Record companies: Save us from ourselves!

With payola up but profits down, labels are wondering if paying $100 million to middlemen "fixers" is still a swell business idea.

Published March 13, 2002 8:00PM (EST)

Most listeners don't know it, but virtually every song they hear on FM commercial radio has been paid for -- indirectly -- by five major record labels. The companies pay millions of dollars each year to the independent radio promoters, universally referred to as "indies," who in turn pass along money to radio stations whenever they add new songs to their playlists.

But the once-cozy world of pay-for-play is not a happy one these days. Radio station owners and major record labels are bickering over who's to blame for the costly and controversial system. At least one major station group owner claims labels won't let it clean up pay for play in urban radio, which is especially corrupt. Meanwhile, labels are readying an offensive of their own, asking the government to draw up strict guidelines that would wipe out the current pay-for-play system -- one they helped create to get around charges of payola -- that pours millions of dollars into station coffers.

And while all this is going on, a major media spotlight is about to be trained on the strange and shadowy way the music industry does business.

Wendy Day, founder of the Rap Coalition, an artist advocacy organization, can't wait for the system to die. "It corrupts the art form," she says. "Because instead of radio playing what people want to hear, they're playing music that's backed by the deepest pockets."

The system has been entrenched for decades, but now, because of unprecedented consolidation in the radio industry, a handful of large broadcast groups and their exclusive indies broker unprecedented power. That makes the record companies nervous. Indie promotion is costing them in excess of $100 million each year.

With the music industry mired in a severe slump, the labels are no longer willing to shell out those kind of dollars. That's why the Recording Industry Association of America, working at the request of the major record companies, may soon ask the Federal Communications Commission to come up with new, tougher payola rules for radio. Label sources admit they're not sure what a new system would look like, just that they don't want to continue with the current one.

"Maybe there's a way out of this if the FCC is interested in new rules," says one label executive.

"We believe the FCC has the authority to make new rules to more closely regulate the practice and regulate [independent] promoters' relationship with radio stations," says Hilary Rosen, president and CEO of the RIAA. Many industry observers consider the FCC's payola laws to be antiquated and inefficient.

For years, the music industry has been bedeviled by aggressive government intervention, ranging from questions about the marketing of explicit music to minors to allegations of CD price fixing. The fact that it would consider asking federal regulators to probe its business practices indicates just how frustrated it is with the state of radio promotion.

Fearing the accusation of collusion and potential antitrust violations, major labels are reluctant to officially discuss pay-for-play amongst themselves. They can join ranks, however, if the topic is framed as a public policy (i.e. FCC) question.

According to Rosen, the RIAA has never before requested the FCC to change or clarify an existing rule.

The procedure is known as a petition for rulemaking. If and when the RIAA files one regarding payola, FCC commissioners and their staffs will "decide if it's an issue that needs clarification or addressed by the commission," says FCC spokesman David Fiske. If it is adopted for review, the FCC would then for several months accept written public comments from all interested parties -- record companies, broadcasters, indies, artists and even everyday radio listeners -- as to why the rules should or should not be changed. Commissioners would then review the comments and render a decision.

This jockeying should be familiar to some industry veterans. During the mid-1980s, when indies wielded even more power than today, the RIAA considered launching its own investigation into payola, assuming that if the investigation documented any illegal activity the labels would have a reason to cut their ties to the indies, saving millions. In the end, though, journalist Brian Ross, then with NBC, helped along by label sources, aired a sensational report connecting heavyweight indies with organized crime; within days labels announced they were no longer employing indies. (By the end of the '80s, however, indies were back in business and continued to gain influence throughout the '90s.)

This time around, the major labels hope to build a broad coalition, including smaller independent record companies as well as artists, in their brewing battle over pay-for-play.

"It would be great to work with the RIAA, I'd welcome it," says Jenny Toomey, executive director of the Future of Music Coalition, a musician advocacy group that has publicly challenged the RIAA over a range of issues, including royalties and copyrights.

Toomey, though, doesn't think simply rewriting FCC rules is enough. "Labels are very optimistic if they think they, as the ones who participated and created the system, will be allowed to fix it. We need to get out brooms and flashlights and go through the entire closet. We need evidentiary hearings to find out who did what, and how much they paid."

The RIAA may have an even harder time recruiting artists. "They [the labels] created the fucking problem, now you want us to put a target on our backs? Fuck it," says a manager who represents several platinum-selling acts. The fear, he says, is that musicians who complain about indie promotion will be kept off radio. Without commercial airplay it's virtually impossible to sustain a career.

"You'd have to be nuts to come forward," says the manager.

