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.

By Eric Boehlert

March 13, 2002 | 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.

Next page: How the system works