to any owner, lessee, manager, employee, or other person in control of or interested in, any talking machine company, radio broadcasting company or station, electrical transcription company, motion picture company, or any place of public entertainment, for the privilege of performing, recording or reproducing, or having performed, recorded or reproduced, in such places, any works published, copyrighted, owned and/or controlled by such member of the Industry. Any member of the Industry may engage the facilities of a broadcast- ing studio or hire any theatre or other place of public entertainment for the purpose of having performed therein any of the musical compositions published, copyrighted, owned and/or controlled by such member, provided however, that a public an- nouncement is made at such performance that the performance is at the expense of such member and for the purpose of exploiting the said musical compositions of such member. 5. No member of the Industry shall pay, or contract to pay any compensation, of any nature whatsoever, either as royalties or otherwise, to any performer, singer, actor, musician or orchestra leader, or any agent or representative thereof, either directly or indirectly, in connection with the publication in printed form of any song or other musical composition, unless such person shall be the bona fide composer, arranger, or writer of the words and/or music of such song or musical composition. 6. No member of the Industry shall give, permit to be given, or offer to give, anything of value for the purpose of influencing or rewarding the action of any employee, agent, or representative of another in relation to the business of the em- ployer of such employee, the principal of such agent or the represented party, without the knowledge of such employer, principal or party. This provision shall not be construed to prohibit free and general distribution of articles commonly used for advertising except so far as such articles are actually used for commercial bribery as hereinabove defined. 7. No member of the Industry shall give away, directly or indirectly, or through any subsidiary or associated company, or through any person employed by such member, copies of music or other musical material except for the bona fide purposes of "sampling," either to the trade or to professional performers. All such copies of music and musical material given away under the provisions of this Article must be PAYOLA IN RADIO AND TELEVISION BROADCASTING 321 plainly marked in some appropriate manner to indicate that they are not for resale. Each member of the Industry shall keep in some appropriate manner an accurate account of the merchandise thus given away. 8. No member of the Industry shall publish advertising (whether printed, radio, display, or any other nature), which is misleading or inaccurate in any material particular, nor shall any member of the Industry in any way misrepresent any ser- vices, policies, values, credit terms, products, or the nature or form of the business conducted. 9. No member of the Industry shall publish or sell any book of songs, pamphlet, song sheet, or other compilation of songs, or the lyrics of songs, without the special written permission of the several copyright owners whose works appear in such compilation. 10. No member of the Industry shall pay, furnish, bestow, or in any other manner, directly or indirectly, present to any customer, teacher, or any person, firm, or corporation whatsoever, or to their agents, or any one representing them, any sum of money, gift, bonus, refund, rebate, royalty, service, or any other thing or act of value in excess of published rates and discounts, as a bribe, secret rebate, or other induce- ment to acquire any business or custom from such person, firm, or corporation. 11. No member of the Industry shall pay transportation charges in any form whatsoever upon any musical works sold, consigned, or otherwise designated for shipment to a purchaser or prospective purchaser, except in instances where musical works are sold for cash or where delivery is to be made within the recognized local delivery limits of the city within which such member is situated. 12. No member of the Industry shall wilfully induce or attempt to induce the breach of existing contracts between competitors and their customers or sources of supply, either foreign or domestic, or otherwise interfere with or obstruct the perfor- mance of any such contractual duties or services, with the purpose and effect of hampering, injuring, or embarrassing competitors in their business. NRA Code of Fair Competition for the Broadcasting Industry Article VII-Trade Practices 4. General Provisions (d) No broadcaster or network shall accept or knowingly permit any performer, singer, musician, or orchestra leader regularly employed by such broadcaster or network to accept any money, gift, bonus, refund, rebate, royalty service, favor, or any other thing or act of value from any music publisher, composer, author, copy- right owner, or the agents or assignees of any such persons for performing or having performed any musical or other composition for any broadcaster or network when the purpose is to induce such persons to sing, play, or perform, or to have sung, played, or performed any such works. 322 THE JOURNAL OF LAW AND ECONOMICS APPENDIX B Interpretative Illustrations of the House Committee on Interstate and Foreign Com- merce from H.R. Rep. No. 1800, 86th Cong., 2d Sess. 20-26 (1960) A. Free Records 1. A record distributor furnishes copies of records to a broadcast station or a disc jockey for broadcast purposes. No announcement is required unlt:ss the supplier furnished more copies of a particular recording than are needed for broadcast pur- poses. Thus, should the record supplier furnish 50 or 100 copies of the same release, with an agreement by the station, express or implied, that the record will be used on a broadcast, an announcement would be required because consideration beyond the matter used on the broadcast was received. 2. An announcement would be required for the same reason if the payment to the station or disc jockey were in the form of cash or other property, including stock. 3. Several distributors supply a new station, or a station which has changed its program format (e.g., from "rock and roll" to "popular" music), with a substantial number of different releases. No announcement is required under Section 317 where the records are furnished for broadcast purposes only; nor should the public interest require an announcement in these circumstances. The station would have received the same material over a period of time had it previously been on the air or followed this program format. 4. Records are furnished to a station or disc jockey in consideration for the special plugging of the record supplier or performing talent beyond an identification rea- sonably related to the use of the record on the program. If the disc jockey were to state: "This is my favorite new record, and sure to become a hit; so don't overlook it," and it is understood that some such statement will be made in return for the record and this is not the type of statement which would have been made absent such an understanding, and the supplying of the record free of charge, an announcement would be required since it does not appear that in those circumstances the identifica- tion is reasonably related to the use of the record on that program. On the other hand, if a disc jockey, in playing a record, states: "Listen to this latest release of performer 'X,' a new singing sensation," and such matter is customarily interpolated in the disc jockey's program format and would be included whether or not the particular record had been purchased by the station or furnished to it free of charge, it would appear that the identification by the disc jockey is reasonably related to the use of the record on that particular program and there would be no announcement required. B. Where payment in any form other than the matter used on or in connection with the broadcast is made to the station or to anyone engaged in the selection of program matter 5. A department store owner pays an employee of a producer to cause to be mentioned on a program the name of the department store. An announcement is required. PAYOLA IN RADIO AND TELEVISION BROADCASTING 323 6. An airline pays a station to insert in a program a mention of the airline. An announcement is required. 7. A perfume manufacturer gives five dozen bottles to the producer of a giveaway show, some of which are to be identified and awarded to winners on the show, the remainder to be retained by the producer. An announcement is required since those bottles of perfume retained by the producer constitute payment for the identification. 8. An automobile dealer furnishes a station with a new car, not for broadcast use, in return for broadcast mentions. An announcement is required; the car constituting payment for the mentions. 9. A Cadillac is given to an announcer for his own use in return for a mention on the air of a product of the donor. An announcement is required since there has been a payment for a broadcast mention. C. Where service or property is furnished free for use on or in connection with a program, but where there is neither payment in consideration for broadcast expo- sure of the service or property, nor an agreement for identification of such service or property beyond its mere use on the program 10. Free books or theater tickets are furnished to a book or dramatic critic of a station. The books or plays are reviewed on the air. No announcement is required. On the other hand, if 40 tickets are given to the station with the understanding, express or implied, that the play would be reviewed on the air, an announcement would be required because there has been a payment beyond the furnishing of a property or service for use on or in connection with a broadcast. 11. News releases are furnished to a station by Government, business, labor and civic organizations, and private persons, with respect to their activities, and editorial comment therefrom is used on a program. No announcement is required. 12. A Government department furnishes air transportation to radio newscasters so they may accompany a foreign dignitary on his travels throughout the country. No announcement is required. 13. A municipality provides street signs and disposal containers for use as props on a program. No announcement is required. 14. A hotel permits a program to originate on its premises. No announcement is required. If, however, in return for the use of the premises, the producer agrees to mention the hotel in a manner not reasonably related to the use made of the hotel on that particular program, an announcement would be required. 15. A refrigerator is furnished for use as part of the backdrop in a kitchen scene of a dramatic show. No announcement is required. 16. A Coca-Cola distributor furnishes a Coca-Cola dispenser for use as a prop in a drugstore scene. No announcement is required. 17. An automobile manufacturer furnishes his identifiable current model car for use in a mystery program, and it is used by a detective to chase a villain. No announcement is required. If it is understood, however, that the producer may keep the car for his personal use, an announcement would be required. Similarly, an announcement would be required if the car is loaned in exchange for a mention on the 324 THE JOURNAL OF LAW AND ECONOMICS program beyond that reasonably related to its use, such as the villain saying: "If you hadn't had that speedy Chrysler, you never would have caught me." 18. A private zoo furnishes animals for use on a children's program. No an- nouncement is required. 19. A university makes one of its professors available to give lectures in an educa- tional program series. No announcement is required. 20. A well-known performer appears as a guest artist on a program at union scale because the performer likes the show, although the performer normally commands a much higher fee. No announcement is required. 21. An athletic event promoter permits broadcast coverage of the event. No an- nouncement is required in absence of other payment by the promoter or agreement to identify in a manner not reasonably related to the broadcast of the event. D. Where service or property is furnished free for use on or in connection with a program, with the agreement, express or implied, that there will be an identifica- tion beyond mere use of the service or property on the program 22. A refrigerator is furnished by X with the understanding that it will be used in a kitchen scene on a dramatic show and that the brand name will be mentioned. During the course of the program the actress says: "Donald, go get the meat from my new X refrigerator." An announcement is required because the identification by brand name is not reasonably related to the particular use of such refrigerator in this dramatic program. 23. (a) A refrigerator is furnished by X for use as a prize on a giveaway show, with the understanding that a brand identification will be made at the time of the award. In the presentation, the master of ceremonies briefly mentions the brand name of the refrigerator, its cubic content, and such other features as serve to indicate the mag- nitude of the prize. No announcement is required because such identification is reasonably related to the use of the refrigerator on a giveaway show in which the costly or special nature of the prizes is an important feature of this type of program. (b) In addition to the identification given in (a) above, the master of ceremonies says: "All you ladies sitting there at home should have one of these refrigerators in your kitchen," or "Ladies, you ought to go out and get one of these refrigerators." An announcement is required because each of these statements is a sales "pitch" not reasonably related to the giving away of the refrigerator on this type of program. The significance of the distinction between the identification in (a) and that in (b) is, that in (a) it is no more than the natural identification which a broadcaster would give to a refrigerator as a prize if he had purchased the refrigerator himself and had no understanding whatever with the manufacturer as to any identification. That is to say, in situation (a), had the broadcaster purchased the refrigerator he would have felt it necessary, in view of the nature of the show, adequately to describe the magnitude of the prize which was being given to the winner. On the other hand, the broadcaster would not, where he had purchased the refrigerator, have made the type of identification in situation (b), thus providing a free sales "pitch" for the manufac- turer. PAYOLA IN RADIO AND TELEVISION BROADCASTING 325 24. (a) An airplane manufacturer furnishes free transportation to a cast on its new jet model to a remote site, and the arrival of the cast at the site is shown as part of the program. The name of the manufacturer is identifiable on the fuselage of the plane in the shots taken. No announcement is required because in this instance such iden- tification is reasonably related to the use of the service on the program. (b) Same situation as in (a), except that after the cameraman has made the forego- ing shots he takes an extra closeup of the identification insignia. An announcement is required because the closeup is not reasonably related to the use of the service on the program. 25. (a) A station produces a public service documentary showing development of irrigation projects. Brand X tractors are furnished for use on the program. The tractors are shown in a manner not resulting in identification of the brand of tractors except as may be recognized from the shape or appearance of the tractors. No announcement is required since the identification is reasonably related to the use of the tractors on the program. (b) Same situation as in (a), except that the brand name of the tractor is visible as it appears normally on the tractor. No announcement is required for the same reason. (c) Same situation as in (b), except that a closeup showing the brand name in a manner not required in the nature of the program is included in the program, or an actor states: "This is the best tractor on the market." An announcement is required as this identification is beyond that which is reasonably related to the use of the tractor on the program. 