Facing the music: debatable point: tough stance may not halt tradition of payola.

WARNER Music Group Corp. agreed last month to pay $5 million to settle allegations that its executives regularly gave radio broadcasters airline tickets and Super Bowl seats to ensure lucrative air time for its recording artists.

The settlement, the second in recent months obtained by New York State Attorney General Eliot Spitzer, is part of a campaign against what he calls "deceptive and illegal" practices that are "pervasive" in the industry. In July, Sony BMG Music Entertainment agreed to pay $10 million to settle similar claims.

Meanwhile, the Federal Communications Commission appears to be taking an unusually aggressive stance on the issue.

But hasn't this song and dance been heard before?

The long-running industry practice of paying off broadcasters to play songs--more popularly referred to as "payola"--has been around since the days when recording companies paid cash to DJs. Will the recent settlements really change a decades-old practice?

Background

To understand how far back payola originates, consider its roots: The term comes from a contraction of the words "pay" and "Victrola," the brand name of a wind-up record player.

By 1960, Congress enacted a law barring broadcasters from taking cash or valuable items from record companies that want certain songs on the air. Several state statutes followed, including the New York law at the heart of Spitzer's suits.

But payola has never really stopped. "There are three stages of payola," said Jerry del Colliano, a music professor at the University of Southern California. "When disc jockeys played music, that was a scandal in the '50s. So radio companies said, 'We'll let program directors pick the music.' Then the program directors picked the music and they got involved in the next wave of payola in the '60s and '70s. The third era was legalized: The consolidated radio groups took things for allowing access to their programming people."

But Spitzer's lawsuits charge that there is nothing legal about recording companies giving gifts to station employees in return for having their songs played. Other recording companies, such as EMI Group PLC and Universal Music Group, have been subpoenaed for records.

Radio stations are expected to be next on Spitzer's list: Clear Channel Communications Inc. and Infinity Broadcasting Corp., owned by Viacom Inc., already have received subpoenas. They "are the ones most fundamentally who are violating the public trust,'" Spitzer said last month.

Meanwhile, the FCC, which tended to ignore payola problems in past years, has taken a stronger stance against the issue by launching its own investigation and threatening jail time for violators of laws against pay-for-play. In response to Spitzer's probe, Commissioner Jonathan Adelstein said the most recent payola settlements "may represent the most widespread and flagrant violation of any FCC rules in the history of American broadcasting."

Separately, U.S. Sen. Russ Feingold, D-Wis., has introduced a bill that would strengthen the FCC's ability to enforce anti-payola laws by granting the agency authority to increase penalties or revoke a station's broadcast license.

Crackdown has effect

Unlike payola of past years, the most recent crackdown involves the units of publicly held media giants that have shareholders to consider.

"These corporations do not view fines lightly," said Michael Harrison, publisher of Talkers magazine, the trade magazine for talk radio. "Even though it might be the cost of doing business, when something gets attention in the press and the snowball starts rolling onto the government, they're concerned. They can't just have a cavalier attitude."

In Warner Music's most recent quarterly report, released before it agreed to settle Spitzer's suit, the company said that the investigation and recent FCC announcements had "the potential to result in changes in the manner in which the recorded music industry promotes its records or financial penalties, which could adversely affect our business, including our brand value."

As part of its settlement, Warner Music agreed to stop using certain independent promoters who often serve as the middlemen between recording companies and broadcasters.

Depending on the success of Spitzer's investigation, the recent spate of settlements could help launch a string of more costly suits by attorneys general in other states. So far, the investigation has helped at least two independent record labels file their own suit against Sony BMG.

Tom Hayden, chief executive of Tarzana-based TSR Records Inc., one of those labels, said he is seeking damages for all the time slots he lost to Sony BMG, which gave broadcast employees plasma screen televisions and trips to Hawaii--things his smaller label could never afford to do. At least one other New York independent label has joined TSR Records in its suit.

"It's something we have had experience with for 25 years, but it would have been difficult for us to prove it up to this point without Eliot Spitzer," Hayden said.

Reforms bypassed

Historically, crackdowns on payola have been temporary. And despite attempts at stopping them, radio stations and recording companies have found other ways to continue a payola-based relationship with one another.

Further, Spitzer's settlements of $5 million to $10 million are a minor dent in the pocketbooks of the companies involved. "They spend that in legal fees in 10 seconds," said Colliano, who referred to the settlements as "collateral damage."

Sony BMG, a 50-50 joint venture between Sony Corp. of America and Bertelsmann AG, is the No. 2 record company in the world. Tokyo-based Sony Corp. reported second-quarter sales of $15 billion, about the same as for the like period a year earlier. (Net income was $246 million, down 46 percent from a year ago due to poor sales in the electronics and movie divisions).

Warner Music, which had its initial public offering earlier this year, last week reported a fourth-quarter loss of $30 million, compared with a loss of $137 million for the like period a year earlier. Revenue grew to $905 million, from $798 million.

It's unlikely that the FCC, which for decades has done almost nothing about payola, would follow up with high-stakes investigations like Spitzer's. Even with its terse language in recent months, the FCC has been unconvincing in its efforts.

Outlook

Soon after the settlement, Sony BMG fired an executive vice president of promotions at Epic Records for activities related to Spitzer's investigation. The company also agreed to hire a compliance officer to monitor promotional practices.

Warner also said that certain employees had handled promotional activities in a way that was "wrong or improper."

The investigation already has affected radio broadcasters. Clear Channel, which launched its own investigation after one of its San Diego radio stations was highlighted in Spitzer's probe, fired two programming executives.

But much of the impact on the recent settlements depends on how successful Spitzer is with investigations against other music labels and broadcast companies.

What's more likely to affect payola between broadcasters and recording companies is the advent of alternative means of distributing music through technology--namely the Internet, satellite radio and the iPod. That may stem questionable practices among broadcasters, but it wouldn't necessary end payola, especially when it involves media that are not regulated by the FCC.

"In the future, there is a real question as to whether radio will be the target of payola," said Colliano. "You will see payola in a way we haven't seen before, in places we never thought of. But there will always be ways to influence air play and influence the sales of music."