It lies within the government's power to outlaw a market, but not ordinarily to abolish it. At most, the authorities can drive the nexus underground. The resource-allocation need that gave rise to the market will survive. Associated transactions will assume a form that disguises, but does not alter, their substance.
In light of this foreseeable response, a recent New York Times report on circumvention of rules against payola—record companies' purchase of radio airtime—can hardly be called news. The supposedly shocking revelation was that Blackground Records and Roadrunner Records, two labels distributed by Universal Music Group, bought radio commercials that incorporated a couple of their current releases. This exposure propelled the songs to #1 and #2 on the charts.
According to the Times, the arrangement may have violated a settlement reached five months earlier between Universal and New York State Attorney General Eliot Spitzer. (Universal, which says it has no ownership stake in Blackground or management control of Roadrunner, launched an inquiry into those companies' actions.)
The Times speculated that music industry executives might make other attempts to capitalize on perceived loopholes in the settlements between Spitzer and various record companies. If they do, they will be continuing a tradition that dates back to the prohibition of undisclosed payola following sensational Congressional hearings of 1959.
Barred from accepting cash for airplay unless accompanied by prohibitively cumbersome announcements, radio stations resorted to "show-ola." That practice provided airtime to record companies in exchange for allowing bands to play, for less than their customary live-performance fees, at festivals staged and broadcast by the station.
Another subterfuge involved "independent record promoters." These operators shelled out vast sums to the stations, officially for the privilege of seeing the stations' playlists, but in reality to get their recording company clients' discs on the air. Thanks to the music industry's ingenuity in perpetuating the market for airtime, a new payola scandal has broken out every few years since Congress criminalized the practice.
Not addressed in the latest New York Times exposé, or in much of the commentary on Eliot Spitzer's crusade, is a fundamental question: Why it is deemed a crime to promote recorded music in the only way that works, namely, making sure that consumers hear it?
This principle was understood even before the recording era. Prior to beginning his celebrated collaboration with William Gilbert, British composer Arthur Sullivan promoted sheet music sales of one of his songs by inducing a leading baritone to include it in his public recitals. The quid pro quo was a share of the song's royalties. Later on, music publishers made similar arrangements with Al Jolson, knowing that stage performances of a song by "The World's Greatest Entertainer" were almost guaranteed to make it a hit. In one instance, Jolson received payment in the form of a race horse.
Nowadays, shelf space in supermarkets is routinely and openly purchased by food manufacturers. Bookstores charge for window displays without fear that prosecutors will show up on their doorstep. These mechanisms for achieving consumer awareness represent valuable resources. It furthers economic efficiency for firms to work out appropriate prices for such resources. Why, then, did Congress single out radio airtime as an awareness-building mechanism for which no market may lawfully exist?
Like most market interventions, the 1960 amendment to the Communications Act came at the behest of powerful vested interests. Up until the mid-1950s, roughly three-quarters of U.S. record sales were concentrated in the hands of four companies. By the end of the decade, however, their share plummeted to one-third. The change they had not counted on was the sudden emergence of rock and roll, which was pioneered by independents such as Chess and Sun.
Marketing professors' prescription would have been to adapt to the new consumer preference. The major corporations instead reacted instinctively by appealing to Washington for relief. Soon, the long-established industry practice of compensating disc jockeys for airtime was being portrayed as a vile form of bribery.
In reality, all that was distinctive about the independents' use of payola was that they relied on it more heavily than the majors. Unlike the industry giants, the innovative newcomers could not afford to sign well-established recording artists and deploy vast marketing teams. Adding insult to injury, the oligopolists' allies in Congress audaciously disinformed the public that payola was making it impossible hard for small labels to compete.
Predictably, outlawing payola did not end the practice, but merely caused it to take different forms. Still, the politicians achieved their goal of crushing the upstarts. Hampered in their efforts to obtain vital airtime, the independents were forced to cut deals with the majors or sell out to them. By 1979, six large companies controlled more than 85% of U.S. record sales.
After nearly five decades of futility, will Congress concede that a market will—and ought to—continue to exist for radio airtime, as it does for many analogous resources? In economic terms, rescinding the payola prohibition would eliminate sizable deadweight costs. Talented executives would no long spend time searching for loopholes in the regulations and the government would cease prosecuting the record companies for their resourcefulness. From a political viewpoint, however, legalization would eliminate politicians' regularly recurring opportunity to grab headlines with investigations of a glamorous business.
I leave it to readers to guess which of these considerations will prevail.
Martin Fridson is the author of Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace, which contains a more detailed economic perspective on payola.