26. (a) A bus company prepares a scenic travel film which it furnishes free to broadcast stations. No mention is made in the film of the company or its buses. No announcement is required because there is no payment other than the matter fur- nished for broadcast and there is no mention of the bus company. (b) Same situation as in (a), except that a bus, clearly identifiable as that of the bus company which supplied the film, is shown fleetingly in highway views in a manner reasonably related to that travel program. No announcement is required. (c) Same situation as in (a), except that the bus, clearly identifiable as that of the bus company which supplied the film, is shown to an extent disproportionate to the subject matter of the film. An announcement is required, because in this case by the use of the film the broadcaster has impliedly agreed to broadcast an identification beyond that reasonably related to the subject matter of the film. 2 7. (a) A manufacturer furnishes a grand piano for use on a concert program. The manufacturer insists that enlarged insignia of its brand name be affixed over normal insignia on the piano. An announcement is required if an enlarged brand name is shown. (b) Conversely, if the piano furnished has normal insignia and during the course of the televised concert the broadcast includes occasional closeups of the pianist's hands, no announcement is required even though all or part of the insignia appears in these closeups. Here the identification of the brand name is reasonably related to the use of the piano by the pianist on the program. However, if undue attention is given the insignia rather than the pianist's hands, an announcement would be required. 326 THE JOURNAL OF LAW AND ECONOMICS APPENDIX C lnterpretatve Illustrations of the Federal Communications Commissionfrom 40 FCC 141, 149-51. 28. (a) An automobile manufacturer or dealer furnishes to a producer of television programs a number of automobiles with the understanding that the producer will use them, or some of them, in some of his programs which call for the use of automobiles; and that the automobiles may be used for other business purposes in connection with the production of the programs, such as transporting the cast, crew, equipment and supplies from location to location or transporting executive personnel to business meetings in connection with the production of the programs. There is no understand- ing that there will be any identification on the television programs beyond an iden- tification which is reasonably related to the use of the automobiles on the programs. No other consideration is involved. Under such uses, no announcement is required. 29. (a) A hotel permits a program to originate from its premises and furnishes hotel services, such as room and board, for cast, production and technical staff, and also furnishes other elements for use in connection with the programs to be broadcast, such as electricity and cable connections, free of charge, and with no other considera- tion. There is no understanding that there will be an identification of the hotel on the program beyond that reasonably related to the use made of the hotel on the program. No announcement is required. (b) If the hotel pays money or furnishes free or at a nominal charge any services or items which are not for use on or in connection with the program (e.g., furnishing free or at a nominal charge room and board for the producer for any period of time not related to the production of the program at the hotel site), an announcement is required. E. Effective Date 30. Does Section 317 as amended on September 13, 1960 apply to programs or portions of programs produced or recorded prior to September 13, 1960? No, unless valuable consideration was provided to a broadcast station (rather than to a producer or other person) for the program or the inclusion of any program matter therein and the program was broadcast after said date. F. Nature of the Announcement 31. A station broadcasts spot announcements which solicit mail orders from listen- ers. The sponsor is merely referred to in the announcements and in the mail order address as "Flower Seeds" or "Real Estate" or "the Record Man." Such a reference to the sponsor of the announcements is insufficient to constitute compliance with the Commission's sponsorship identification Rules because it is limited to a description of the product or service being advertised. The announcement requirement con- templates the explicit identification of the name of the manufacturer or seller of goods, or the generally known trade or brand name of the goods sold . . . . PAYOLA IN RADIO AND TELEVISION BROADCASTING 327 32. A station broadcasts "Teaser" announcements utilizing catch words, slogans, symbols, etc., designed to arouse the curiosity of the public by telling it that some- thing is "coming soon." The sponsor of the announcements is not named therein, nor is any generally known trade or brand name given, but it is the intention of the station and the advertiser to inaugurate at a later date a series of conventional spot announcements at the conclusion of the "teaser" campaign. Announcements of this type do not comply with the Commission's sponsorship identification rules. All com- mercial matter must contain an explicit identification of the advertiser or the gener- ally known trade or brand name of the goods being advertised . . . . 33. A station carries an announcement (or program) on behalf of a candidate for public office or on behalf of the proponents or opponents of a bond issue (or any other public controversial issue). At the conclusion thereof, the station broadcasts a "dis- claimer" or states that "the preceding was a paid political announcement." Such announcements per se do not demonstrate compliance with the sponsorship iden- tification rules. The Rules do not provide that either of the above-mentioned types of announcements must be made, but they do provide in such situations that an iden- tification be broadcast which will fully and fairly disclose the true identity of the person or persons by whom or in whose behalf payment was made. If payment is made by an agent, and the station has knowledge thereof, the announcement shall identify the person in whose behalf such agent is acting. If the sponsor is a corpora- tion, committee, association or other group, the required announcement shall contain the name of such group; moreover, the station broadcasting any matter on behalf of such group shall require that a list of the chief officers, members of the executive committee or members of the board of directors of the sponsoring organization be made available upon demand for public inspection at the studios or general offices . . . of the station . . . . 34. Must the required sponsorship announcement on television broadcasts be made by visual means in order for it to be an "appropriate announcement" within the meaning of the Commission's Rule? Not necessarily. The Commission's Rule does not contain any provision stating whether aural or visual or both types of announcements are required. The purpose of the Rule is to provide a full and fair disclosure of the facts of sponsorship, and responsibility for determining whether a visual or aural announcement is appropriate lies with the licensee . . . . G. Controversial Issues 35. (a) A trade association furnishes a television station with kinescope recordings of a Senate committee hearing on labor relations. The subject of the kinescope is a strike being conducted by a labor union. The station broadcasts the kinescope on a "sustaining" basis but does not announce the supplier of the film. The failure to make an appropriate announcement as to the party supplying the film is a violation of the Commission's sponsorship identification rules dealing with the presentation of pro- gram matter involving controversial issues of public importance. Moreover, the Commission requires that a licensee exercise due diligence in ascertaining the identity of the supplier of such program matter. An alert licensee ~hould be on notice that 328 THE JOURNAL OF LAW AND ECONOMICS expensive kinescope prints dealing with controversial issues are being paid for by someone and must make inquiry to determine the source of the films in order to make the required announcement . . . A station which has ascertained the source of kinescopes is under an additional obligation to supply such information to any other station to which it furnishes the program. (b) Same situation as above, except that the time for the program is sold to a sponsor (not the supplier of the film) and contains proper identification of the adver- tiser purchasing the program time. An additional announcement as to the supplier of the films is still required, for the reasons set forth above. (c) Same situation as in (a) or (b), above, except that only excerpts from the film are used by a station in its news programs. An announcement as to the source of the films is required ... 36. A church group plans to film the proceedings of its national convention and distribute film clips "dealing with numerous matters of profound importance to members of (its) faith" in order to "disseminate to the American people information concerning its objectives and programs." The group requests a general waiver under Section 317(d) of the Communications Act so that it need not "waste" any of the short periods of broadcast time donated to it by making sponsorship identification an- nouncements. In the below-cited case, the Commission did not grant such a waiver because of the absence of information indicating that the subject matter of the clips was not controversial and because the alleged "loss" of a few seconds of air time was not of decisional significance vis-a-vis Congressional and Commission policy relating to issues of public importance. EXHIBIT G Fredric Dannen, HIT MEN (1990) • POWER BROKERS AND FAST MONEY INSIDE THE MUSIC BUSINESS Ill FREDRIC DANNEN Vintage Books A Division of Random House, Inc. New York FIRST VINTAGE BOOKS EDITION, JULY 1991 Copyright© 1990, 1991 by Fredric Dannen All rights reserved under International and Pan-American Copyright Conventions. Published in the United States by Vintage Books, a division of Random House, Inc., New York, and simultaneously in Canada by Random House of Canada Limited, Toronto. Originally published in hardcover by Times Books, a division of Random House, Inc., New York, in 1990. Grateful acknowledgment is made to the following for permission to reprint previously published material: Hudson Bay Music Inc.: Excerpt from the lyrics of"Yummy Yummy Yummy" by Arthur Resnick and Joe Levine. Copyright© 1968 by Alley Music Corp. and Trio Music Company, Inc. Used by permission. All rights reserved. William Morrow & Company, Inc.: Excerpts from Clive: Inside the Record Business by Clive Davis. Copyright © 1975 by Clive Davis. Reprinted by permission of William Morrow & Company, Inc. National Broadcasting Company, Inc.: Excerpts from transcripts of NBC News broadcasts of February 24, 1986, and March 31, 1986, concerning payola. Copyright© 1986 by National Broadcasting Company, Inc. Excerpts reprinted courtesy of National Broadcasting Company. All rights reserved. Straight Arrow Publishers, Inc.: Excerpts from 'The Godfather ofRock-n-Roll" by Fredric Dannen (these excerpts constitute a portion of Chapter 3) from the November 17, 1988, issue of Rolling Stone magazine. Copyright© 1988 by Straight Arrow Publishers, Inc. All rights reserved. Reprinted by permission. Library of Congress Cataloging-in-Publication Data Dannen, Fredric. Hit men: power brokers and fast money inside the music business/Fredric Dannen.-1st Vintage Books ed. p. em. Includes bibliographical references and index. ISBN 0-679-73061-3 (pbk.) l. Sound recording industry-United States. 2. Rock music-United States -History and criticism. I. Title. ML3790.D32 1991 338.4'778166'0266-dc20 90-55680 CIP BOOK DESIGN BY]. VANDEVENTER Manufactured in the United States of America 9B8 1rmer air >fficer of ~ecords. at intro- ·enhim. ted that •er CBS e black. e entire nerican put it, n. But f not a ~h had ecords like a ide red :man- ied on tiator, ard to ghhe ream- Lildn't •eight t and e felt 'alter ~t. :cord very- -ked. rela- >ster rbra Dia- ton. THE EDUCATION OF DICK ASHER Asher felt he had to fight to get the American company interested in his overseas acts. One artist Dick championed was a Spanish singer named Julio Iglesias. He was vindicated when Iglesias's al- bums sold millions of copies in the United States. "Not chopped liver," he pointed out. Asher knew he was a poor politician, though he was probably worse than he realized. The rank and file hated the new deputy on sight. To them, he was a spy sent down from Corporate, that mysterious enclave on the thirty-fifth floor of Black Rock, CBS headquarters in Manhattan. Dick did not help his cause with di- plomacy. He detained people in endless meetings and wore them down with interrogation. He thought CBS Records was out of control and that no one was accountable. He would make them accountable. Asher set out right away to cut perks. He issued stern direc- tives: buses instead of limos, less dining at fine restaurants, fewer trips. People grumbled, but Dick was adamant. When his eye fell on a huge ledger item, the millions being spent on independent promotion, he was less certain what to do. It baffled him. Who were these guys? Why were they paid so much? Of course, Dick knew what independent promotion was. He had been one of the first to use outside consultants to help plug records to radio. But that was a long time ago. Before Dick went to London in 1972, in die promotion was a small expense. You might hire a freelance promoter to work a record for, say, $100 a week, because your internal staff was overloaded. In seven years the decimal point had moved three spaces. It now ran you as much as a hundred grand to hire a top promoter for one pop song. The service had gone from a tiny line item to the company's biggest expense after sala- ries. Dick knew that good Top 40 promotion was crucial and diffi- cult. Each big record company had Top 40 promoters on staff in every region of the country. The staff promoters called on stations in their territories and attempted to urge new singles on the pro- gram directors, the radio people with power to add a song to the playlist. Top 40 radio was a paradox, though. It alone could make a hit record in most cases, yet it strived to play only records that were already hits. No Top 40 station wanted to be first on a new song, and this made lhe program director a tough sell. Each month the PD was assaulted with more than two hundred new 7 t the over You orne Top with 1ce). 