Ideoblog

Artist radio royalties and payola

Per the WSJ Congress is considering legislation that would require radio companies to pay royalties to record labels and artists in addition to the royalties they now pay to songwriters and music publishers. Tony Bennett and Sheryl Crow are singing and talking in favor, radio star Eddie "Piolin" Sotelo is talking against.The National Association of Broadcasters is running a radio ad called "Don't Feed the Fat Cat" on Washington area radio stations.  Let's cut through the noise to see what's really at stake.

Both radio and records are struggling financially. Radio points out that they’re already “paying” by promoting artists. The recording industry says radio is not so important for promotion anymore. My question: why not just allow the recording industry to pay for promotion?  If promotion is important they'll pay. If not, they won't.

I discussed this about five years ago, responding to a Surowiecki New Yorker article complaining about record industry "spot buys" on radio.  Surowiecki noted Ronald Coase’s position (in Payola in Radio and Television Broadcasting, 22 J.L. & ECON. 269 (1979)) that payola helps radio stations allocate scarce bandwidth by spotting potential winners. But he didn't like “spot buys” of radio time because of supposed lack of transparency.

I pointed out that regulation just messes with efficient market mechanisms:

When government banned payola of the Alan Freed variety, it blocked a practice that was, after all, getting more air time for new kinds of music. (In general, regulation hurts the newcomers more than it hurts the established players.) But it didn’t stop payola. What Surowiecki refers to as “new payola” (spot buys) arose in response to the banning of the old payola. The new payola, as Surowiecki points out, creates a less informed market than the old payola.

And the idea of new forms of payola isn’t so new. Greg Sidak and David Kronemyer wrote in 1987 about other perverse market and regulatory effects of the banning of the old payola in The 'New Payola' and the American Record Industry, 10 Harv. J.L. & Pub. Pol'y 521, draft here. Payola's effect in making the music market less transparent is analogous to the effect of insider trading regulation. Insider trading, like payola, helps disseminate information. Regulation forces the trading underground, making markets less informed.

As usual, regulation begets more regulation. Seems like we could solve the royalty problem by just allowing payola.  

Where's all the money gone?

Junior Brown has a song for our times.

Are you ready for the frivolous five?

It's a bit off topic but there was simply no resisting this.  I dare the NYT to top this.

Elvis meets Milton Friedman

I'm going to go out on a limb here and say that In the Hamptons is the best song about the subprime meltdown ever introduced by Arthur Laffer (at an art museum of course), mentioning Milton Friedman and Ben Bernanke, based on a Mac Davis song (In the Ghetto, recorded by Elvis) and sung by a money manager calling himself Merle Hazard. HT NYT.

When is a rock group a partnership?

For those who have doubts, yes, partnership law can be cool.

The WSJ law blog reports on a dispute among the Violent Femmes. Not clear if it’s a partnership case.

But the recent Love v. The Mail on Sunday, 489 F.Supp.2d 1100 (C.D.Cal., May 10, 2007) involving the Beachboys clearly raised a partnership issue. Seems that Mike Love couldn’t prove that Brian Wilson was his partner after giving the following testimony (which must have made his lawyer cringe):

Q Have you and Brian ever sat down and specifically entered into an oral partnership agreement?

A I think we sat down and co-wrote songs together ... as songwriting partners. That's my understanding of the relationship. [ ] We didn't sit down and get into a formal agreement other than songwriting partnership on particular songs.

Q By partnership you mean collaborating on songs?

A Yeah.

For more such cases see Bromberg & Ribstein on Partnership, Section 2.05(b), note 16.

These cases will make interesting precedents for the co-blogger cases coming down the pike.

Talkin bout my generation

The WSJ covers a new Who concert. 61-year-old Pete Townshend sang “hope I die before I get old," in which the audience joined “without a trace of irony.” Fine for the audience, but at my age I really wonder what Townshend was thinking.

Payola, Politics, and Price-Fixing

Pseudonym raises the interesting question of why Eliot Spitzer might be pursuing payola cases in lieu of more pressing matters.  I am sure that I do not have the complete answer to that question.  But I think some economics might shed a bit of light on some of the political interests in play, and at least spice up the calculation.  I do not mean some economics of payola.  I have explained previously why payola payments are an important (and efficient) part of the competitive process, and an attempt to contractually resolve an incentive incompatability betweem music publishers and radio stations.  The important point is that payola payments are part and parcel of price competition (read the whole prior post for details).

