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Payola inquiry includes Emmis: New York AG, FCC study financial ties with record labels

August 15, 2005

Emmis Communications Corp. early this year received a subpoena in an investigation of pay-forplay practices throughout the radio industry, and the Indianapolis company confirms two of its employees in the New York market are under scrutiny.

New York Attorney General Eliot Spitzer earlier this year began investigating whether record companies were using improper promotional practices to win airplay for their artists' songs. In July, he reached a $10 million settlement with Sony BMG, owner of several record labels.

This month, the Federal Communications Commission jumped into the fray, announcing it was launching an even broader investigation that industry observers say could lead to heavy fines or even license revocations.

"I believe this payola scandal may represent the most widespread and flagrant violation of any FCC rule in the history of American broadcasting," FCC Commissioner Jonathan Adelstein said in a statement last week.

"Mr. Spitzer's office has collected a mountain of evidence on the potentially illegal promotion practices of not only Sony BMG, but also other major record companies, independent promoters and several of the largest radio station groups."

Emmis, Texas-based Clear Channel Communications and a handful of other radio station operators have received subpoenas from Spitzer's office. In addition to Sony BMG, record companies under investigation include EMI Group, Warner Music Group and Universal Music Group.

"When the dust settles on this, we're going to see some serious consequences," said Robert Papper, a Ball State University telecommunications professor and former radio station owner and manager. "This is going to be a huge issue and will end up affecting some markets that will surprise you."

It's not clear whether investigators are looking into possible pay-for-play practices in the Indianapolis market.

Officials with Emmis and Clear Channel, which both have a major presence in Indianapolis as well as other major U.S. markets, say they're cooperating with investigators. Emmis says it's launched an internal investigation. Neither the company nor a spokesman for Spitzer would identify the New York employees under scrutiny.

"From the get-go, we've said we welcome the scrutiny," said Emmis Radio President Rick Cummings. "That only serves our company, our shareholders, our listeners and our advertisers. This assures music gets played for the right reasons."

Added Andy Levin, Clear Channel's chief legal officer: "We have always had a zero tolerance policy for any action that could be construed as pay for play. If there are some bad apples, we will find them."

At issue are practices some record companies use to reward radio program directors, disc jockeys and others for giving their records airplay. Strict federal guidelines govern arrangements that could be considered payola, including that they be fully disclosed to the listening public.

When investigators unveiled their $10 million settlement with Sony BMG, they said the company had tried to disguise a flat screen TV it gave a California radio programmer as a "contest giveaway" and had lavished a program director in North Carolina with PlayStation 2 games and an out-of-town trip with his girlfriend.

"This issue has been around a long time," said Tom Taylor, editor of trade publication Inside Radio. "It really took wing in the mid 1950s with the emergence of rock 'n' roll and the small, independent record labels that produced the music."

Even with the proliferation of the iPod and growth of satellite radio, Taylor said over-the-air commercial radio is still "by far the best way to promote a record or song." A single top station in New York can reach as many listeners as all of satellite radio.

Taylor said he's not surprised Emmis and Clear Channel are entangled in the latest payola flap.

"Emmis and Clear Channel have many hundreds of millions of dollars in radio properties in some of the nation's largest markets, including top stations in Los Angeles and New York," Taylor said.

He said that if employees of either company did anything wrong, it probably wasn't because executives at the top wanted them to.

"A top station in New York is valued at $200 million to $300 million," Taylor said. "Rationally, as a businessman, you don't jeopardize losing your [FCC] license by getting caught up in something like this."

Congress passed a law making payola a misdemeanor offense nearly a half century ago, after Alan Freed and other disc jockeys were charged with taking bribes to play certain records. As a result of the scandal, and the congressional hearings that followed, record labels began working with independent promoters to avoid direct involvement with stations.

The record companies would pay promoters, who would pay stations fees, ostensibly to gain access to stations' play lists. Local radio station operators say that in the 1980s and '90s, they were able to use such payments to bankroll their entire advertising and promotional budgets.

But after the arrival of Napster in 1999 badly weakened the record companies and strained their budgets, independent promoters lost influence, and labels began dealing directly with stations again.

Clear Channel officials say they used to use independent promoters in many of their markets, including Indianapolis, but discontinued the practice in April 2003. Emmis followed suit, according to Cummings, ending its relationships with all independent promoters 18 months ago.

Local broadcasters said they now have processes in place to guard against payola.

For example, Radio One Indiana General Manager Chuck Williams said his company relies on a board comprised of program directors, disc jockeys, ad sales executives and others to select play lists for its Indianapolis stations, including WHHH-FM 96.3 and WTLC-FM 106.7.

"The corporate guys give line-by-line directives to avoid any improprieties or even appearances of conflict," said Williams, who added that Radio One Indiana doesn't use independent promoters. "We realize this issue can crop up in any market, so it's very tightly controlled."
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