The FCC Payola Probe Continues

Cite this Article
Joshua D. Wright, The FCC Payola Probe Continues, Truth on the Market (April 21, 2006),

The Federal Communications Commission has announced that it is stepping up efforts in its investigation of payola practices at four radio conglomerates: Clear Channel, CBS Radio, Entercom, and Citadel, and has issued former letters of inquiry. Bill pointed me to an article in the LA Times which reports that settlement talks with the four radio firms broke down recently:

“The four broadcasters have been negotiating with the FCC for weeks to forestall a federal inquiry by offering to discontinue certain practices and pay limited fines. But those talks stalled last month over the issue of how much the broadcasters should pay. Clear Channel proposed a fine of about $1 million, according to people with knowledge of the negotiations. Some commissioners were pushing for as much as $10 million, those sources said. ‘We were in the process of trying to reach settlements, but when talks were inconclusive, we decided we needed more information,’ said an FCC official who spoke on the condition of anonymity because the investigation was continuing. ‘We will continue to speak with the parties and to hold those who have violated commission rules accountable.'”

The FCC could issue sanctions ranging anywhere from fines to a revocation of licenses. This is in addition to the penalties imposed by settlements with Eliot Spitzer and the NY Attorney General’s office pursuant to its own ongoing payola investigation which has already extracted significant penalties from Sony BMG and Warner. $10 million strikes me as a pretty hefty fine for violating a statute that has seen haphazard enforcement for the past several decades. The magnitude of the fine, along with those already paid in the Spitzer settlements ($10 and $5 million), leads me to wonder whether the magnitude of the sanction is appropriately proportional to the harm at issue?

I have opined elsewhere that I believe payola is likely to help rather than harm consumers (see e.g., here and here), so perhaps I have already tipped my hand. But my conclusion is consistent with evidence presented by Coase in his seminal payola analysis, as well as more recent history, that the industry has consistently failed to coordinate a “no payola” agreement, though not for lack of effort. In that sense, a fine of this magnitude seems unreasonably large relative to the alleged harm.

A useful benchmark might be fines for other forms of business conduct challenged on the grounds that the conduct harms consumers, i.e. price fixing conspiracies. Unlike payola, however, there exists strong theoretical and empirical support for the proposition that price fixing actually harms consumers. There have been only 51 Sherman Act fines greater than $10 million, most associated with international price fixing conspiracies (the largest is a whopping $500 million). The average fine imposed in the 324 price fixing cases brought by the DOJ from 1990-99 was just under $5 million. Does it make sense that sanctions for payola statute violations are greater than or equal to the penalties imposed on the average international cartel? I say no. Your thoughts?