Return of the $50 Handshake: My FCC Comments on Proposed Payola Waiver and “Steering” Agreements PT 1

You think internet “fast lanes” were problematic? How about “payola lanes”  on terrestrial radio and webcasting? Payola is back! And it wants to go Legit this time.  That’s right, broadcasters are proposing a payola waiver from the FCC.  Here is the document they filed with the FCC.  Read it for yourself. It is freaking unbelievable.  PDF below or you can read it on the FCC website here.

 DA-15-325A2

As a member of the public you can make an “express” comment to FCC.  It doesn’t have to be as long and as detailed as my comment.   It can simply be a couple sentences.   Proceeding number is 15-52.  Deadline is tomorrow May 12.  Link here:

http://apps.fcc.gov/ecfs/upload/display

 

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554

MB Docket No.15-52

Comments of David Lowery In the Matter of Media Bureau Seeks Comments on Petition for Class Waiver of the Commission’s Sponsorship Identification Requirements Filed by the Radio Broadcasters Coalition – March 20, 2015

My name is David Lowery. I am a founding member of the groups Cracker and Camper Van Beethoven and a lecturer at the Terry School of Business at the University of Georgia at Athens. I have written or co-written and recorded the songs performed by my bands for many years. I also write The Trichordist blog devoted to issues of importance to independent artists and songwriters. I am filing this comment on my own behalf from the perspective of an independent artist and songwriter.

 

I appreciate the opportunity to comment on the Radio Broadcaster Coalition payola waiver, and appreciate the FCC’s interest in hearing from the public on this critical matter of public interest. I respectfully oppose the Commission’s grant of the payola class waiver because I think at least iHeartMedia and Pandora have entered into many “steering agreements” that demonstrate a desire to find a loophole in the payola laws. I suggest that the Commission should make it no easier for these massive media companies to circumvent the law than it already is. I also respectfully suggest that granting the waiver will make steering agreements the 21st century version of the notorious “$50 handshake.”

 

Are Steering Agreements the New $50 Handshake?

While I concur with many of the comments that have been already filed objecting to the class payola waiver on public interest grounds, “steering agreements” are a problem with the waiver that I have not seen made by others. “Steering agreements” implicate the “other valuable consideration” and “indirect payment” prongs of the payola rules.[1]

I respectfully suggest that “steering agreements” are already creating a “payola lane” on both terrestrial and Internet radio to which the listener is none the wiser as it is. If the Commission grants the class waiver to the Radio Broadcasters Coalition, the Commission will make it even easier for a “payola lane” to form which I respectfully suggest is not in the public interest.

This payola lane is not only a creature of at least iHeartMedia’s “steering agreements” with record companies, it is also a factor in Pandora’s direct licenses. While Pandora is not part of the Radio Broadcast Coalition, the “class waiver” sought will benefit Pandora when the Commission approves Pandora’s acquisition of KXMZ, which appears to be imminent given the Commission’s recent ruling in Pandora’s favor on foreign ownership.[2]

 

Steering Agreement Background

The direct licenses between record companies and iHeartMedia and Pandora are reported to contain “steering agreements.” “Steering agreements” relate to situations where the broadcaster or webcaster pays a performance royalty and wishes to reduce the cost to the broadcaster or webcaster of those royalty payments. The broadcaster or webcaster negotiates a “steering agreement” directly with a record company (outside of any statutory license) pursuant to which the broadcaster or webcaster pays less if they play more of the record company’s catalog. This arrangement sounds counterintuitive because if the station plays more of the label’s music, one would expect that the station would pay a higher royalty—because more is…well, more.

However, “steering agreements” allow the broadcaster or webcaster to pay a lower royalty payment (the quid) if the broadcaster or webcaster plays more of the record company’s recordings (the pro quo). The broadcaster or webcaster then “steers” more of the record company’s recordings to the listener in order to qualify for the lower royalty payment. (I suspect that there is a contractual formula to give effect to the quid pro quo, but the specific contract terms of the iHeartMedia and Pandora deals are confidential.)

At this point, I can guess that the artists whose recordings were “steered” are paid less and the lower rate could apply on a catalog-wide basis even to artists whose recordings were owned by the record company concerned but were not “steered.” We just don’t know because the deals are secret.

The listener is none the wiser and neither are artists not “lucky” enough to be included in one of these agreements—absent the sponsorship identification required by the payola statute that the FCC is required to oversee. I can easily understand why the Radio Broadcaster Coalition would want a class waiver to further obfuscate this quid pro quo.

Is Less More?

This whole arrangement may seem counterintuitive because we are accustomed to payola being a cash payment or other valuable consideration paid to a broadcaster to incent them to do something they do not disclose to the public at all—a mistake that even Pandora’s CEO made in public[3]. The popular conception of payola predates the payment of public performance royalties for sound recordings in the U.S.[4]

 

I suggest that an undisclosed payment under a “steering agreement” is the identical transaction to more traditional payola, it just takes the “$50 handshake” into the digital age. The benefit still flows from the record company to the broadcaster or webcaster, it’s just in the form of paying less rather than palming a bill. Broadcasters did not want to disclose the $50 handshake, so perhaps it is not surprising that they are seeking a waiver to further obfuscate the benefits from their “steering agreements.”

