As ad revenue continues to decline more and more news organizations are turning to paid and sponsored content. Luigi and Kate revisit the decades-old music payola scandal and debate how to ensure proper disclosure in the digital age.
As ad revenue continues to decline more and more news organizations are turning to paid and sponsored content. Luigi and Kate revisit the decades-old music payola scandal and debate how to ensure proper disclosure in the digital age.
Speakers: The sharing of biased and false news has become all too common on social media.
Kate: Hi, this is Kate Waldock at Georgetown University.
Luigi: And this is Luigi Zingales at the University of Chicago.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And most importantly, what isn’t.
Kate: A media organization called Sinclair has been in the news recently because it was making its anchors read the same statement, and everyone across a bunch of stations was sounding like zombies just reading the same thing over and over again, which was something like:
Speakers: Unfortunately, some members of the media are using their platforms to push their own personal bias and agenda to control exactly what people think, and this is extremely dangerous to our democracy.
Speaker 4: This is extremely dangerous to our democracy.
Speaker 5: This is extremely dangerous to our democracy.
Kate: To back up for a sec, Sinclair is both a TV and a radio broadcasting company. They own something like 193 just television stations, but there’s also talk about them acquiring even more from Tribune Media soon. What’s ironic is Sinclair was actually fined by the FCC a few months ago in what was basically the largest fine in history because they were found guilty of accepting money in exchange for endorsements.
Speaker 6: More and more patients at Huntsman Cancer Institute are recording their life stories.
Speaker 7: My grandfather’s family all died, usually in their late 20s, early 30s, because they were not diagnosed back then.
Speaker 8: It’s taking too many lives, and my husband at 54, he had a lot to offer the world.
Kate: But they were reporting news tied to cancer organizations as if it were news without disclosing that they had accepted payments for what they were claiming was news.
Luigi: So we’re going to try to unpack today these practices, starting from payola to go to advertising to sponsored content, but we want to start with actually the music industry.
Kate: Yeah, can I talk really quickly about the word payola?
Luigi: Please.
Kate: I just, I hate the word payola. It makes me think of 1950s naming conventions, like Crayola and Victrola. They just added ola. Terms that you may be more familiar with now are pay for play, #sponcon, which stands for sponsored content. But anyway, it’s all the same idea.
Luigi: And this is a practice that has been going on in the music industry since probably the beginning of the music industry. What really shook the industry is that in 1955, four traditional companies were controlling 78 percent of record sales. By 1958, the same four companies dropped to 34 percent, and the reason was the explosion of rock ’n’ roll that was done by other record companies. Many senators got concerned about the spreading of this evil music, and of course, the evil music could only spread because of corrupt practices. As a result, there was an investigation in Congress about the use of payola to promote the new music, which was rock ’n’ roll.
Kate: So anyway, Ronald Coase, who’s a Nobel Prize winner, he wrote this paper describing everything that happened, and his opinion, payola in the music industry was really not that bad of a thing.
Luigi: Yeah, and his argument, I think, is quite clear. Number one, he says it’s not a bribe, because in legal terms, a commercial bribe is when you pay somebody to use his discretionary power in a way in which his boss does not want him to. In this particular case, the radio stations were perfectly happy to have the DJ take that money, and they knew this money was taken, so it’s a little bit like a waiter in a restaurant. You give him or her a big tip to get the corner table. This is not a bribe by any measure of the word.
Kate: Yeah, and another argument that he makes is that from the DJ’s perspective, it doesn’t really make sense to accept money to play bad music, because you still want people listening to your station, and so you’ve got this sort of joint optimization problem, where on one hand, you want to make money by being paid some amounts by these record labels, but you also want to make money through your salary from the music station, which means that you want to have a lot of listeners. So it’s not necessarily the case that bad music was being pushed on a lot of people. Maybe once in a while there was the occasional record that people wouldn’t have normally wanted to listen to that they had to listen to, but for the most part, people were still listening to music that they enjoyed because that was consistent with the incentives of the DJ.