Also, there is simmering distrust among artist activists, who are already battling against the RIAA over their own contracts. That feud may make acts less willing to fight alongside the industry group to eliminate payola.

With or without artists, momentum seems to be growing to change the pay-for-play system, which for years operated in obscurity.

In recent months, Rep. John Conyers, D-Mich., has stated that he would like to hold hearings on the pay-for-play system. (Since he's in the minority party, though, it's unlikely the Republican-controlled House Judiciary Committee will grant his request.) In January, Rep. Howard Berman, D-Calif., wrote the FCC and the Department of Justice asking the agencies to more closely examine the business practices of radio giant Clear Channel Communications, and specifically the "persistent allegations that record companies often must pay radio stations to play the music of their artists."

Meanwhile, two national television news operations are busy preparing prime-time stories about radio's controversial indie promotion system.

Indies today don't exactly control what gets played on commercial radio. But they do take credit for -- and get paid for -- what gets played.

Here's how the system works: Indies pay for the right to exclusively represent radio stations. The up-front fee is roughly between $100,000 and $400,000, depending on the size of the market. Once that deal is signed, the indie sends out weekly invoices to record companies for every song added to that station's playlist.

Those invoices add up. Every song added to an FM music playlist comes with a price attached: roughly $800 per station in medium size markets, $1,000 and more in larger markets, up to $5,000 per song.

It costs approximately $250,000 just to launch a single on rock radio today. That doesn't guarantee any sort of success, just that the single will have access to the airwaves. If the song catches on and eventually crosses over to the mainstream Top 40 format, indie costs balloon to more than $1 million.

And that's why labels are increasingly uncomfortable with the system they helped create. Suddenly caught in the middle of severe economic downturn (music sales are down sharply for the first time in two decades), labels simply cannot afford to pay out millions of dollars to indie middlemen who may or may not create hit records.

Label sources suggest they would rather spend their marketing dollars buying radio commercials to directly promote their artists to consumers. But most record company budgets cannot support both large indie promotion and advertising budgets. (Labels can't simply drop indie payments; the unspoken fear is indies would then try to keep the label's acts off the air.)

At the same time, broadcasters, caught in a similar recession (radio advertising was down dramatically last year), need to find ways to generate more revenue, and they're looking increasingly to the record companies and indies to provide stations with a generous source of easy money.

For instance, Clear Channel Communications, the nation's largest radio broadcaster with 1,225 stations, recently charged record companies $35,000 each for the right to have acts perform in front of a room full of Clear Channel programmers at a three-day company conference. Clear Channel reportedly pocketed nearly $1 million from the arrangement.

Even more appealing for large broadcast companies, most of which are publicly owned and under intense pressure to post strong quarterly earnings, are payments from independent promoters.

Take for example, the system Radio One is trying to implement. As the nation's largest black-owned radio group, Radio One owns 65 stations operating in the top 22 markets. Approximately 50 of those 65 stations program new, hit music. (The rest are made of up talk or gospel stations.) Radio One's new exclusive indie, Ventura Media Group, is charging record companies approximately $1,500 for every new song added to a Radio One station playlist. Assuming its active music stations add five new songs each week, which is the industry norm, that's $7,500 per station, multiplied by 50 stations: $375,000 every week in indie fees, or at least $19 million each year paid out by labels for Radio One stations simply doing their job: selecting and playing new music.

"The money is out there. It would be ridiculous not to take advantage of it," says Radio One's chief operating officer, Mary Catherine Sneed. She won't say how much Ventura Media paid for the right to be Radio One's exclusive indie, but if the company does take in $19 million in the next year in promotion fees, industry experts estimate Radio One would pocket roughly $12 million of that.

"My biggest fear is they're doing it just to get bigger piece of the pie, and not to change the system," says Day at the Rap Coalition.

Sneed, however, told the Los Angeles Times that Radio One is trying to clean up urban radio but that record companies were balking at its proposal to use Ventura Media exclusively. She suggested they were hesitant because radio promotion executives at labels get kickbacks with the current system.

Her allegations mirror the ones first aired in a Salon piece last summer. It detailed what industry insiders insist is rampant corruption within the urban and rap radio formats, with illicit payments -- bribes -- flowing freely into the hands of programmers and indies, as well as record company executives who allegedly pocket generous kickbacks.

Those kinds of revelations led to more and more head-shaking inside the music industry. Says the manager, "I try to explain this to people who don't work in the business and they say, 'Stop it, it can't be true.' There's no other business that operates like this. It's unbelievable."

By Eric Boehlert

Eric Boehlert, a former senior writer for Salon, is the author of "Lapdogs: How the Press Rolled Over for Bush."

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