1s m that o be tcert page hese 1rted ized . He with ords the ·ears ekly ons. 1dies was o to 1sn't e an l bit the .me. ; an i no tists y. A rbra dop vent / THE EDUCATION OF DiCK ASHER You were dependent on Top 40 radio for that. People did not buy pop music they had never heard. But it was axiomatic that for each single in the Top Ten, you could sell a million albums. So promotion, the art and science of getting songs on the air, drove the record business. Not marketing, because no amount of adver- tising or even good reviews and publicity were enough to sell mil- lions of albums. Not sales, because record stores only reacted to demand and did not create it. Even the best A&R-artist and repertoire-staff in the world couldn't save you if radio gave you the cold shoulder. Dick immediately formed some dark suspicions about inde- pendent promotion, but he put them aside. He had other worries that had nothing to do with possible illegality or even the high price. It was simply dangerous to have a power base like that out- side your company. The more powerful it became, the harder it was to control. It was a slap in the face of your own people. Dick kept insisting to the heads of promotion at Columbia and Epic, If your staff can't do the job as well as the independents, get rid of them and hire better people. They told him he was missing the point. It became imperative for Asher to prove them all wrong. But how to do that? By taking a single and breaking it without indepen- dent promotion. Easier said than done. If he chose a new group for his experiment and failed to make the pop charts, what did that prove? It was hard to break a new act under the best of circum- stances. If he picked a star act, he was asking for trouble. The torturing would start right away. He could see it: The artist's man- ager or lawyer would blow up, and it was always a variation on the same theme-One Career. My act has only One Career. How dare you make my act an experiment. My act could sign with another label. So when Pink Floyd's The Wall hit the album charts and rose to number one, Dick believed his prayers were answered. Nor- mally, you could not have a hit album without a hit single, but Pink Floyd was not normal. Pink Floyd's manager, Steve O'Rourke, was barely conscious of Top 40 radio. He'd probably never heard of independent promotion. He would not torture. From a commercial standpoint, it hardly mattered if The Wall generated a hit 45 or not. Your objective was to sell albums; you never made much money from singles, even hit ones. If Asher used Pink Floyd, his experiment carried little financial risk. Dick 9 in the Top 40 ~iment: ~ick off Bruce .IS own .ecords in the ; song, .rket, a in Los ities to of the y con- ong to lid not lration milton ay the were , even ;imply 'op 40 l every- ~t that asked, .ourke ourke ed he ts big- ~k re- s and after ~noon .. A. It THE EDUCATION OF DICK ASHER was unbelievable. By mid-March KFI reported the song at number 1 KEARTH at number 3, and KHJ at number 9. A month later "Another Brick" remained the top song at KFI and KEARTH. KRLA never played the record, so for the purposes of the experi- ment, the station was meaningless. But the result was clear. It conjured images of the stone wall on stage, standing impenetrable until unseen hands brought it crashing down. How many bands, Asher wondered, could book five back-to-hack dates in one of the largest indoor halls in America and pack them in every night? How could you blackball any rock act so popular? It was not a possibility that Dick had even allowed for, because until now he had imagined that independent promo- tion was at worst a powerful positive force, not an invincible neg- ative one. Only when he considered the implications of what had happened in Los Angeles did Asher realize what he was up against. 1111 They were called the Network, an informal alliance of the dozen or so top independent promotion men. The Network was rumored to have been formed at a summit meeting in New York in 1978. The term surfaced, apparently for the first time, in a November 1980 Billboard article. It was probably coined by its own members; a few independent promoters even had "The Network" embroidered on their golf shirts. Billboard identified some of the key men of the Network in 1980. Among others, the magazine named Joseph Isgro of Los Angeles; Fred DiSipio of Cherry Hill, New Jersey; Gary Bird of Cleveland; Dennis Lavinthal of L.A.; Jerry Brenner of Boston; and Jerry Meyers of Buffalo. Though the term "Network" conjured images of a powerful, secret society, it referred to the tendency of the promoters to work as a loosely knit team. Each member had a "territory," a group of stations over which he claimed influence. If a record company wanted national airplay for a new single, it could choose to hire one of the Network men, who would in turn subcontract the job to the other members of the alliance. The Network was mostly a phenomenon of Top 40. * To a lesser degree, it promoted records to "urban" radio, an industry euphemism for stations with a predominantly black audience. * For several years, the preferred term for Top 40 has been CHR, or contempo- rary hit radio, to reflect that such stations often play even fewer than forty records at a time. "Top 40" is used throughout this book to mean CHR. 11 THf DEPUTY AND THE PRESIDENT There were non-Network indies who promoted to Top 40 and urban stations, but they were not nearly as well rewarded. There were also indies who worked country and album-oriented stations. The money in these formats was apparently not great enough to interest the Network. The two leading figures of the Network were Fred DiSipio and Joe Isgro. According to one estimate, DiSipio, who worked out of a squat office building in a shopping center near Philadelphia, had influence over ninety key stations. One station DiSipio routinely took credit for was KEARTH of Los Angeles, one of the Pink Floyd holdouts. It might seem odd that a man who worked in Cherry Hill, New Jersey, could deliver an L.A. station, but the Network promoter's territory often had nothing to do with where he lived. Joe Isgro of Los Angeles took credit for records added at L.A.'s KFI-another station in Asher's experiment-but also KAMZ in El Paso and WCIN in Cincinnati. Not long after the Pink Floyd incident, Asher began to en- counter Isgro and DiSipio, mostly in social situations. He found them distasteful and dealt with them as little as possible. Joe Isgro, a native of Philadelphia and only thirty-three at the time of the Wall tour, could have passed for a hood. He wore black shirts and custom-made suits and gold jewelry, and flashed big wads of C- notes. He employed two beefy British bodyguards. Isgro was broad-shouldered, with furtive eyes, a pencil mustache, a peren- nial three-day beard. He referred to himself as a "street guy." It was hard to imagine him making it as a promoter, let alone one who could afford a marble-floored mansion in the San Fernando Valley and a Rolls-Royce Corniche. He was humorless and men- acing. Isgro said he was haunted by his tour of duty in Vietnam. He kept a box full of photographs of the Vietcong he had slain. Fred DiSipio was twenty-one years older and more polished than Isgro. He was short, spectacled, and appeared to wear a rug. He had a rapid-fire repartee and a surprising command of Yiddish. "Freddy could open the shul and close it," said one man who heard DiSipio speak. DiSipio also had a reputation for discourag- ing competition. Like Isgro, he went around with a huge body- guard, Big Mike. It seemed incredible to Asher that the record industry was paying millions to these "grade-B movie characters," as he called some of the promoters and their retinue. After emerging from his seven-year cocoon running CBS Records UK and then the com- 12 >p 40 and ed. There 1 stations. ~nough to iSipio and ~ed out of lphia, had routinely 'ink Floyd n Cherry Network he lived. at L.A.'s ~AMZ in an to en- 1e found foe Isgro, ae of the ;hirts and 1ds of C- sgro was a peren- : guy." It lone one i'ernando md men- vietnam. slain. polished ar a rug. Yiddish. 1an who scourag- ge body- .stry was 1e called from his he com- THE EDUCATION OF DICK ASHER pany's entire foreign operation, Dick had not expected to find men like Isgro and DiSipio as power brokers in the American record business. Asher had been involved with the music business for a long time-since 1958, in fact, as a young associate at a mid-sized New York law firm-and had seen a lot. This Network business was something new, yet disturbingly familiar at the same time. Shortly before the fifties had ended, payola-a contraction of "pay" and "Victrola"-became a household word when disc jockey Alan Freed went down for taking bribes to play records on WINS. Asher long remembered the public outcry, the congressional hearings, the ruined careers. Freed, who became a symbol of the payola scandal, drank himself to death in 1965. But payola did not go away. It was rampant again in the early seventies, which brought a fresh round of scandals. Even then it persisted. Payola was an unpleasant fact of life, but never all that noticeable at the corporate level. It was pretty much a nickel-and- dime affair. After all, how much did it take to bribe a low-paid record-picker at a radio station? Indie promotion in the eighties, however, was not a matter of nickels and dimes. Asher did a quick calculation. CBS Records was spending $8 million to $10 million a year on the indies. This meant the entire industry was probably laying out at least $40 million. Dick had no idea what percentage was being used to bribe radio stations, but if the indies could keep a monster group like Pink Floyd off the air, it had to be a significant amount. In time, indie promotion would be dubbed the "new payola," which indeed it was. Perhaps a better term would have been "in- stitutionalized payola." During the seventies, the record business had coagulated into six large multinational companies, of which CBS and Warner Communications were the biggest, and a handful of key indepen- dent labels. But unlike other businesses-such as car manufactur- ing or fast-food restaurants-bigness provided few competitive advantages in records, at least in terms of having hits. In fact, it could be a disadvantage. The small labels were often quicker to spot a new trend, and they could make a record as cheaply as a big company. And radio airplay was free to the label with the best record. The large record companies understood on some level that if radio airplay were not free, it would mean a major competitive 13 TH ~ D~PUTY AND TH f PR~SID~NT edge. The big companies had budgets sufficient to outbid the small labels for airplay. Payola had always been the means to put a price on free airplay, but it had never been institutionalized. To get a lock on pop radio across the nation would take a big outlay of cash. The large companies had the money, but they could not allow their staff people to make payments to radio stations. It had become too risky. The antipayola statute of 1960 was feeble and rarely enforced. But the seventies gave rise to the Racketeer Influ- enced and Corrupt Organizations statute, known as RICO, which can inflict heavy penalties on a company that engages in bribery. In the words of a law journal study on the "new payola": "The threat of RICO liability created an incentive for record companies to retain independent contractors for record promotion in order to insulate themselves from imputed criminal liability or com- plicity." The Network proved the ideal insulation. Membership in the Network did not necessarily mean you were a payola conduit. Some top indies had clean reputations. Other Network men, how- ever, plied station program directors with cash, cocaine, expensive gifts, and hookers. The former program director of a medium- sized California radio station, for example, admitted in 1987 that he had taken about $100,000 in cash from an independent pro- moter over a three-year period. Every week he got a "birthday card" in the mail, delivered to a post office box he had set up under an assumed name, as instructed by the indie. Each week he added three or four songs for the promoter and found between $500 and $1,000 in his birthday card. There were other methods of delivering the payoff money. One promoter stuffed the money in empty cassette boxes. Others used record jackets. "There are programmers," one label executive laughed, "who take the record up in the sleeve and go like this." He held an imaginary 45 to his ear and shook it. "Sounds good, sounds good. I like it, I like it." The Network served its purpose. After 1978, records put out by small labels began to vanish from the Top 40 airwaves. But indie promotion was a two-edged sword. At first the big labels were bidding against the small ones, but before long they were bidding against each other. The price of indie promotion rose steadily. By 1985 it was costing the industry at least $60 million and perhaps as much as $80 million a year. A label might spend as much as $300,000 to promote one record. 14 L wa ce] th: pn dis sa1 co thl 01 lO di< an va Tl of N th th la· bt cc at as re ta le h; bJ w lli pl S( n e: ll! mall )rice get a ty of l not ~had :and nflu- Thich bery. "The anies order com- n the 1duit. how- ~nsive iium- 7 that t pro- thday under added 10 and loney. )thers cutive this." good, ut out s. But .s were >idding ily. By wps as Jch as r- THE EDUCATION OF DICK ASHER This was vastly more money than was needed to rig the air- waves. The leftover millions made a few top indie promoters ex- ceptionally rich. Meanwhile, a few label bosses expressed fears that indie promo dollars were being kicked back to some vice- presidents of promotion at the record companies, the men who disbursed funds to the Network. Mo Ostin, head of Warner Bros., said in a deposition, "There was ... a suspicion that [the indies] could be corrupting promotion men who might work for us," al- though, he added, "we had no indication that that had happened." One former promotion VP, requesting anonymity, confirmed that 10 percent was a typical kickback, and admitted taking money. ''I didn't steal enough,"he said. "I'm real fucking sorry; I saw many an opportunity." Vice-president of promohori, he added, "is a very valuable job. And nobody ever gets nailed. You know why? They're all working for public companies. Nobody breathes a word of what happened." Though institutionalized payola remained a good deal for the Network, the bribe-takers at radio stations, and promotion VPs on the take, it eventually turned into a very bad deaHorthe labels that had created it. The $60 million to $80 million in annual out- lays might not sound oppressively large, but it was for the record business. Despite its powerful influence on culture and fashion, re- corded music is a relatively small industry. Americans today spend about the same amount on breakfast cereal-$6.8 billion a year- as they do on compact discs, tapes, and records. In 1985, the U.S. record industry grossed no more than $4.5 billion and made pre- tax profits of perhaps $200 million-and this is a generous estimate.* Therefore, in 1985 the U.S. record industry was spending at least 30 percent of its pretax profits on indie promotion. By then it had become a financial crisis, one of the worst an industry has ever brought upon its own head. Even before it became unbearably expensive, the Network was not a good investment. For all its power, the Network could not make a hit record. No one could do that except the market- place. You could saturate the airwaves with an uncommercial song and have some moderate success, but in the end you could not force people to buy a record they did not like. It is easy to find examples of "turntable" hits: records that got loads of airplay but * Maybe too generous. That year, four of the nation's six largest record compa- nies lost money or were only marginally profitable. 