Luigi: Actually, I don’t like that argument too much, because as we will discuss hopefully later, this leads to being too sort of accepting of other practices I have more quarrels with. I’m more intrigued by two points that he makes that are quite clever. The first one, it says, look, it’s not like the rating or the combination of music that you receive on the radio is not distorted without the payola. In a world without the payola, the way that radio supports itself is through commercial ads, and as we know, if you want to maximize audience, you’re trying to play the music that is more enjoyed by people who buy more products, and so you make yourself more valuable to the commercial ads.
So to some extent, the payola was useful in getting the music that actually listeners wanted, independently of the kind of commercial power they had. That’s the reason why they started to play the rock ’n’ roll, because the rock ’n’ roll was appealing to teenagers, but it was not appealing to old farts with a lot of money in their pockets.
Kate: Yeah, so I think Coase’s most compelling argument is that the groups who were really anti-payola were the big band music stations or the music labels of the 1930s, and they were pitted against these new, up-and-coming rock ’n’ roll artists, who they considered obscene. If you think about it, big band was already being played on the radio, and so the marginal dollar spent on payola by someone who was already super popular was not really that valuable, whereas if you were a new rock ’n’ roll artist, then maybe you would want to spend a little bit of money, you want to give a little bit of money to DJs asking them to play your stuff so it would be introduced into the mainstream. So it was really the old incumbents who were trying to fight against the new upcomers and prevent them from breaking onto the scene.
Luigi: And many of the actions to ban payola were actually conceived as a way to restrict this payment and maximize the revenues of the music industry, and that’s the reason why the attacks to payola are very cyclical, because the payola starts as a very common practice, then becomes so widespread that it actually takes the form almost of blackmail, that now the radio controls the access to listeners and they ask for a payment, an extortion, in order to reach the listeners. When this arrives to this point, in a normal situation, you should have an antitrust enforcement. In the payola industry, you have a surge in the protests, and often either the parliament gets involved or people like Eliot Spitzer, who want to run for a political position and think to make themselves popular by going after the payola industry.
Kate: Yeah, so let’s talk about payola or sponcon in the context of today. It shows up all over the place, and I think it’s important that we make the distinction that it can show up in cultural contexts. For example, if you listen to Spotify or Pandora, there’s a lot of concerns that the curators of playlists are being paid off by the artists themselves. That’s very different than if we’re talking about Twitter, which is actually a medium that people use for learning about the news and learning about information.
I think an important component of what makes this so widespread today is the internet. There’s just so many people offering up their opinions and offering up ratings and anonymously posting on Yelp or anonymously blogging, and it’s impossible to tell who’s accepting money and who’s not, and that’s why I think it’s important to make this distinction between news and culture or product reviews.
I think when it comes to culture and product reviews, I have a pretty good sense of when people have been paid for. In news, it’s more difficult to tell, and so I think we should talk about where payola shows up today, but also distinguish between news outlets versus culture and product sales.
Luigi: I think we should distinguish, but honestly, I think it’s problematic even in cultural issues, in the sense that I love wine and I really value the opinion of one wine critic, Robert Parker, who has a publication without ads. I trust him because over time, I really enjoy the kind of wine that he selects, but also, I am reassured by the fact he doesn’t take any ads. In fact, there is an economic paper looking at the comparison of ratings between Wine Advocate and Wine Spectator, and it finds that the difference in ratings are correlated with the amount of advertising that Wine Spectator gets. So there is this at least prima facie evidence that even traditional advertising might distort content in a major way.
Kate: OK, well maybe you like wine, but I like makeup, and I follow an Instagram makeup artist named Militza Yovanka, and she obviously accepts money from makeup producers. I think that she’s probably getting a lot of money from L’Oreal, I don’t know, different places. She posts these videos where she’s doing her own makeup using all these different products, and I know that she’s being sponsored by these products, but it doesn’t really bother me because A, she’s really good at doing her makeup, and B, I feel like I can tell the difference between when she’s doing something promotional and when she’s not, even if it’s not disclosed.
