@Billboard is Demonstrably Short on Pandora Payola: Just Read FCC Website

On last Thursday, Billboard wrote again about the  Pandora/Merlin direct deal.  For those of you who don’t know about the deal it basically says:   Merlin accepts lower royalty payments if Pandora plays Merlin songs more often.   We covered this a couple weeks ago after NPR’s Laura Sydell interviewed me about the deal.

Billboard says last week:

[T]he charge that the Merlin deal amounts to payola might be convoluted logic. Payola occurs when labels pay radio to play their music, not the other way around, as what happens in the digital realm. Even if the Merlin deal results in a slight economic benefit to Pandora, payola laws would need to be turned upside down and inside out to apply to this particular situation. Of course, stranger things have happened in the U.S. legal system. 

Unfortunately, that’s not what the FCC website says and I think Ed Christman knows better which is why he left that back door open.  Ed’s one of the best writers Billboard’s had for a long time and has a highly credible track record of getting it right.  But–part of that quote (“Payola occurs when labels pay radio to play their music, not the other way around, as what happens in the digital realm”) is almost word for word what Pandora’s CEO told NPR’s Laura Sydell:

“Payola is where record labels pay radio stations to get airplay,” McAndrews says, “and the opposite is what happens today. As Pandora, we pay the record labels and the artist to allow airplay. So it’s completely different.”

I have to believe that this angle to Billboard’s story came under tremendous pressure from Brian McAndrews and Pandora’s extensive and expensive PR and lobbying team.  But because Ed’s a great reporter, he left the door open with that last statement: “Of course, stranger things have happened in the U.S. legal system.”  I’m sure McAndrews did not like that part one little bit.  Good for Ed.

Here is what the FCC says:

Federal law and FCC rules require that employees of broadcast stations, program producers, program suppliers and others who, in exchange for airing material, have accepted or agreed to receive payments, services or other valuable consideration must disclose this fact.

Here’s what the actual FCC regulations say:

§ 73.1212 Sponsorship identification; list retention; related requirements.

(a) When a broadcast station transmits any matter for which money, service, or other valuable consideration is either directly or indirectly paid or promised to, or charged or accepted by such station, the station, at the time of the broadcast, shall announce:
(1) That such matter is sponsored, paid for, or furnished, either in whole or in part, and
(2) By whom or on whose behalf such consideration was supplied: Provided, however, That “service or other valuable consideration” shall not include any service or property furnished either without or at a nominal charge for use on, or in connection with, a broadcast unless it is so furnished in consideration for an identification of any person, product, service, trademark, or brand name beyond an identification reasonably related to the use of such service or property on the broadcast.
(i) For the purposes of this section, the term “sponsored” shall be deemed to have the same meaning as “paid for.”
(ii) In the case of any television political advertisement concerning candidates for public office, the sponsor shall be identified with letters equal to or greater than four percent of the vertical picture height that air for not less than four seconds.

Assuming the FCC decides that the payola rules apply to Pandora, I think that a big royalty discount is “other valuable consideration” that is “accepted by” Pandora by contract with Merlin and must be “announced” by Pandora “at the time of the broadcast”.  It is Pandora‘s responsibility to disclose that consideration under the payola laws, not Merlin’s.  (Merlin has probably done about all it can to disclose the consideration by discussing it in the press.)

As we previously posted, Pandora’s own high powered Washington DC lawyer, David Oxenford, wrote an article in 2008 about Internet radio and payola that everyone should read:

As Pandora lawyer Mr. Oxenford tells us:

“The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves – we’ll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a “radio” service for purposes of this statute).  But that does not end the inquiry.  Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute.  Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage.  Such statutes are in no way limited to radio, but can apply to any business.  Thus, Internet radio stations would need to be concerned.”

So as Pandora’s lawyer tells us, if the FCC can’t get  jurisdiction over pureplay webcasters, state attorneys general may be able to under applicable state law commercial bribery statutes.  That’s potentially what’s called a 51 jurisdiction issue (50 states plus federal law).

I don’t think that it will require that “payola laws would need to be turned upside down and inside out to apply to this particular situation”  and I don’t think Pandora’s lawyer does either.  Also Pandora is the only pureplay webcaster with a broadcast radio station so that puts them in a special class and invites an FCC investigation.

Now remember–the law applies to FCC licensed broadcasters who don’t pay the same royalties for terrestrial that webcasters do for digital and never have (that’s what the #irespectmusic campaign is all about).  If broadcasters had paid a terrestrial royalty, do you think that the broadcasters on the receiving end of the “$50 handshake” form of payola would have taken the money and still paid a full performance royalty?  Or any performance royalty?

And if payola only applied to cash money as Pandora’s CEO would like you to believe, would the FCC have looked the other way when broadcasters received the legendary “hookers and blow”?  Vacation trips and clothes?  You know, “other valuable consideration”?  Do we really have to start quoting “Hit Men” or “Stiffed” here?  Morris Levy is laughing his ass off!

I’m just not hearing a credible argument for why getting a below market discount on something–in this case, royalties in exchange for airplay–is not “other valuable consideration.”   Therefore since Pandora is doing everything it can to buy a radio station (and is in front of the FCC right now trying to get their acquisition approved) you’d think they’d want to disclose receiving valuable consideration for playing Merlin artists. And they aren’t.

Billboard and I agree on this:  stranger things have happened in the U.S. legal system.  Far, far stranger things.  The only one who can sort this out is the FCC–and good news!  The FCC has a way to do that as part of its review of Pandora’s license for South Dakota radio station KXMZ that the FCC is reviewing right now.  And until the FCC rules on the payola issue with Pandora, it’s hard to see why Pandora’s lawyer Chris Harrison should be able to use Pandora’s end run around the law to lower everyone else’s rates in the rate hearing in Washington.  Ed Christman did his homework on this part of the story, too and called Pandora lawyer Chris Harrison on the bullshit he pulled while he was at DMX that shafted songwriters and that Harrison is trying to duplicate for Pandora to shaft artists, musicians and vocalists.  Ed got that exactly right.  And won’t it be interesting if it turns out that Chris Harrison filed an illegal contract with the royalty hearing on everyone else’s already putridly low Pandora royalties to try to drive Pandora’s payments even lower.

I encourage everyone to file a complaint with the FCC. Tell the FCC to get off their asses and do their job.  Stop coddling telecommunications firms and protect the consumer for a change.

Here’s the FCC’s “Online Complaint Form”.

http://www.fcc.gov/complaints

Remember “Pandora Is Radio” so select the box for “radio broadcaster” for station KXMZ(FM) in Box Elder, South Dakota.