15 TH~ D~PUTY AND TH~ PR[SID(NT did not sell. Consider Cady Simon's hit single "Jesse," on Warner Bros. Records. Said an executive at a competing label, " 'Jesse is legendary as one of the most expensive singles of all time in the amount of indie promotion money spent on it. I don't know the actual number, but if you told me $300,000, I wouldn't blink. The amusing thing is, it was top ten, it got a lot of airplay, but they didn't sell any albums. It was perceived as a hit record. But the album was a stiff. So was it a successful project? Not for anybody. Except for the independent promoters. You can't blame them for taking the money." In fact, the Network's power came not from its ability to make a hit record but to prevent one. This was deliberate, since the Network was the means to deprive small labels of access to the Top 40 airwaves and increase the market share of the large labels. Unfortunately, market share isn't worth anything if you can't ac- quire it profitably. In business, a company that buys market share at a heavy price is tagged with the unflattering name of "loss leader." The Network was the ultimate loss-leader deal. Some of the record companies felt they had no choice but to hire the indies. Dick Asher, for example, complained that "it wasn't payola, it was extortion-the price you had to pay to be in business." Said Elliot Goldman in mid-1986, when he was presi- dent of RCA Records: "You got the feeling you had to hire them so bad things wouldn't happen." To make matters worse, the Network became adept at getting money for nothing. "I call them claim-jumpers," said Paulie Gal- lis, a non-Network indie promoter who had got his start in radio in 1948. One time, in the late seventies, Callis, who worked on re- tainer for Motown Records, persuaded a friend at a radio station in Tallahassee to add a Motown single to his playlist. A promotion executive at Motown called Callis to thank him but said he was unable to pay him a bonus for landing the station. "He says, That station belongs to somebody else, and I have to pay that guy," Callis recalled. "I said, What do you mean it 'belongs' to somebody else? Wait a minute! Are you that fucking stupid? You're going to pay a guy for a station that I got?" The Network men, some of them, were obstinate about being paid, and you did not want to cross them. This seemed especially true of Fred DiSipio. "The line about Freddy," said one promotion vice-president, "was that if he flew in a plane over an antenna, he claimed the station. Any time he could do one, he would turn it 16 in. tot del the tra~ hin his tip1 reh rati rna rec kn< a s1 Aft san sta bUJ of1 Bo the: OUI its on ke1 ev< ho1 wo m· 1 Warner 'Jesse is 1e in the 1't know 1't blink. but they But the mybody. :hem for to make ince the s to the e labels. ~an't ac- et share of "loss e but to that "it to be in ts presi- re them getting lie Gal- radio in I on re- station motion he was s, That t guy," nebody oing to t being >ecially notion ma, he turn it r-m THE EDUCATION OF DICK ASHER 4' in. I admit, I allowed him to intimidate me." It always came down to the Network's ability to stop a hit. What's more, when a Network indie demanded a bonus for delivering a station, it was hard for record companies to verify that the station was playing the song in question. The standard con- tract given to a Network promoter by a record company entitled him to a bonus, or "spiff," of up to $7,500 each time a station in his "territory" told Radio & Records magazine, the industry's top tipsheet, it had added a specific song. If a radio programmer was reluctant to add a song because he feared it would hurt his station's ratings and endanger his job, he could still help a Network pro- moter get his spiff by lying to Radio & Records. This common ruse was called the "paper add." (An alternate ploy was to add the record, but only during off hours-say, after 2:00A.M. This was known as putting a record into "lunar rotation.") Paper adds infuriated Radio & Records publisher Bob Wilson, a scrupulously honest man who valued the integrity of his charts. After he discovered the practice in the late seventies, about the same time the Network came into being, he issued a warning that stations caught reporting songs they never played would be bumped from R&R's Top 40 survey. Wilson so warned a number of offending stations, including KEARTH, after program director Bob Hamilton reported a Doobie Brothers song he never put on the air. Hamilton's KEARTH was one of the stations that had held out on "Another Brick in the Wall." As Dick Asher learned more and more about the Network and its methods, it heightened the sense of eerie dislocation he had felt on returning to U.S. operations after his long absence. Why, he kept asking himself, did the industry allow it to continue? Why was everyone around him so complacent? Surely, Asher figured, his boss and longtime colleague Walter Y etnikoff, another attorney, would share his concerns about independent promotion. He was in for a surprise. 17 EXHIBIT H R. Serge Denisoff, SOLID GOLD, THE POPULAR RECORD INDUSTRY (1975) ~OIILIID> ~OILI1D) THE POPULAR RECORD INDUSTRY R. SERGE DENISOFF • Transaction Publishers New Brunswick (U.S.A.) and London (U.K.) Copynghted matenal . --- . Fourth printing 1995 Copyright C 1975 by Transaction Publishers, New Btu.nSwlck, New Jersey 08903. AU r:ighls rHMVed und~ In~etnJtionaJ and Pan.Arnerkan Copyright Con- ventions. No part of this book ~y be reprochu:ed or transmitted in ally fonn or by any means, electtonie or meebanical, including photocopy, re- oonllila. or any information storage and retri.eval system, without prior permission in writing from the publisher. All inquiries should be addressed to 'Jnmsaction Publishets, R11tger.s- The State University, New Brunswick, New Jersey 08903. This book Is printed on acid-free paper that meets the Amerlean National Standard for Permanence of Paper for Printed Library Material•. Libru:y ofConpess Cataloa Number: 74-20194 ISBN: 0.818SS-S86-2 (paper) Printed in the United States of America Copynghted matenal ~-------------------------' ~-- . THE VINYL CRAP GAME 97 ally has been a key factor in their approach to corporate dice playing. Unlike their smaller counterparts, they have greater resources to spend and consequently try more often to win. A $50,000 gamble with possible winnings in the millions means little to corporations with annual earnings of $200 million or more. Parent companies in conglomerate struc- tures are sometimes only too happy to subsidize such activi- ties for tax purposes. Yet, despite the obvious advantages of size these bonuses are not as dedsive as one might expect. THE BUCKSHOT THEORY OF RECORD RELEASING: GOUATH VERSUS DAVID CBS Records, with its plant and catalog, must produce an enormous amount of product to keep its various bureaus, agencies and departments busy. Of every I 0 records released, only 2 or 3 wiJl sell. Consequently, large companies must produce massive amounts of product to sustain their larger corporate bodies. Huge investments are made and must be maintained. A concentration upon proven talent, coupled with the 7 to 3 ratio, motivates the larger companies to treat newcomers indiscriminately, at the same time competing with each other for sure-fire sellers. According to Mike Ochs: They need that, they have to have that. Columbia owns aU their own distributors. They've got like hundreds of hundreds of peo- ple employed. So that the guy in St. Louis works only on Colum- bia product. So to keep that kind of major overhead up. it's got to have a lot of superstars. They can't afford no L to have like 10-20 acts that sell a million out because they have all that ma- cllintry that has to lttep going. Brown Meggs argues, "A company the size of Capitol Records needs 20 LPs per month to support the overhead.'' "Or," David Lawhon, the marketing chief adds, "4,000 peo- 98 SOLID GOLD ple geL spooky." Capitol operates on what Meggs calls For- mula 10, which is nearly identical to Columbia's 7 to 3 ratio. Capitol's advertising department head believes that in 10 re- leases at least one should be gold with several others bringing in a sizeable return. Companies with a smaller overhead, like A&M, can be more selective about when they wish to chal- lenge Lady Luck. Still, companies with their own distribution systems (branches) appear to have a tactical advantage in servidng radio stations and retail outlets. Richard Schulenberg recaJls: I was with two other companies before coming to Columbia, and my first week was right at the height of Johnny Cash's "Boy Named Sue." I was amazed to find out d1at every week, "Boy Named Sue" had sold over 750,000 units, the single, which com- pletely blew my mind because 1 had come from a company where when we had sold 30,000 or 40,000 total on a single, we had gotten very excited. we figured we were on the way. The idea that Columbia had just sort of opened up the pipeline and the three- quarter million units of one record had moved through that pipe- line very easily without any returns in that week was a complete mind blower to me. The "throw it up against the wall, and see if it sticks" or "buckshot" philosophy of the larger companies is highly con- troversial. Many majors, including Columbia and Warner/ Re- prise, officially condemn the practice. Conversely, artists, agents and many company executives, all for different rea- sons, decry the vast amount of product released each year. Roy Silver, whose concern lies with artists , claims that the major obstacle in the music business is getting ''the record company behind the artist. .. Many artists feel lost at major companies. A United Artists executive observed, "There's no way of having 200 acts and keeping artists happy." uno you know how many people from Columbia Records were here when I opened the other night? .. asked blues singer john Paul Hammond. "There were none ... not one person from my ~----------------~~----------------------------------~ THE GATEKEEPERS OF RADIO 253 Diego market will not be dismissed easily at future sessions of the annual Gavin, Hamilton and Billboard broadcasters con- ference. The diminishing idiom of free-form radio continues to be the record companies' favorite outlet. Bill Roberts, who broke "American Pie," explains: "At progressive stations you can go in the studio and sit down with the deejay and rap to him while he's on the air in between records, and sometimes you can hand him a record. And if he has enough trust in you as a music expert, he'll put it on immediately and you tell him what cut you want played and he'll play it." On Top 40, he maintains, the situation if different: .. All they give you is 15 minutes to promote maybe 20 singles and 15 albums. If you don't talk fast your chances of getting a record on are not too great.'' GETTING THE NEEDLE ON THE RECORD In a survey of Florida high-school students, George Allen Booker found that 54 percent of his respondents listed the disk jockey as the most important influence in the develop- ment of their musical tastes.33 Despite the artists' dues paying and record-company mixing and hype, it all comes down to getting a deejay to play that record so a sufficient number of people can hear it. Some of these listeners hopefully will like it well enough to buy it.. The more people who hear a record the greater its chances for success. This relatively simple pro- cess is complicated by the sheer volume of product. AM Top 40 stations are deluged by dozens of record companies with at least 7,000 singles each year, 2,000 more than in the payola years. AM and FM stations receive that many singles plus approximately 4,000 LPs, a thousand more than in the late 1950s. Since the average album has 12 cuts, the program director has a hypothetical choice of 48,000 cuts and 7,000 single selections from which to choose. Obv·iously, all 55,000 ---------------------------------------------------~ 260 SOLID GOLD records. The Rolling Stones early m their career wrote, "Un- der-Assistant West Coast Promo Man" with the line, "Sitting here and thinking just how sharp I am, I'm a necessary talent for every rock and roll band.'' Richard Robinson, author, deejay and producer, portrayed the promo man as "a breed apart, resembling human beings, but living Jives based on plastic being the true essence of good. To say, therefore, that the promotion man is, ofne<'essity,jive is simply to state a sad fact of Jife. "31 Despite the disapprobation hurled upon the promo man by Robinson and the Rolling Stones, to the com- pany he is the pulse of the people. He is closest to the street. His sole function is to get precious air time for his records. This is no simple feat, given the amount of product available. Promotion departments use standard techniques of selling: visits, caUs, artist biographies and an adequate supply of sam- ple copies. Occasionally, the promotion man is assigned to escort a touring act from station to station. Beyond this is the shady area of "goodwill." One Detroit program director de- fined goodwill: · ~The game of the promoter is to get you obliged, be it through exclusives, dinner, theater tickets, or what have you. "31 The "what have you" is a sticky subject. Various favors are frequently exchanged in some markets and none in others. Some underground stations consider plastic bags containing .. grass'' or pills inserted in an album jacket a token of goodwill. At the easy·listening station a bottle of Chivas Regal or j&B is still welcome. The soul·music market, which is nearly identical to the Top 40 milieu of the late 1950s, is the most susceptible to under-the-table promotion. Small black companies vie with the Hollywood giants for air time. Payola is an important promotional technique with soul radio stations. Because of this situation many industry execu· tives do not accept soul charts as accurate. Kal Rudman re· fuses to have a soul section in his tip sheet. He says, "I started the whole R&B thing, and I want no part of it. "40 Most profes~ sionals consider themselves corporate executives and conse- quently frown upon activities which are openly beyond the FCC or other legally prohibited rules of the game. However, -----------------------------------------------------r~ 264 SOLID GOLD not only talk to a music director or program director about what kind of music he should be programming, but they can walk down the hall, up to a sales manager or the general manager of the station, talk to him about fixing an advertising program, and then go back to the program director and incorporate these two things. This makes them much more professional and vital to the total successful operation of the radio station and not just a delivery boy. The buying of advertising has increasingly become a pro- motional tool. Spots provide the record company a minUle in which to expose their acts before T op 40 audiences without having to go through the program director's screening pro- cess. TheoreticaJly. with enough advertising revenue a com- pany can break an act in this manner. Spots feature one or more cuts on an album followed by an announcement of the title and the closing '~on Warner Brothers Records." There is sufficient precedent to believe that spots are going to accel- erate both on radio and television. Warner Brothers has been experimenting, especially in England, with television adver- tisements for Deep Purple. Company executives are ex- tremely high on this possibility. The validity of spots, perhaps, has best been illustrated by the popularization of two commercials as popular songs. "It's Only Just Begun" was originally a theme for a California savings and loan firm. The song earned the Carpenters a gold record. The New Seekers followed this success with "I'd Like to Teach the World to Sing in Perfect Harmony"-·· a Coca.Cola commerA cial. Spots, according to Dennis Killeen, Capitol advertising director, do not always work. Shelter Records•s Freddie King did a spot with minimal results . while j.]. Gale's radio ad was a success. The reason for this differentiation was probably due to the infectious guitar opening to CaJe's " Pretty Women.'' Warner/Reprise, as Stan Cornyn is quick to obA servet will try any method available to solve the problem of getting the sound to the "folks out there ... A&M, considered by many to be "the hot company of the 1970s." concentrates a large segment of its public·relations ------------------------------------------------------~ I · ~-- 268 SOLID GOLD a McLean recording of the song was being aired in the New York area as a public service announcement, hopefully cre- ating a "built-in market." Tapes of the album were sent to progressive FM stations in areas where McLean was known either through his college concerts or his slint on Pete See~ ger's ecology boat the Clearwater. His acceptance on FM radio, particularly in the Chicago area where the singer was appear- ing at the QJ.tiet Night club, hastened the issuance of the album. Roberts and Cerf envisioned "American Pie" as a hit single on AM radio. There were two major barriers: the AM program director and the artist himself. " America n Pie" is 8~ minutes in duration, violating the 2:37 or 3:05 minute length so popular with AM programming. The second prob- lem was McLean's anti-record company attimde. A veteran of the Broadside (NYC) New York folk-protest scene. McLean was anti-establishment and Top 40 radio is, as free enterprise, as "dog-eat-dog•• as any of john D. Rockefeller's early o il com- panies. Bill Roberts , in time, convinced Don to "go around to the radio s tations and meet some people with [him]." He was never able to get McLean to explain the message of " Ameri- can Pie." This problem was minor in contrast to breaking an 8 ~ minute folk song on AM radio. According to Marty Cerf, United Artists ignored many of the traditional avenues. At firs t tbey went around the Top 40 PD to the progressive sta- tions, this being done with a two-week national tour of FM stations and a mailing. Also, "we didn't buy one ad. We didn't buy one T-shirt. We didn't buy one button. We went after it as straight AM product. It was a lo t of money." UA allotted the largest album expenditure on "American Pie" in its his- tory, at least $100,000. Cerf recalls, "It was the greatesl suc- cess this company ever had. but had it not been it would have been the greatest expenditure in a flop we ever had." Nearly all of the money was spent on AM radio spots, again going around the program director to the people . This was all prior to releasing the shortened single version. Mike Stewart, UA president, personally ordered the field men to break it in best jay Lasker style. " Mike would have looked bad if it bombed," -------------------------------------------------------r 1 · ~-- THE GATEKEEPERS OF RADIO 269 said one UA employee. College radio play was arranged. All this was done prier to issuing the single. "It was," says Marty Cerf, "a totally planned committed promotion . . . we totally committed ourselves. We tried to develop it and sincerely tried to bring it in." Both the album and the single have sold nearly five million copies. United Artists's media relations staff uses an interesting mix of techniques introduced at other companies as well as their own original innovations. UA's approach to program directors includes the traditional "people-to-people" game with goodwiJI, and Bill Roberts's attempts to indoctrinate his some 25 field people on the aesthetics of UA product. He says, "We have to turn them on to our product or they're ineffective. They're really ineffective because they'Ll go in and promote something else they like." As with A&M, the empha- sis is first placed upon energizing the field people. If this fails, Roberts and Cerfwould frequently go directly to the program or music directors, as they did with "American Pie.'' UA also places considerably more emphasis on the significance of me- dia . In the summer of 1971 United Artists introduced 7 -inch scale miniatures of the 33 ~ album with a full-color deluxe design down to the printed dust cover. United Artists an- nounced the miniature album saying, "It's something the ra- dio stations have been demanding for some time .. . with new acts ... we must find as many areas as possible to promote the groups, for PDs and Djsjust simply don't have time to dredge through 45 minutes with every new act that crosses their desk.