By George Howard

Below is a case study focusing on Payola. In case you’re not familiar with the term, “Payola” is the practice of exchanging money (or some other item of value) for radio play of a song.  The practice is illegal under U.S. Law (47 U.S.C. § 317).  Payola—in one form or another—has been going on since pretty much the dawn of radio, and continues to this day. I wrote about this at length in a much-discussed article on the TuneCore blog.

Arguments vary over whether or not payola should be illegal, or whether or not payola is good or bad for the business/artist.  But what is undeniably true, is that lack of transparency in any business is correlated to unethical activity.

The question explored in the case, however, presents the competing forces that those in the music business frequently face: (A) adhere to your core values, and run the risk of reducing your chances of success; or (B) abandon values/ethics, and do whatever it takes to make it.

I very much look forward to your comments on what you would do if faced with the situation described in the case study…

Your New Record Label

You are a young music executive who after years of successfully running smaller divisions has recently been put in charge of a large record label.  This label has recently gone through some changes in ownership, and is now owned by a parent company that is in part owned and financed by a major investment bank.

As president of this label you maintain a degree of autonomy from your corporate parent, but, because they provide funding, you are in fact closely tied to them.  Your label employs approximately 40 full-time employees, and has an artist roster of about 15 active artists (i.e. artists who are touring and releasing records every year or so), and another approximately 300 catalog titles (records that are distributed to stores but not heavily promoted).

The label has been in existence for nearly 20 years, and has carved a niche for itself by acquiring and exploiting these catalog titles.  In fact, the active artists are, in some ways, kept on the label to bolster catalog sales.  This strategy is in alignment with the industry reality that very few new (i.e. active) artists make money for record labels.  In other words, the record label never recoups the costs invested in these artists.

While this strategy keeps the label from being viewed as a “sexy” type of entity in comparison to other labels that concentrate on breaking new artists, it has allowed the label to stay in business far longer than many of its competitors. Additionally, this business strategy offers a degree of security for the label’s employees, as well as the artists and estates who entrust their records to the label.

Adding a New Artist

The new corporate owners of the label have recently begun (strongly) suggesting that the label should sign some more current acts, specifically one artist who would be just the type of marquee name that would energize the label from both a reputation standpoint and a financial one.

As president of the label, one of your principle duties is A&R (artist & repertoire); it is your job to find and sign the talent for the label.  Given the mandate from your corporate parent to sign this marquee artist, it is your job to do so.  During numerous meetings with the artist and her manager, you find that this artist had a very successful career as a major label artist.  She holds the record for longest-charting song on an important radio chart. Her three albums have sold roughly 700,000 copies each.  Her videos had been aired frequently on both MTV and VH1.

All of this success, however, occurred five years ago or longer.  In the ensuing five years, she primarily fought with her label over creative issues, and, ultimately, both the artist and the label agreed to part ways.  What this artist wants now, more than anything else, is creative control, and she is willing to forgo the big budgets offered by major labels in order to make the type of records she wants.

You explain to her that artistic freedom is the philosophy of the label.  You also tell her that even with her reduced expectations, by virtue of her past successes and the pressures being put on you by your corporate parents, that this is a big risk for the label, and one that will involve a budget several times higher than those for other active artists signed to the label.  The vast majority of this budget will go towards attempting to capitalize on her past successes at radio.

Needed: Radio Play

While your label has consciously never attempted to break an artist at commercial radio, you are well aware that the costs of attempting to break an album at radio are so high that the risks typically outweigh the rewards for a label of this size.  For this marquee artist, however, there simply is no other way to achieve even a fraction of the sales she garnered for her prior records without radio.  In fact, radio play is the only way the vast majority of her fans will know she has a new record out.

Assurances are, therefore, made by the artist that she will deliver a track suitable for radio, and the label, in turn, promises to invest the money and human resources required to try and achieve significant radio airplay.  The deal is made.  A sizable (relative to your label’s history) advance is paid to the artist, and a massive budget is allocated for radio play.  This artist is the label’s new number one priority.

As president of the label you must get the staff excited and motivated to work on this new artist’s behalf.  Though a difficult task, it is made somewhat easier by the fact that the employees soon realize that their livelihood is potentially dependent on the success of this one artist.

While your employees are feeling the pressure from you, you, in turn, are feeling the pressure from your corporate parent, as they have grown increasingly concerned with the flow of money being invested…and the radio campaign has not even begun.  You begin hiring radio consultants to help devise the plan that will make or break the record.

The Plan

As the radio team begins to take shape, so too does the strategy.  A prominent jean manufacturer has agreed to give away hundreds of jeans to radio stations who will use them for contests in exchange for your marquee artist appearing in their ads.  This artist will appear at dozens of radio station events (all travel picked up by the label).  There will be various subtle remixes of the single (the song that is pulled from the album to go to radio), so that stations can have the one that works best for them (again the label picks up the tab).

A video will be made, in part to send directly to stations so that they may have a visual image of the song, but also because radio stations want to know, that should a record begin getting airplay, that a video will be available to be aired and thus drive even more demand for airplay (the label pays for a video).  The label’s sales staff pushes as many records into the marketplace as possible in order to assure the radio stations that when they play the song their listeners will be able to find the record in stores (the cost of getting records into stores is huge, and, of course, the label pays for this).

You , as president of the label, approve all of these expenses, and explain/justify them to your corporate parents.  While the dollar figures are exponentially larger for this artist, these costs and this plan is not radically different from ones you’ve approved in the past.  You feel like you are properly setting the record up.

As the date to bring the record to radio and attempt to get the song “added” to the stations’ playlists approaches, you begin another of  your scheduled conference calls with the rest of the radio team.  This team is comprised of the members of your radio staff, who are employees of the label, as well as five or six consultants hired by the label who have relationships and expertise in the radio format(s) which you are trying to reach.

Right or Wrong?

After dialing into the conference you realize that it is only you and the head consultant on the phone.  The head consultant states that the radio campaign is at the make-or-break stage. That while some stations are reacting well to the sound of the song and the other promotional activity taking place, sufficient numbers of stations are not reacting strongly enough to cause the record to succeed in a major way; i.e. succeed in a manner that would result in airplay and thus sales that would recoup some of your investment, and allow the artist to succeed.

You listen attentively, and ask what can be done.  She states that certain stations need a push.  A monetary push.  Very quickly she gives you an address (no name), and tells you to send twenty-five American Express gift checks in $10,000 intervals to this address.  As you don’t say anything, she continues.  She tells you that these gift checks will be used to push those stations that are on the edge, over—so they will begin playing the record.  She tells you that this is done all the time, and that because they’re AmEx gift checks, they’re untraceable.  You tell her that you’ll get back to her and hang up the phone.

You are now faced with a decision.  You know that payola (the act of paying for a song to be played on the radio) is illegal.  You also know that not only have your corporate parents mandated that this record be a success, but that many of your employees have mortgages and kids, and that the success or failure of this record will determine whether or not you will be able to continue paying them.  Last, but not least, you’ve promised the artist that you would do all that you could to make the record a success, and thus revitalize her career.  Making the record a success is certainly contingent upon the song being played on the radio.

What are your ethical obligations in this situation? What do you do?

George Howard is the COO of Concert Vault, Daytrotter, and Paste Magazine. Mr. Howard is an Associate Professor of Management at Berklee College of Music. Follow George on Twitter.

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