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?
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Thanks for your thoughts Paul. I very much appreciate them. Some thoughts:
I’m not sure that I am assuming that antitrust fines are rational, but that their is (or should be) a rational relationship between consumer harm and sanction levels across statutes. For example, if antitrust sanctions are too low, for the sake of argument, I am not sure how this would justify payola fines of the same average level as those for price fixing when we have essentially no evidence that payola results in consumer harm. Sanctions for price fixing are very unlikely to deter conduct that benefits consumers. The same cannot be said for payola sanctions. But perhaps this is a separate objection to the payola fine levels.
I do appreciate your point that payola fines would not look so bad relative to price fixing fines if the latter were too low relative to optimal levels. As an aside, however, price fixing sanctions are generally carefully measured to approximate the consumer harm caused by the conduct (which are generally observable harms that are a function of the cartel markup and the volume of commerce affected).
Your analysis assumes that the price fixing fines are rational and appropriate, thus a valid benchmark for comparing punishments of other types of corproate wrongdoing. It may well be that the the price fixing fines are way too lax given the harms done to consumers, so your baseline would shift up and the payola fine may not be so stiff after all.
In general, the US has been through more than 3 decades of getting tough with every conceivable type of street crime, but the same has not applied to ‘crimes in the suites.’ A few steps in the toughness direction isn’t so bad, and a little effort on the part of corporate accountability is OK.