·· The United Artists experiment with the mini-album was fundamentally an attempt to get around the barrier of getting people into the albums. These mini-albums contain four cuts from the parent album which the United Artists staff feels are the most salable. Another technique developed by Cerf and Roberts consists of direct promotional mailings to record-store per-sonnel, not just the dealers. Coupled with their innovations was Phonograph Record magazine, which un- like Circular and Fluff was a fuJJ-scaJe Roili1tg Stone size rock EXHIBIT I Michael C. Keith, THE RADIO STATION (8th ed. 2010) Michael C. Keith ELSEVIER Broadcast, Satellite & Internet EIGHTH EDITION AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Focal Press is an imprint of Elsevier. I _...... ........................................ , Focal Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Linacre House, Jordan Hill, Oxford OX2 8DP, UK Copyright© 2010, Elsevier Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Permissions may be sought directly from Elsevier's Science & Technology Rights Department in Oxford, UK: phone: (+44) 1865 843830, fax: (+44) 1865 853333, E-mail: permissions@elsevier.com. You may also complete your request on-line via the Elsevier homepage (http://elsevier.com), by selecting "Support & Contact" then "Copyright and Permission" and then "Obtaining Permissions." Library of Congress Cataloging-in-Publication Data Application submitted British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-0-240-81186-4 For information on all Focal Press publications visit our website at www.elsevierdirect.com Typeset by: diacriTech, Chennai, India 09 10 11 5 4 3 2 1 Printed in the United States of America Working together to grow libraries in developing countries www.elsevier.com I www.bookaid.org I www.sabre.org ELSEVIER BOOKAID s b 1:' d . International a fC 1 •OUll attOll -------------------------------------------------------~ Digital and HD Radio Revolution Digital and HD Radio Revolution DAB makes analog AM and PM outmoded systems. With the great popularity of home and portable digital music equipment (CD, MP3s, iPods), broadcasters are forced to convert their signals to remain competitive. Thus, DAB, or High Definition (HD) as it is more popularly called, looms large in the future of radio. The days of analog signal propagation are numbered. (For an explana- tion of both digital and analog signaling, see Chapters 9 and 10.) In the mid-1980s, compact disc players were introduced to the consumer market. Today, CD players no longer rank as the top consumer item for home music repro- duction, because they have all but been replaced by iPods and MP3s. Turntables have long gone by the board, and the analog tape cassette market is consigned to the history books. Digital is here to stay, at least until something better comes along. At first broadcasters viewed DAB as a threat. The National Association of Broad- casters (NAB) looked at the new sound technology adversarially. In an interview in the July 23, 1990, issue of RadioWeek, John Abel, NAB's executive vice president of operations, stated, "DAB is a threat and anyone who plans to stay in business for a while needs to pay careful attention." As time went on, DAB was regarded as a fait accompli, something that was simply going to happen. Soon broadcasters assumed a more proactive posture regarding the technology, and then the concern shifted to where to put the new medium and how to protect existing broadcast operations. Early on, NAB proposed locating DAB in the L-band portion of the electromag- netic spectrum. It also argued for in-band placement. Eventually the FCC saw fit to recommend that DAB be allocated room in the S-band, and it took its proposal to the World Administrative Radio Conference (WARC) held in Spain in February 1992. This spectrum designation is expected to help in-band terrestrial development. In-band, on-channel (IBOC) digital signal- ing, developed by iBiquity Digital Corpora- tion's Glynn Walden, permits broadcasters to remain on their existing frequencies. This is something they favor, as satellite DAB signal transmission is regarded as a significant threat to the local nature of U.S. broadcasting. On the other hand, many countries are fully supportive of a satel- lite DAB system because they do not have the number of stations the United States possesses and thus lack the coverage and financial investment. Of course, digitized terrestrial radio (called HD Radio) renders existing analog receivers obsolete. This is cause for some anxiety among broadcasters who wonder how quickly the buying public will convert. However, considerable confidence exists since consumers' huge appetitite for new and improved sound shows no sign of abating. As of this writing, several manu- facturers are offering HD receivers at prices that are becoming more and more afford- able and competitive and a number of car manufacturers provide HD Radio in their latest models. Digital converters are also available at a modest price. Considered another plus of digital radio is its capacity to do other things. For example, iBiquity has developed a technology that allows those stations broadcasting digitally to transmit data to portable digital services, including cell phones. This is attractive to the station operator's bottom line. The ability to multicast (provide side-channel transmissions) is yet another major plus for HD Radio. Known as HD2, it allows the medium to provide additional program streams (two to eight channels) to the lis- tening audience. America is a nation of audiophiles, demand- ing high-quality sound. Analog broadcasting cannot compete with the interference-free 23 FIGURE 1.19 HD Radio advertisement. Courtesy iBiquity. 24 reception and greater frequency dynamics of digital signals. Digital signaling heralds a new age in radio broadcasting. Jeff Tellis, former president of the IBS, explains why. "The reason for the great interest in digital broadcasting is its considerable number of advantages." Among them are: • Significantly improved coverage using sig- nificantly less power • Dramatic improvement in the quality of the signal; compare CD to vinyl • More precise coverage control using mul- tiple transmitters similar to cellular phone technology • No adjacent channel reception problems • On-channel booster capabilities eliminat- ing the need to use separate frequencies to extend the same signal • Easy transmission of auxiliary services, including format information, traffic, weather, text, and selective messaging services • Sharing of transmitting facilities- common transmitter and antenna Telecommunications professor Ernest Hakanen expands on the cost advantages of digital broadcasting. "DAB also promises to be economically efficient. Since there is no interstation interference between digital signals and because of the appeal of the spectrum efficiency provided by the interleaved environment, all of the channel operators in an area could utilize the same transmitter. The transmission facilities could be operated by a consortium for the con- struction, operation, and maintenance of the common transmission plant. Antenna height for DAB systems is also lower than current FM standards. Electrical power con- servation and savings are a huge advantage of DAB." Picking up on Hakanen's point about consolidating broadcast operations, Lynn Christian says, "The consortium (radio station malls or clusters) approach to main- taining and operating a station is common- place because of economic reasons, and HD Radio is very conducive to a collaborative relationship among broadcasters." Prior to the WARC meeting in 1992, NAB's DAB Task Force proposed a set of standards to ensure that the technology CHAPTER 1 STATE OF THE FIFTH ESTATE would operate effectively. The specifications included: • CD-quality sound • Enhanced coverage area • Accommodation of existing AM and FM frequencies • Immunity to multipath interference • Immunity to stoplight fades • No interference to existing AM and FM broadcasters • DAB system interference immunity • Minimization of transmission costs • Receiver complexity • Additional data capacity • Reception area threshold After nearly a century of analog signal transmission, radio is venturing into the digital domain, which will keep it relevant to the demands of a technologically sophis- ticated listening marketplace as it embarks on its next 100 years. As of this writing hundreds of radio stations across the country offer digital signals, and the majority are also providing expanded listening options with HD2 service. At several industry gath- erings in the first half of the 2000s, former NAB president Eddie Fritts presciently pro- claimed HD Radio as the wave of the medi- um's future, saying "Transitioning to digital will give radio even better opportunities to serve [its] listeners." Today, not all industry observers see HD/ HD2 as the solution to the drop in music radio listening. Observes Mark Ramsey of Mercury Media Research, "Will digital help reverse radio's declining audience? Abso- lutely not." Counters Dave Neugesser, "It's not something that's going to happen over- night. HD 2 gives radio an infinite dial with incalculable choices, but it won't impact the market as fast as some would like. Before this happens, it has to be standard equipment in new cars, and people have to buy HD radios. It's a steep hill, but it can be surmounted." Satellite and Cable Radio Radio broadcasters retain a wary eye on the ever-evolving digital audio services being made available by satellite companies (see Figure 1.20). It is the threat of increased h Satellite and Cable Radio competition that inspires concern for the new and evolving audio options. Although broadcasters have long employed satel- lite programming and network services to enhance their over-the-air terrestrial signals, the idea of a direct-to-consumer alterna- tive has not been greeted with enthusiasm, especially since these nonterrestrial signals are available in digital sound, something broadcasters are just beginning to offer. For several years, the FCC debated the ques- tion of satellite radio. In the waning years of the 1990s, the feds gave licenses to com- panies, such as CD Radio and XM Satellite Radio, to launch their services. Meanwhile, the NAB vociferously argued against its introduction into the local marketplace. Despite all the brouhaha, XM Satellite launched its service in September 2001 and a year later claimed nearly a quarter of a million subscribers. Less than a year after XM Satellite rolled out its audio service, Sirius Satellite Radio debuted. It quickly became clear to terrestrial broadcasters that there was a new kid in town, one who would further accelerate the splinter- ing of the radio listening audience. In 2008, both satellite radio services merged, with Mel Karmazin at the helm of the renamed SiriusXM. Over the air broadcasters contend that their local orientation betters the services of the satellite audio companies, which are nationally based programmers. Former Infinity Broadcasting senior vice president, David Pearlman, says, "Broadcast radio is locally rooted and the satellite compa- nies can't fulfill that need at the present time. This will be its saving grace and aid in its ability to withstand this frontal attack. With its selling of local news, traffic, weather, events, personalities, and services, the product differentiation will work in the industry's favor." Satellite radio is fee driven and offers a wide array of program options, which include an array of famous personalities, among them Howard Stern, Bob Dylan, and Martha Stewart. In all, satellite radio provides some 200 channels to subscrib- ers. A monthly cost of $12.95 is charged for the coast-to-coast signals (continuously in receiver range), but subscribers also have to invest money for receiver equip- ment. SiriusXM has signed contracts with car manufacturers to install their digital receivers and predicts the acquisition of an impressive segment of the drivetime listen- ing audience in the not too distant future. At this writing, satellite radio was approaching 14 million subscribers, which for a company whose primary revenue is based on "sign- ups" is encouraging. In the mid-2000s, many longtime broad- cast radio listeners were making the switch to satellite for reasons similar to those articulated by media scholar and author Christopher Sterling: "Like many older Americans, I used to listen to radio, espe- cially in the car . . . but in the past year here in Washington, the medium has left me in the lurch. I used to listen to three stations (usually one at a time), but all have dumped friendly formats to slave after programming already available on other outlets in this market. The main public radio station dropped a decades-long clas- sical music and talk format to rely totally on the latter - including British talk shows that keep giving me numbers I can call in London (I note with an 'I told you so' feeling that their audiences and donations are down as a result). The remaining com- mercial classical music station got caught in a shift of Clear Channel station frequen- cies and now uses a fringe transmitter that can't put a decent signal into downtown. And most recently, the oldies station that 25 FIGURE 1.20 Courtesy National Association of Broadcasters. I ~ 26 had played music from the 60s and 70s 'moved ahead' and now focuses on the late 70s and the 80s. Why do programmers presume nobody of 55 matters? Thank heaven for satellite radio where genuine choice thrives. I almost never turn on a radio anymore." Former XM programming chief Lee Abrams discounted the potential impact on his medium of terrestrial HD Radio. "''m pretty sure these guys will screw up HD. They'll add a Blues channel but it'll play 200 blues songs and be run by guys who don't know much about the blues beyond Stevie Ray Vaughn." And about the potential of increased local programming on broadcast radio stations influencing the fate of his medium, Abrams said, "I doubt local radio will ever get back to the so-called 'commu- nity.' In fact, they're going the other way by cutting