Creating a Merit-Based Music Economy: Compulsory or Blanket Licensing for Interactive Subscription Services

A4. The Payola Dynamic and High Risk

The Payola Dynamic is simply the music radio version of the law of supply-and-demand: Radio exposure is scarce, compared to the demand for that exposure, so it becomes very expensive. You can push it out over here, but it'll pop up over there -- you can't just get rid of it by trying to outlaw it. All you can do is push it from a white market to a black market -- as long as there is an enormous value, someone will be there to set up a gate and collect it somewhere along the way.

It can cost a huge amount to get a song played on the radio, often at least a hundred thousand dollars for a major label act. That's an awful lot of money, on top of what (for a major label) is often a similar amount to produce the record, and much more for a video and tour support. You have to sell a lot of records to make back enough to break even and start making a profit -- typically in the hundreds of thousands of units.

The RIAA's Hilary Rosen testified before Congress on 5/25/00: "Typically, less than 15% of all sound recordings released by major record companies will even make back their costs. Far fewer return profit. Here are some revealing facts to demonstrate what I'm talking about. There were 38,857 albums released last year [1999], 7,000 from the majors and 31, 857 from independents. Out of the total releases, only 233 sold over 250,000 units. Only 437 sold over 100,000 units. That's 1% of the time for the total recording industry that an album even returns any significant sales, much less profit"

Even considering that indie labels (and majors, with "developing artists") spend rather less producing and promoting some records, so they can be profitable at somewhat lower sales levels, 15% is a pretty weak success rate for a business that wants to stay in business. How can this be? The answer is that the big hits make so darn much money that the failures get swept up in the average and the company makes money overall.

Why is the distribution of success so extremely skewed? To a great extent it's because of the scarcity and cost of mass media or equivalent exposure. There are so many more records being created than could ever possibly fit through those channels that simple arithmetic ensures only a small fraction of them could ever be successful in that market, no matter how good they are.

But then, those records may be so successful that the payola cost to play the game is completely offset by the sales that result from it.

It's a big risk with a big payoff. All or Nothing. Blockbuster or Bust. Star or Starve.

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