 

If anything, these steering transactions are even more insidious than the $50 handshake as they are only detectable if you have access to the relevant contracts or the Commission requires that broadcasters disclose them under the payola statutes. iHeartMedia announced their deals but not much in the way of specifics. Pandora likewise disclosed some terms of their Merlin deal but became more circumspect with their Naxos agreement.

It is also important to point out that “steering agreements” ostensibly apply to entire catalogs of music and not just to the “Top 40” hits.

I initially thought that Pandora would not be subject to the payola laws as an Internet radio station, but I have become persuaded by a 2008 article[5] about the applicability of the payola laws to Internet radio written by Pandora’s well-known Washington, DC counsel, David Oxenford. I think this passage by Attorney Oxenford applies particularly well by analogy to Pandora’s steering agreements:

“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.”

 

While Mr. Oxenford’s excellent and thorough analysis raises the question of whether Internet radio stations ought to be subject to commercial bribery rules regardless of whether the station is an FCC licensee, in Pandora’s case the Internet radio station will be an FCC licensee if the Commission approves the KXMZ transfer.[6] I have to believe this additional fact could change his analysis.

His point seems to be that the behavior is bad, even if Pandora can find a loophole to hide in for purposes of the payola statute.

 

Goose and Gander: The Payola Lane and Pandora’s Planned Acquisition of KXMZ

The payola lane and steering agreements are of particular concern to artists and songwriters in light of the pending application to assign FM broadcast station KXMZ(FM), Box Elder, South Dakota, from Connoisseur Media Licenses, LLC to Pandora Radio.[7] As the Commission’s recent ruling[8] suggests that the FCC may approve the assignment without regard for Pandora’s motivation, I respectfully believe that artists and songwriters will expect the FCC to address the payola implications of “steering agreements.”

I would assume that approving the assignment of the KXMZ license to Pandora will require the FCC to enforce the law against Pandora as it would any other licensed broadcaster. This presents the question: How should the FCC address payola in Pandora’s existing online business if Pandora becomes an FCC licensed broadcaster? Will the FCC treat Pandora differently in its existing webcasting business than its newly acquired broadcasting business? For that matter, will the FCC require iHeartMedia to comply with the payola statutes in its online business following the same logic?

Will all broadcasters subject to the statutory webcasting license be able to take what would otherwise be payola as Attorney Oxenford suggested in 2008? Will Pandora or other licensees not currently before the FCC be able to benefit from the requested payola waiver from the FCC?

Is what’s good for the goose also good for the gander? Is there a principled reason why there should be a “payola lane” on the Internet where the substance of the rules do not apply, even once Pandora becomes an FCC licensed broadcaster? If so, then why should Internet radio receive special treatment?

 As Pandora will be the only “pureplay” webcaster that is also an FCC licensee once the Commission approves the assignment of KXMZ, I respectfully suggest that it is incumbent on the FCC to clarify whether the payola rules apply to all aspects of Pandora’s business, including its webcasting business. That would certainly seem to be the public policy intent of the payola statutes as I follow Attorney Oxenford’s argument.

As Pandora will be the only “pureplay” webcaster that is also an FCC licensee once the Commission approves the assignment of KXMZ, I respectfully suggest that it is incumbent on the FCC to clarify whether the payola rules apply to all aspects of Pandora’s business, including its webcasting business. That would certainly seem to be the public policy intent of the payola statutes as I follow Attorney Oxenford’s argument.

Pandora’s motives for buying KXMZ are well known[9]—Pandora has no connection to South Dakota and has shown little interest in the public welfare of the citizens of Box Elder. Pandora is buying the station for one reason only—Pandora wants to align itself against songwriters for a commercial advantage in its webcasting business otherwise unrelated to its KXMZ broadcasting business.

As the FCC has made it clear to songwriters that Pandora’s motives for buying KXMZ are of no concern in approving the license assignment, I respectfully suggest that the FCC should also make it clear to songwriters, artists and indeed to the citizens of South Dakota, whether the quid pro quo in steering agreements are subject to the payola statutes and if the same rules will apply to Pandora.

CONTINUED IN PART II

 NOTES

[1] 47 C.F.R. § 73.1212(a): 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….
[2] In re Pandora Radio LLC, Petition for Declaratory Ruling Under Section 310(b)(4) of the Communications Act of 1934, as Amended (Adopted May 1, 2015).

[3] See NPR Article, note 9 below.

[4] See Digital Performance Right in Sound Recordings Act of 1995, Pub.L. No. 104-39, 109 Stat. 336, codified as 17 U.S.C. §106.

[5] David Oxenford, “Payola on Internet Radio – Legal?” (Sept. 10, 2008) available at http://www.broadcastlawblog.com/2008/09/articles/payola-on-internet-radio-legal/

[7] Id. and note 2 above.

[8] See note 2 above.

[9] See CNN report in note 15 below.

About Dr. David C Lowery

Platinum selling singer songwriter for the bands Cracker and Camper Van Beethoven; platinum selling producer; founder of pitch-a-tent records; founder Sound of Music Studios; platinum selling music publisher; angel investor; digital skeptic; college lecturer and founder of the University of Georgia Terry College Artists' Rights Symposium.