costs and taking on more remote voice track and syndicated programming." To compound the competition for the listening audience, cable companies provide in-home music services for most of their subscribers. For example, Comcast cable users receive more than 50 chan- nels of music that are often quite niche specific. These commercial-free channels of diverse nonstop music, replete with on- screen information about what is being played, are very attractive to subscribers and frequently result in the loss of yet another portion of traditional radio's lis- tening audience. That said, many media observers believe satellite radio's prospects for succeeding in the face of myriad new audio com- petitors and mounting debt is not good. Jason Insalaco of The Kelton Agency says, "Satellite radio's subscription-based model has not yet reach critical mass, and I'm not sure it ever will." Internet Radio In the early 2000s, many listeners accessed their favorite radio station via their com- puters. However, with the specter of costly copyright royalty fees imposed on stations streaming music, their numbers dwindled and the future of Internet radio was cast in doubt. To mollify the situation, CHAPTER 1 STATE OF THE FIFTH ESTATE a proposed royalty rate compromise bill, known as the Small Webcaster Settlement Act (H.R. 5469), was passed by Congress. It was designed to mitigate the burden, so the future for the medium has brightened. Rates established by the Digital Millennium Copyright Act of 1998 had forced many radio broadcasters - both commercial and noncommercial - to reconsider their plans to Web cast. At the time radio industry publisher Eric Rhoads made this observa- tion, "With the current fees, the econom- ics do not make sense for anyone intent on building a business from this. Unless Congress steps in and makes a change, the RIAA fees are unreasonable and will kill the music side of online radio." Despite the upheaval resulting from the "pay for play" issue, most broadcasters felt that it was important to retain a Web pres- ence, even if it meant offering no music programming. It was thought that stations broadcasting news, sports, talk, and other nonmusic forms of programming were the likeliest to remain in the webcasting busi- ness. Maintaining a Web site for promotional purposes, even without audio streaming, was perceived as a worthwhile endeavor. Commented Jay Williams, Jr., "In the initial surge of the dot.com boom, radio stations rushed to create web sites that included station, music and local event information as well as billboard ads. After the Inter- net bloom faded in 2001, many stations stopped streaming audio and many radio web sites languished. Station web sites are again considered essential, and streaming over the Internet is seen as a critical, addi- tional distribution platform for terrestrial radio stations. As more national and local advertisers demand a web site presence as part of their radio buys, stations have also learned the benefits of using these sites to relate programming and promotion infor- mation. Station web sites can give listeners direct and immediate access to personali- ties and can be used for listener research, both of which can improve a station's con- nection with the audience and the on-air product." In spite of the formidable issues con- fronting webcasters, the RAB determined that over 4000 stations were streaming their content as of April2002, andArbitron/ ~ E t Internet Radio Edison Media Research calculated that online radio listening actually grew from 14% in 1999 to 23% in 2001. Meanwhile, Measure- Cast reported that Internet radio listening was continuing to grow a year later, so the practice was far from moribund. Radio Ink magazine cited Jazz FM and Virgin Radio in London, L-Love Radio in Sacramento, ESPN Radio in Connecticut, and WQXR/ FM Radio in New York as the top five simul- cast streamers during the summer of 2002. Indeed, today stations continue to view the Internet as a viable supplement to their on-air signals, especially for promotion and audience research purposes. Interactive radio is a growing reality, as is the oppor- tunity for everyone with the right com- puter and software to be a broadcaster or cybercaster. With an Internet encoder, the home user can transmit to an international audience. This prospect prompts a collective sigh from station managers, who are losing track of the new forms of competition. Notes longtime broadcaster Lynn Chris- tian, "The major concern regarding the future of radio is centered on new competi- tion from satellite, cable, and online sources. Those companies that are planning to partner with these new media choices, and develop data services, will undoubtedly be the big winners in the twenty-first century. Broadcast radio, as I have known it during the past 50 years, will not be the same in the next few years. But what American business is the same now? These are revolutionary times in radio and in the world." Jason Insalaco, observes: Radio executives programming in the rapidly changing media landscape must embrace the technological revolution that is upon them. Cell phones, the Internet, MP3 players, the iPod, and videogames are vying for the audi- ence's attention. Programmers must heed these encroachments on terrestrial radio or else accept extinction. Rather than fear the new and evolving audio media, traditional radio needs to embrace it for its own benefit. Radio websites are great places for listeners to find out about the station's personalities, music, contests, and events. Websites are cyber-extensions of the over the air station brand. Station websites also enhance audience interactivity and constitute another revenue source for a station. 27 FIGURE 1.21 Stations employ websites to extend their brand. Courtesy 97lFMTalk. ~+·' ....................................... ......... 28 FIGURE 1.22 The Apple iPod represents yet another competitive threat to broadcast radio. The youth listening market has enthusiastically embraced the new audio alternative, causing further anxiety among already besieged radio station programmers and managers. In 2009, the biggest challenge confront- ing Internet presence related to fees charged to provide music. States Paul Kemp of Backbone Networks, an Internet radio soft- ware provider: The performance royalty rates is probably the largest obstacle. Currently, in the US, there are a number of different rates and laws that apply to internet performance royalty rates. This includes the Small Webcasters Settlement that requires stations of a certain size to pay a percentage of their revenue. There is also the commercial Copyright Review Board (CRB) rate that requires internet radio stations to track performances of a particular piece. This rate escalates through next year [2009] when it is up for renewal again. The reason this is a big challenge for internet radio is that the rate is higher than for other broadcast mediums, like terrestrial and satellite broadcasts. If the rate was equal across all broadcast media we suspect there would be a rush to internet broadcasting because of the more precise lis- tener statistics that can be generated and the opportunity to more precisely advertise to a particular target. The royalty rate discussion masks a broader issue that needs to be con- fronted. The strength of the internet is that it is worldwide. As such an internet broadcaster would have to pay performance royalties to all of the Professional Rights Organizations where a connection terminates (the country from where the listener connects). Cognizant of the many obstacles and chal- lenges that exist in the age of the Internet, most radio broadcasters forecast a long-term CHAPTER 1 STATE OF THE FIFTH ESTATE relation between the two mediums, one that will benefit both. As radio heads warp speed into this "future world," it is obvious that aspiring broadcasters will have to know their way around a computer, because the audio studio will exist both in the ether and in cyberspace. For those interested in this aspect of the medium, Radio and Internet Newslet- ter (RAIN) provides a daily update on the key issues involving radio and the Internet. Mobile Music Services Cell phones, with music downloading capa- bilities, and MP3s and iPods constitute the biggest competitive challenge to radio, and with the ever-expanding WiFi and WiMax universe, this will only increase. Mark Ramsey says, "We are fast-entering a time when 'radio' will become a feature of other things rather than simply a destination unto itself, as it has been up until now." Although many media observers predict that down- loading will continue to draw huge numbers of young listeners away from traditional radio, Emmis Communication's VP of Pro- gramming, Jimmy Steal, thinks otherwise: I don't agree that there is a mass exodus of young people away from radio to downloading media. According to the Paragon Media Youth Radio and New Media study conducted earlier this year (Spring 2008), 14-2 4 year old males and females who "listen to music on FM over the air more than they listen to music from other sources" surged from 27% in 2007 to 41% in 2008. All MP3 players need to be fed new music~ Check out the latest generation Micro- soft Zune model withe built in FM receiver. You can bet Microsoft did a lot of research Before making this radio upgrade. Can we be doing an even better job of attracting young listeners? Absolutely, in the future radio needs to perme- ate cell phones as well as all mobile media. Steal's boss at Emmis, Jeff Smulyan, agrees: While there has been a migration to iPods, recent research indicates that most new music is discovered by traditional radio (65%). That's why Zune has added a tagging device to its new Zunes, which lets people buy songs they hear on the radio included in the Zune. Our goal as an industry is to have a radio embedded in all portable devices (iPods, PDAs, and all cell J LPFM (Low-Power FM) phones) within the next five years We think radio is a perfect complement to portable music consumption in the future. Nearly half of all cell phones sold outside the United States include radios. There is a Paragon research study that was featured in The New York Times recently the showed that among younger listeners, radio consumption has actually increased in the last year as iPod fatigue begins to occur. Michael A. Krasness, head of Oxysys, a mobile music networking service, expands on the virtues of his enterprise: For the listener, traditional music radio - both over-the-air and Internet delivery - is about listening to tracks the user already knows, plus music discovery by the radio sta- tion's playlist, driven by an ad-based revenue model. Mobile music services add to that by allowing interactive user selection of music, active participation in the music discovery process, and social networking. As similar ad- based revenue model may be augmented by e-commerce through integration of a store. Traditional radio certainly provides comple- mentary services for our users. As a feature for our users, Oxy phling1 includes simple, inte- grated access to a number of Internet radio stations. For the radio station, they now have access to our community of mobile users. With Pandora Radio, Slacker, and other Internet-based mobilized audio services likely venturing into nonmusic areas, such as talk and sports, the competitive threat to broadcast and satellite radio looms larger than ever. On the upside, Consultant Ed Shane says, "these services have new apps for mobile phones that allow reception of terrestrial radio." LPFM (low-Power FM) A microradio movement surfaced in the 1990s and raised the ire of both broadcast regulators and the industry. The debate positioned the NAB against what it labeled radio "pirates." After lengthy reflection, FCC Chairman William Kennard proposed rule-making designed to legitimize these unauthorized, tiny wattage outlets. The argument used to justify support of LPFMs cited the erosion of programming diversity in commercial radio as the consequence of widespread consolidation and mergers. According to Kennard this new species of broadcaster would give voice to those alien- ated or disenfranchised by mainstream cor- porate radio. The FCC's proposal sought to create two types of new licenses on the FM band. Power would span 1 0 (LP 1 0) to 1 00 (LP 1 00) watts with service areas restricted to three to nine miles. Among many stipu- lations, the FCC requires that LPFM licens- ees be nonprofit organizations. This rule helped placate commercial broadcasters' concerns that the new category of stations would represent yet another competitive threat. The LPFM rules further require that this "sub" or "secondary" category of radio stations not interfere with the signals of regular full power outlets. As the FCC states, "LPFM stations are not protected from interference that may be received from other classes of FM station." Perhaps the greatest threat to the existence of microstations is the looming conversion of regular radio outlets to IBOC digital. This will all but squeeze out any chance for the continued survival of the community-centric medium. Meanwhile, many proponents of LPFM have been alarmed by the microme- dium's takeover by conservative religious broadcasters, which have been scooping up as many noncommercial frequencies (both primary and secondary) and translators as possible to spread their gospel. Former executive director of now defunct Allston-Brighton Free Radio, Stephen Provizer, gives this view of the threatened medium. "As an open platform for all voices, we had two goals: to disseminate program- ming that would otherwise be unavailable and to empower our participants which, to the greatest extent possible, encompassed the entire community. The first goal becomes increasingly important as the range of con- sumer choice becomes narrower due to ongoing corporization and an obsession with demography-driven advertising. The second goal, participation, is driven by our belief that direct participation is the key to empower- ment. If an individual in our media-drenched culture is going to be able to exercise critical judgment toward mainstream media, he or she must have the process demystified and clarified. Perhaps if media literacy educa- tion was more available in lower school this would not be necessary, but such is not now and has never been the case." 29 ~6 ................................................ ......... l 06 I L is not always the case. At some stations, the position is primarily administrative or cleri- cal in nature, leaving the PD to make the major decisions concerning airplay. In this instance, one of the primary duties of the music director might be to improve service from record distributors to keep the station well supplied with the latest releases. A radio station with poor record service may actually be forced to purchase music. This can be prevented to a great extent by main- taining close ties with the various record distributor reps. Over the years the music industry and the radio medium have formed a mutu- ally beneficial alliance. Without the product provided by the recording companies, radio would find itself with little in the way of programming material, since 90% of the country's stations feature recorded music. At the same time, radio serves as the princi- pal means by which the recording industry gets word of its new releases to the general public. Succinctly put, radio sells records. Although radio stations seldom pay for their music (CDs) - recording companies send demos of their new product to most stations - it must pay annual licensing fees to American Society of Composers, Authors, and Publishers (ASCAP), Broadcast Music Incorporated (BMI), or SESAC (Society of European Stage Authors and Composers) for the privilege of airing recorded music. ASCAP provides a "blanket" license for music stations. Fees are a percentage of a station's annual income, usually 1-1 Vz% of gross income. According to ASCAP, non- commercial radio stations "pay an annual fee determined by the U.S. Copyright Office." These fees range from a few hundred dollars at small, noncommercial, educational stations to tens of thousands of dollars at large, commercial, metro market stations. The music licensing fees paid by stations are distributed to the artists and composers of the songs broadcast. When music arrives at the station, the music director (sometimes more appropri- ately called the music librarian or music assistant) processes them through the system. This may take place after the PD has screened them. Records are catego- rized, indexed, and eventually added to the library if they suit the station's format. CHAPTER 3 PROGRAMMING Programmer Jon Lutes designates music categories in the following manner: New Music, Medium Current, Hot Current, Hot Recurrent, Medium Recurrent, Bulk Recur- rent, Power Gold, Secondary Gold, Tertiary Gold, and so forth. Each station approaches cataloging in its own fashion. Here is a simple example. An AC outlet receives an album by a popular female vocalist whose last name begins with an L. The PD audi- tions the album and decides to place three cuts into regular on-air rotation. The music director then assigns the cuts the following catalog numbers: Ll06/U/F, Ll06/D/F, and L 1 06/M/F. L 106 indicates where the album may be located in the library. In this case, the library is set up alphabetically and then numerically within the given letter that rep- resents the artist's last name. In other words, this would be the 1 06th album found in the section reserved for female vocalists whose names begin with an L. The next symbol indicates the tempo of the cut: U (p) tempo, D(own) tempo, and M(edium) tempo. The F that follows the tempo symbol indicates the artist's gender: Female. When a station is computerized (and in this day and age, few are not), this informa- tion, including the frequency or rotation of airplay as determined by the PD, will be entered accordingly. Playlists are then assembled and printed by the computer. The music director sees that these lists are placed in the control room for use by the deejays. This last step is elimi- nated when the on-air studio is equipped with a computer terminal. Deejays then simply punch up the playlists designed for their particular airshifts. Ed Shane offers, "To hone the music mix for proper balance and rotation, stations use music rotation software from a variety of suppliers. The most used software program is Selector from Radio Computing Services (which also supplies music test analysis software, traffic software, and a digital studio operation system). Other popular music rotation software is Power- Gold and Music Master" (see Figure 3.22). Without a doubt, the use of computers in music programming has become standard, especially in larger markets where the cost of computerization is absorbed more easily. The number of computer companies selling both hardware and software designed for use Syndicator Services syndicated programming of some type, which may consist of as little as a series of one- or two-minute features or as much as a 24-hour, year-round station format. Longtime program specialist Dick Ellis cites economics as the primary reason why stations resort to syndicators. "When I programmed for Peters Productions they supplied high-quality programming and engineering at a relatively low cost. For instance, for a few hundred dollars a month a small market operator gets a successful program director, a highly skilled mastering engineer, all the music he'll ever need (no service problems with record companies) recorded on the highest quality tapes available. It takes a programmer eight hours to program one twenty-four-hour cut reel. It takes a mas- tering engineer eight hours to remove all the pops and clicks found on even brand new records, plus place the automation tones. All of this frees the local operator to concentrate his efforts on promotion and, of course, sales." William Stockman, who led Schulke Radio Productions (SRP was purchased by Bonneville Broadcasting System in the mid- 19 80s), says that stations are attracted to syndicators because of the highly profes- sional, major market sound they are able to provide. "By using SRP's unique program- ming service, a smaller station with limited resources can sound as polished and sophis- ticated as any metro station." Both economics and service motivate radio stations to contract syndicators, con- tends former Satellite Music Network (now part of ABC Radio) programmer Lee Abrams (now heading the program- ming effort of XM Satellite). "Stations are attracted to our affordable, high-quality programming. It's just that simple. Syndies provided an excellent product within a cost-effective context. Their expertise in delivering niche concepts was very appeal- ing to radio operators." The late and great Rick Sklar observed, "In today's cost-conscious economic climate, more and more radio station operators are turning to suppliers of twenty-four-hour formats for their programming. Whether delivered via satellite, conventional tape, CD or DAT, these increasingly sophisticated Pro's and con's of using a consultant: * Objective, experienced view * Exposure to new ideas * Ongoing evaluation of the station * Input about stations from around the country * Overreliance on consultant and not enough local input * Program director gets too much advice from too many sources * National research and information * Experience/assistance in a wide range of areas including music, promotion, marketing, talent management, etc. products are not only penetrating new markets but larger markets as well, where until now, traditional thinking has held that locally originated programming was the only way to go." The demand for syndicator product has paralleled, if not exceeded, the increase in the number of radio outlets since the 1960s. Again, the new millennium has brought a change in the field of program syndication with the large radio corporations often assuming the chore of program generation in-house. Every part of the broadcast day is served by syndicators, and morning drive in par- ticular, observes Ed Shane. "Syndicated morning shows are widespread and prolif- erating. There are almost too many to keep track of. At a quick glance, you've got Bob and Sheri, John Boy and Billy, Bob and Tom, Mark and Brian, Steve and DC, Big D and Bubba, Mancow, Opie & Anthony, and on and on." Syndicator Services The major program syndicators usually market several distinctive, fully packaged radio formats. "In its heyday, Peters Pro- ductions made available a complete format service with each of their format blends. They were not merely a music service. Their programming goal was the emotional grati- fication of the type of person attracted to a particular format," says Dick Ellis, whose former company offered a dozen differ- ent formats, including Beautiful Music, Easy Listening, Standard Country, Modern FIGURE 11.7 Courtesy Jacobs Media. 313 314 ~-------------------------- CHAPTER 1 1 CONSULTANTS AND SYNDICATORS Country, Adult Contemporary, Standard MOR, Super Hits, Easy Contemporary, and a country and contemporary hybrid called Natural Sound. Century 21 Programming also was a leader in format diversity, explains Dave Scott. "Our inventory included everything from the most contemporary super hits sound to several Christian formats. We even offered a full-time Jazz format. We had programming to fit any need in any market." Drake-Chenault Enterprises (now owned by Jones Satellite Networks) was among the oldest and largest of syndicators and specialized in Beautiful Music. Today, Clas- sical Music Network, TM Century, Jones Satellite Network, Westwood One, United Station Radio Network, and NBG Radio Networks also are among the most success- ful of those syndicators marketing several program formats. Some syndicators prefer to specialize in one or two programming areas. For example, Bonneville Broadcast- ing and Churchill Productions primar- ily specialize in the adult Easy Listening format. Syndicator formats are fully tested before they are marketed, explains Stockman. "At Schulke our strategy was to reorient the music from essentially a producer-oriented to a consumer-oriented product. Music was tested on a cut-by-cut basis in several markets coast-to-coast. Using patented and proven methodology, music was carefully added or selectively deleted. By determin- ing what songs the listeners like to hear and which songs they dislike, SRP assem- bled a totally researched library that has been on the air via our subscriber stations since March 1983. Every song played on our stations has been rated by the listeners as a 'winner' and all the 'stiffs' that have a high dislike factor have been eliminated altogether." Customized sound hours are designed for each format to ensure consistency and compatibility on the local station level. "An exact clock is tailored for our client station after our market study. The format we provide will perfectly match the station in tempo, style, music mix, announcing, promos, news, weather, and commercial load," says program syndicator Dave Scott. Observes Ed Shane, "The key to using syndicator or network program- ming is to make it sound like it belongs to the station. Even big personality shows like Rush and Dr. Laura can make use of local avails and bumpers for personalized call letters and promos." Audience and market research and anal- ysis are conducted by syndicators before implementing a particular format. "Our clients receive comprehensive consulting services from our seasoned staff. We begin with a detailed study of our client station's market. We probe demographics, psycho- graphics, and population growth trends of a station's available audience. We analyze a client's competition quantitatively through available ratings and qualitatively from airchecks. Then the programming our service provides is professionally positioned to maximize our client's sales, ratings, and profits. All of our programming is solidly backed by systematic studies of the listening tastes of each format's target audience. Our research includes call-out and focus group studies, in-depth market analysis, attitudinal audience feedback, psychographic patterns and tests, and several in-house computers with ratings data online," says Dave Scott. Format programming packages include hundreds of hours of music, as well as breaks, promos, and IDs, by seasoned metro market announcers. Customized identity elements, such as jingles and other special forma tic features (taped time checks), are made available by the majority of syndica- tors. "We try to cover all bases to ensure the success of our clients. We back each of our formats a dozen different ways. For example, image builders in the form of promotions, contests, and graphics also are an element of our programming service at Radio Arts," says programmer Larry Vanderveen. To stay in step with the ever-changing marketplace, syndicators routinely update the programming they provide their sub- scribers. "When you want people to listen to a station a lot, you've got to keep them interested in it. To do so you have to air a sound that's always fresh and current. Tape updates are plentiful. We give sta- tions the most extensive initial collection s Syndicator Services Proara11mina Power More OpltillflS tar Better Radio Jones Music Programming is tile single source tor all of your music programming needs. Whether you need an hour of music Pregramminl ~~~~~~~-word of advice or an entire makeover, we have the s,n,•lli~e-111<•1lt~<•r"fl Formats Choose from 11 targeted, localized, and talent driven formats to give your station a competitive edge. With our satellite-delivered formats you can put ymn- mind at ease and your resources to work on other issues important to your business. Select Logs and the music scheduling is clone for you. Receive tully researched music logs in a tor·mat designed to fit your market and your hard drive. We provide you with the complete music library, 24/7 music logs, Chartbreakers \>Veekly Hits music elise along with the expertise of our programming and consulting team. Schedule Plus We make it easy to build your own music logs. Schedule Plus provides you with the software, researched music, song database, clocks, music policies and r·ules. Chartbfea!rnrs Hlts Stay up-to-date with our Chart breakers Weekly Hits CDs. Available for Country, AC, CHR, Rock. Urban, Hip Hop, Christian, Latin Pop, Srnooth Jazz, and moret of music tapes available. Then we follow them up with hundreds more throughout the year. For instance, our CHR, AOR, and Country subscribers receive over 1 00 updates annually. All categories have fre- quent updates, so our client's sound stays fresh and vital," says Dave Scott, who adds that the lines of communication are kept open between the client and syndicator long after the agreement has been signed. "Since the success of our clients is very important to us, continuing consultation and assistance via a toll-free hotline is always available twenty-four hours a day. Automation-experienced broadcasters are in our production studios around the clock, and consultants can be reached at work or home any time. Help is as close as the phone." Syndicators assist stations during the installation and implementation stage of a format and provide training for operators and other station personnel. Comprehen- sive operations manuals are left with sub- scribers as a source of further assistance. Syndicators offer programs on a barter basis, for a fee without presold spots or for a fee containing spots. Leasing agreements generally stipulate a minimum 2-year term and assure the subscriber that the syndica- tor will not lease a similar format to another station in the same market. Should a station choose not to renew its agreement with the syndicator, all material must be returned unless otherwise stipulated. The majority of format syndicators also market production libraries, jingles, and special features for general market consumption. What is the difference between a network and a syndicator? Ed Shane explains, "Networks and syndicators are essentially or almost the same. Premiere calls Rush Limbaugh a 'network' and Dr. Laura a 'syndicated show.' United Stations Radio Network works the same way. (It has more to do with the way spots are sold than the realities of programming.) Westwood One is more of a network, combining CBS News, CNN Radio, long form music programs, Metro Traffic and News with syndicated programming like country music specials. ESPN is networked for all talk shows and live sports (NFL football play-by-play, for example) by ABC" 315 FIGURE 11.8 "Full-service syndicators for every programming need. Courtesy Jones Radio Networks." l .. J~----------............................... J 316 FIGURE 11.9 Century 2ls catalog of syndicated formats in the 1990s. Courtesy Century 21. CHAPTER 11 CONSULTANTS AND SYNDICATORS Wltting's Syndicaticn.net Shews List ~~ ~Nat Kere are just some of the shews we represent. Click en an image to learn more. Stvn up for our FREE Syndication E-mail N&wsletterl Billy Bush FIGURE 11.1 0 Billy Bush. ~- Jay Williams- Billy, although you're best known as a TV star, you began your career in radio. What attracted you to radio? Billy Bush -The intimacy of radio. I got to talk with people in a one- on-one conversation and that was extremely cool and it still is. •.. ,,., Interviewed by Jay Williams Syndication JW - What kinds of jobs did you have in radio, and which were the most rewarding for you? B8 - I had the luxury of starting in a small market where I had every job. I was a sales guy during the day, and boy is that a humbling experience, and I was on the air one night a week, and on the weekends I did promotions. I pumped up the station balloon and I handed out hundreds of fliers. There is not a job in radio I have not done outside of management, and I never want to do that. JW- With "Access Hollywood" and your syndicated "Billy Bush Show," you shift from one medium to the other every day. Is that difficult? Also, what are the major differences as a per- former between the two mediums? 88 - In radio, the greatest prepa- ration is just knowledge. It's just knowing what you're talking about. It's about drawing on life experi- ences. In TV, you have a lot of people helping you. You've got a lot of people preparing and editing and all that. In radio, you need to be your own research department. So radio's a lot more difficult. JW - Tell us about radio. What makes radio unique in your view? 8B - The car, because the car is a unique environment, and radio will always be the easiest and best choice for people. People who are texting and using the Internet in their car are very few and far between. The automobile is ideal for radio and that single inven- tion years ago is what makes radio unique, and it's what will insure that radio will be there forever. JW - As we are talking, radio is going through technological changes, ~ ! l J ~ ,, J ... 