Professor Hazlett Examines Payola in the Internet Age

Professor Thomas W. Hazlett looks at payola in the music industry in an article inspired by Sony BMG's recent agreement to pay ten million dollars in fines for bribing radio stations to play the songs they sell.

Thomas W. Hazlett: Virtual payola, Financial Times Ltd., November 2, 2005. By Thomas W. Hazlett.

"Payola was made famous by scandals in the 1950s where "cash, drugs, and women" were traded to rock 'n roll disc jockeys in exchange for playtime, but the practice has a much richer history. In both the UK and the US, 19th and early 20th Century singers collected side payments from music publishing houses for performing their songs.

Nobel winning economist Ronald Coase explained the practice in a 1979 article. Radio stations own something valuable: songs played more tend to sell more. Competition for airtime thus develops, but how one conducts the best auction when the station's revenues rely primarily on selling audiences to advertisers is complicated. One view is that radio stations should be faithful to listeners and make choices based only on their honest musical appreciation.

But how do companies know what Gangster Rap or Yanni tune is top quality? Payola helps them learn. Because those record companies with the greatest expectations of future sales will tend to value playtime the most, payola reveals consumers' choices."