Instead, I want to talk about the economics of collusion, and in the process, propose a speculative but sinister theory of the payola investigation.  Here's the simple economics: collusion is very difficult.  The incentives to deviate from cartel agreements are powerful.  Music publishers sell products (CDs) with very high profit margins (do you know how small the marginal cost of a CD is?), strengthening the incentive to cheat on the cartel.  One need only read Coase's seminal account of the many failed (and documented) attempts at collusion by music publishers in 1890, 1916-17, 1933, 1960, and 1986, to garner some appreciation for the difficulty of the task.  Importantly, each of these attempts was initiated by the music industry.  Many of these collusive endeavors failed because cartel members could not credibly commit to reducing output. 

So what are wanna be price-fixers to do?  Would be colluders often seek a third party to police and punish parties that might cheat on the cartel.  This strategy is not foreign to the music industry.  Fortunately for consumers, those attempts have failed in the past.  After Sony BMG "settled," I mentioned the possibility that Mr. Spitzer's office may succeed where the recording industry has failed for over a century in deterring compliance with the cartel's competitive restrictions.  After all, the AG's office is not just any third party.  They are a cartel-enforcer with big guns (criminal sanctions, fines, etc.). 

Now that Warner has joined Sony for a mere $5 million donation (cheap, relative to the prospect of monopoly profits for several years), with other industry "victims" likely to follow, perhaps consumers will be less fortunate.  By the way, has anybody else noticed that the payola laws only require disclosure of pay for play but the industry settlements prohibit it altogether?  Maybe I am just being paranoid.  The music industry doesn't donate to political campaigns, do they?

So you want to be a rock and roll star. . .

Do you have a dead-end, routine job?  Do you think you'd be better off as a rock and roll star?  For most of my life that's definitely what I thought.  It's only recently that I've reconciled myself to being too old, the Glimmers notwithstanding. And the star I most wanted to be was Jimi Hendrix. Watching him from the audience, I would have accepted the bad drugs and bad women.  Life, after all, is tradeoffs.  But this NYT review of a recent book about JH has shattered my dream.  Seems, toward the end of his short life, sounding like a law professor in the middle of exam grading or an accountant in the middle of an audit, the Experienced One whines, ''I'm so sick of burning my guitar.''   

The money lenders enter the music temple

Goodbye record companies, hello investment bankers? This W$J article discusses “Bowie bonds,” which capitalize revenue streams from musicians’ works.  While the record companies are losing big from illegal downloads, new streams are opening up in cellphone rings, satellite radio, and iTunes legal downloads.  At the same time, there is a demand for new types of financial instruments that offer ways to diversify out of the stock market, and financial intermediaries, particularly hedge funds, are looking for new things to do.

Of course similar techniques could work for other art, including films, paintings (yesterday's W$J discussed art hedge funds), literature, etc.

I find this particularly ironic because capitalists and artists have traditionally been like oil and water.  After all, Marx complained about how capitalism had destroyed the wholeness of the artisan, and artists today still sound very much like Marx (for evidence, see my article on business in films, Wall Street and Vine). How satisfying if the capitalists end up saving the artists from the non-respecters of property rights.

NYT on payola

The NYT has a piece on payola, Eliot Spitzer's latest project, something I last covered here, with a link to an earlier post. 

The  NYT article says the problem is that "[v]ideos and club promotions can help create interest in a song. But commercial radio reaches more people in a shorter period of time, and that is the recipe for a hit."

As I discussed last time out, more competition, not Eliot Spitzer, is the answer – more ways to promote music reduces the “rent” stations can charge for playing it, and competition drives them to serve customers better.  I pointed, with Randy Picker, to satellite radio.  But it occurs to me that the record companies missed a bet when they attacked the Internet rather than learning early how to play that game.

And here’s another theory: new releases – the product that payola is needed to promote – are just so bad that, even with the extra outlets that have become available since the early payola scandals, the record companies still have to work hard to sell the stuff. I wouldn't trust my own judgment, but I have heard this from at least one person who is not approaching senility.

Then the question would be, if that's so, why?  Could it be that the artists really are motivated by money, contrary to what we were hearing from young deprecators of private property when Napster was big?  If so, unless the Grokster decision really is effective, this will continue to be a problem.

Of course old fogies are always saying that music is getting worse. In my day, they said nothing could ever come close to Frank Sinatra.  Maybe they were right.