1 .......... ______________________________ ___ d Syndicator Services facing new competition and economic distress. Yet, your well-received syn· dicated show is rapidly expanding across the country. How do you see radio's future? 88 - Radio's future is secure because of the car. I said that. But my syn- dicated show is a great answer for people who are facing economic prob- lems because it's cost effective. I don't cost them anything. They just have to give me some inventory. They give me 4 minutes an hour, and that's it. So it's an opportunity cost and not an actual outlay of cash. JW - Syndication seems to be growing, too. From the old network programs such as Paul Harvey news to later off-network radio syndication, such as Howard Stern, Bob and Tom, Rush Limbaugh, more stations seem to be embracing syndication. Do you see that as a growing trend and why? BB - Yes, because syndication makes sense. If you have great talent and content, then you're just giving up time. If the ratings are big, then you'll be able to charge more for the commer- cials that you do get revenue for. So it's all about choosing the right talent, the biggest will survive and I believe we are in that direction. JW - Your show is marketed by West- wood One, one of the largest syndica- tion companies. Tell us about your role verses theirs, how much are you person- ally involved, and how much control do you have over your own show? BB - I have entire control over edi- torial, what I put out there is what goes on the air. In that regard it's great. I'm very personally involved and I control all the content. As for the sales and marketing of the show, I weigh in whenever I want to, but we agree between Westwood and me. If I feel strongly about anything, I'm confident my voice is heard and I'll usually prevail because at the end of the day the talent has to be happy to provide. However, having done every job in radio, I have total respect for the people who do things outside of what I do, and I'm totally open to whatever they have to say. JW - It must be demanding prepar- ing and voicing a new show every day. Who and what does it take to produce your show? BB - I have a broadcast producer, Michelle Salvatore, who takes in all my content and who arranges and orga- nizes our schedule and lays out what the show is going to be each day. I have five bookers who book guests for me on the radio show. I book a lot myself because my BlackBerry has gotten pretty deep over the years. We have three editors on the other side of things who package the show at the end of the day. We are spread out perfectly. JW- You are heavily involved with getting new station clients. Tell us a bit about how that process works. 88 - Everything is sales in life, and each client, each station I'm on needs to feel that if they need to get in touch with me they can. The truth is, they can. Anyone can call and set up a time to talk on the phone through Michelle or anybody else or my assistant, Marla, and I will talk to any station clients. There are walls because it makes it easier for everyone, but if someone needs to weigh in with me, they can. JW - "The Billy Bush Show" com- petes with locally produced shows in many markets. How do you react to objections from potential clients that your show "won't work in this market because it isn't local"? 88 - Entertainment is everywhere. There is an insatiability for celebrity content. What I do is provide an every- man's perspective to it. I tell people about what it's like behind the scenes. I make it personably relatable for them because they hear someone they trust and listen to and connect with deal with celebrities in these situations and they love it. Also I'm honest; I tell it like it is. If someone is difficult, I share that. JW - How do you position your show against other syndicated shows? What makes "The Billy Bush Show" unique or better? 88 - My main competition, I think, is probably Ryan Seacrest, although there are others. I'm not positive how Ryan does his show, but I do believe there's a lot of people taking his existing content and putting it out there. What I do is a totally new and original show for my stations every single day. A lot 317 of syndicated shows are packaged. They do three, four, or five shows at a time. I do a new show every day with new analysis, new insights, and new guests. JW - Do you think more radio sta- tions will embrace syndicated shows because it gives them access to better on-air talent than they can find locally or because, in some cases, syndicated shows may save them money? 88 - The answer is a little bit of both, absolutely. The best on-air talent will survive and grow, and those par- ticular people will continue to survive. The better known you are, the better chance you have out of the gate. Although that doesn't mean local people can't rise to that level. And yes, my show saves a lot of money for sta- tions because they're not paying me. They're giving me commercial time and if my ratings are good, they're going to get more money for the commercial time that they do have left. JW - Does syndication help or hurt radio? 88 - I think syndication helps radio because you want to have big names in your field. You want to be as rel- evant and taken as seriously as every- one else. The bigger stars you have on radio, I think, the higher the profile of radio but the trap is - and I hope radio stations don't fall into it- to go for the biggest name you can get just because of the name. At the end of the day, they have to deliver, they have to work, they have to have that strong ethic. And the biggest radio names are really hardworking people. JW- You're a big TV star, you travel the world to do pageants, events, even the Olympics, and you certainly don't need extra work. So why did you launch "The Billy Bush Show" and get back into radio? 88 - Because I love radio, and because radio gives me the opportu- nity to expand upon my thoughts. It gives me a chance to walk a tightrope without a net. I love being able to express my opinions. I know Holly- wood and understand it very well and I have an insider's perspective, and I love being able to share that with people. l EXHIBIT J Ex’s” Striking It Rich on W. Coast, BILLBOARD, Dec. 11, 1965 Calif. Setting The Tempo in Sounds, Song, Style, BILLBOARD, Apr. 9, 1966 Billboard, December 11, 1965, available at https://books.google.com/books?id=7iIEAAAAMBAJ&printsec=frontcover#v=onepage&q&f=f alse. “The Turtles’ first single [“It Ain’t Me Babe”] sold 550,000 copies and the album has the 90,000 mark, according to Feigen” and “The group’s follow-up disk of “Let Me Be” has also climbed the charts” “Two reasons are cited by Feigen for the singles’ quick acceptance: the music was in the folk- rock groove and the two men [White Whale’s Feigen and Lasseff] were able to call on their collective experiences with distributors and disk jockeys” Billboard, April 9, 1966, available at https://books.google.com/books?id=IkUEAAAAMBAJ&printsec=frontcover&source=gbs_ge_s ummary r&cad=0#v=onepage&q&f=false. “[…] we still need disk jockey play on the East to get us on the Top 10 nationally” - Bill Utley, manager of the Turtles EXHIBIT K E.J. MacGillivray, A TREATISE UPON THE LAW OF COPYRIGHT IN THE UNITED KINGDOM AND THE DOMINIONS OF THE CROWN, AND IN THE UNITED STATES OF AMERICA (1902) A TREATISE UPON THE LAW OF COPYRIGHT IN THE UNITED KINGDOM AND THE DOMINIONS OF THE CROWN, AND IN THE UNITED STATES OF AMERICA CONTAINING A FULL APPENDIX OF ALL ACTS OF PARLIAMENT INTERNATIONAL CONVENTIONS, ORDERS IN COUNCIL TREASURY MINUTE AND ACTS OF CONGRESS NOW IN FORCE BY E. J. ~CGILLIV~ Y, LL.B. (CANTAB.) ;;...-- ' ot THE INNER TEMPLE, BARRISTER-AT-LAW MEMBER (Jp T.JI& ~TY OF ADVOCATES IN SCOTLAND LONDON JOHN MURRAY, ALBEMARLE STREET 1902 CHAPTER V PERFORMING RIGHTS SECTION I.-NATURE OF PERFORMING RIGHT. As copyright is the exclusive right of making copies of a book, so performing right is the exclusive right of representing or per- forming in public dramatic or musical works. In a dramatic or musical work, the two rights-the copyright and the performing right-exist side by side ; but they are quite distinct from one another, and may pass into different hands. The copyright can only be infringed by copying, the performing right by represen- tation or performance. It is no infringement to dramatize and represent on the stage a copyright novel, since the only exclusive right as to non-dramatic work is the multiplication of copies ; 1 . but a drama on which a novel has been founded may be infringed by another drama taken from the novel.1 A writes and publishes a novel. He then dramatizes it, but does not publish the drama. B represents a drama founded on the novel. Such a representa- tion is no infringement either of A's drama 8 or of his novel. It makes no difference even if A has published his drama.' In dramatizing a copyright novel, however, the making of a single copy of the drama may be an infringement of the copyright in the novel." It is no infringement of performing right to print and publish as a book a play which has been publicly performed,6 but it may be an infringement of the common law right in the MS.,7 or the statutory copyright in the book if already printed and published, or it may be a breach of implied contract.8 If a 1 RetJde v. CtnUJ>Iest (1861), 9 C. B. (N.S.), 755; Tinsley v, l.a&y (1863), I H. and M., 747· 1 RetJde v. CDtUfUUI (1863), n C. B. (N.S.), 479· Sclllesinpr v. T11rur (189o), 6J L. T., 764, I Tt~t~le v, Yo11~ (1874), L. R., 9 Q. B., 523- 4 Sclduinpr v. Bedford (xSip), 63 L. T., ~ I Waru v. Su!Jollm (1888), 39 Ch. D., 73· • See Clarll v, Bislw! (1872), ,;a5 L. T .. 908. ' Macllli,. "· Ricllardso7J ( 1770), Amb., 694- a See p. ::ns . .... 122 PERFORMING RIGHTS published for sale. The defendants abridged it and represented it on the stage in the abridged form. It was argued for the defendant that the tragedy having been printed and published as a book, must depend for protection entirely on the statute of Anne in accordance with the decision in Donaldson v. Beckett.1 The statute of Anne gave no performing right, and therefore there was no protection. The Court gave judgment for the defendant, but the ground of their judgment is not quite clear. Some stress seems to be laid on the fact that the tragedy was abridged, and it is therefore left doubtful whether the judges would have considered the representation of an unabridged version to be an infringement of the plaintiff's rights. In either view it is not a decision that there was no performing right at common law. Another case which may be relied on for the contention against performing right at common law is Coleman v. Watkm," but on examination it will be seen that all that case decides is that the statute of Anne gave no performing right, and that representation on the stage was not an infringement of copyright It is submitted that the history of the law of performing right is this : At common law there was no performing right in the proper sense of the term, but an unpublished manuscript was protected from performance as from any other invasion of the author's exclusive right to it. If it was performed on the stage without being published as a book, there would be a remedy on breach of implied contract, the public only being admitted for the purpose of hearing the performance. Once, however, it was published as a book, all exclusive right of performance was gone. The statute of Anne gave no performing right, and performing right proper was first created by 3 & 4 Will. IV. c. 15. This statute and 5 & 6 Viet. c. 45 govern the performing right in dramatic pieces. The performing right in musical compositions is governed by these two Acts, as modified by the Copyright (Musical Compositions) Acts of 1882 and 1888. t (1774), 4 Burr., 24o8. t (1793), 5 T. R., 245; aod see tlictwtr~ of Cockburn, C.J., in T(l()/e v. Ytn"'K (1874), L. R., 9 Q. B., at p. 527· INFRINGEMENT It will be an infringement of performing right to take a single scene from another's drama.1 It is more important to consider what is a dramatic representation than what is a dramatic composition. If a composition not primarily in- tended for representation is publicly represented without per- mission, even if it was not a "dramatic composition," the person representing will be liable for having dramatized it if the representation is dramatic. There can be a dramatic representation by one actor only, and many music hall songs are undoubtedly dramatically represented. Kusical Bights.-Before I 897 there was no exclusive performing right in musical compositions as such. It might have been protected from performance if it could be shown to be part of a dramatic piece.1 By the Act of January 6, I 897, performing right in musical compositions was first created. The protection is now substantially the same as in the case of dramatic pieces. SECTION 11.-PROHIBITED ACTS, AND REMEDIES. It is an infringement, subject to the remedies stated below, to do any of the following acts in respect of a copyright work. In the case of :- 1. Books : 1 without the consent of the proprietor m writing signed in the presence of two witnesses. I. To print or publish. 2. To dramatize or translate. 3· To import. 4· Knowingly to sell or expose for sale copies unlawfully made or imported. The owner's remedies are :- I. Forfeiture of copies. 2. Damages. 3· Injunction. 4· Account of profits. I Brady v. Daly (t899), 175 U.S. Rep., 148; Dat, v. W.rlster (Ifl92), I U.S. App., 573- t See Carle v. D~tJ'{t885), 25 Fed. Rep., 183 . .a Act of tllcJI, sec. 7, amending Revised Statutes, sec. 496+ EXHIBIT L Eaton S. Drone, A TREATISE ON THE LAW PROPERTY IN INTELLECTUAL PRODUCTIONS IN GREAT BRITAIN AND THE UNITED STATES (1879) T lt\'l~ A;!tltiiS l~ ON OF IN "' -~,f.\" I)J) () IY]•' ··1) .rl, :\- . . .... .J .. \ • INTELLECTUAL l)RODUCTlO~S IN GREAT BRITAIN AND THE UNITED SL\TES. COPYRIGHT lN WORKS OF LlTERATli!U~ AXD ART, A.:\D PLAYRIGHT IN DRA~L\.T!C AND MUSICAL com·osrrwxs. DY ', \f lqnire from our legislation a protection not less than whne is proposed in the bll1 reported. Upon the :first prindples of propriNor- shlp in lH'<>perty, an author has an exdusive awl perpetual right, In pref- erence to any otlwrs, to the fruhs of hi.s lal.H)r. Though the nature of liter- ary l)t'Opl.':rty is P'-'Ctll.iar, it is not the 11:6$ real and ntluahle. If ls.bor and hed plays. Iu this clutpter, the common-law rights of dramatists will be considered. ARE THE Ow:lum's CoMMON-LAw RIGHTS LosT BY THE Punuc Prnron:.LANOE OF A MANUSCRIPT Dnnu .. ? It has been shown that the author of any intellectual produc- tion, whether it be a literary, dramatic, or musical compositiont or a work of art, has in it by the common lawn. property which is absolute and complete until lost by some act of the owner or Ly the operation of some statute.1 This property · the owner in the exclusive enjoyment of any and every his production which does not in law amount to a forfeitme his exc1usive rights. The law has been settled to the effect that, by publication in print, the owner's common-law property is lost, and that in a work so published he has no other right.s than those secured by statute. lienee, a dramatist may a statutory but no common-law right to the exclusive reprcsen-. tation of a drama which he has published in print.. But exclusi>e right of the owner publicly to represent a play exists by the common law, unless such public tion, by operation of the common law or by force statute, works an abandonment of the right. The question, then, is raised whether the common-law erty iu a manuscript play is lost or prejudiced by the pu4Hti performance of the play. Public Performance not a Publication which Defeats -It may be regarded as settled that the authorized performance of n manuscript drama is not such a puuu""''n as will defeat a copyright afterward obtained.2 Where 1 See Chap. 1. Roberts t•. Myers, 13 Monthly 2 Boudcault v. :Fox, ll Blatchf. 87; Reporter, SCJ6.; Keene v. Iiimbal!,