Luigi: I would like to test you on that declaration. You’re definitely right that you like wine more than I like makeup, so I think that you have clearly a lot of absolute and comparative advantages there. But I don’t claim I can tell the difference. And I have no problem if you announce that you’re just showing stuff that you have been paid to show. That’s part of what advertising’s about. I’m more concerned when you cannot tell the difference, and honestly, if it comes to wine or makeup, it’s not the end of the world. When it comes to news or important information that makes you decide, for example, on your lifetime savings, that’s quite important.
Kate: So when it comes to payola in culture, where do you fall?
Luigi: To me, the crucial aspect is deception, or the risk of deception, and in the case of payola, actually Coase has a great argument, and in my view, I’d say, “Look, music is an acquired taste, but you need to listen to it to know what it is, and while it’s true that the DJ is forcing me to listen the first time, actually I don’t buy the music unless I’ve listened to it. So it’s not like I’m deceived because I don’t know what I’m buying. I know exactly what I’m buying, and the only thing that the DJ is doing is exposing me to that music.” I don’t particularly like, for the wine, even if for most wine, the worst that can happen, you buy a bottle and unless this is a Château Lafite 1955, it’s not a fortune, and then if you don’t like the bottle, you can make up your mind and discard it.
I think that the argument is quite different if we move from the music industry to other systems of exposure, where the good is not that easy to identify. Suppose I am a travel editor of a major magazine, and I receive payment to promote particular locations. As a buyer, you don’t know if the reason why I rate this trip in Myanmar as the most valuable trip of my life is because it’s really great or because I got paid, and you’re only going to find out after you travel to Myanmar. So it’s very different from music.
In many other situations, it’s very difficult to not be deceived. If you trust somebody to give you an opinion, you would like this opinion to be unbiased. The more the good is an experience good, the more the good is a good that costs a lot of money, the more the risk of deception, the more I am against this practice.
Kate: Well, exactly. If it’s a really expensive product that you’re about to buy, then I think I would be willing to pay for a unbiased report, but if it’s just various shades of lipstick, I think that it’s not worth it for me to pay for an unbiased report. Instead, there’s so much competition in the blogging and Instagram space for these sort of relatively cheap products that if I get fooled by somebody, then I’m going to stop watching their Instagram channel and I’ll just go to somebody else, and so I think that there are incentives for people to report somewhat accurately.
Luigi: OK, so let’s agree that for lipstick and music, we don’t care, but then when it comes to portfolio investment or pension retirement plans or stuff like that, this is even more important than your restaurant or your car. If you are a reputable journal or magazine and you can rely on a very diversified set of advertisers, then you are not dependent on any one of them. Once the set of advertisers shrinks, because if you are a money magazine, there are only so many advertisers you can deal with, and annoying one of them can be very expensive. And actually, the most extreme form of this, a colleague of mine experienced a tragedy: her son was killed, 20 years ago, by a defective crib in the kindergarten where he was.
Kate: That’s terrible.
Luigi: Yeah, it’s terrible, and this person is a very lovely person who tried to transform this tragedy into a good for humankind, so she made a battle to try to expose defective products all over the place. The first place where she went to place the news of this tragedy and a warning for the defective crib were parenting magazines, and to her surprise, the New York Times and the major newspapers were willing to publish the news, but the place where she found the strongest resistance were parenting magazines, and why? Because if you are a parenting magazine, you rely very heavily on a few advertisers, and one of those was actually the producer of the defective crib. And if you have only a few advertisers, you cannot afford to piss off any of them because you end up losing, let’s say, 20, 30 percent of your ad revenue, and that is something that a magazine cannot afford to do.
The reason why this story, besides the tragic aspect, but the reason why this story is so important is because I fear that even the mainstream media is going that direction. There used to be a time in which advertising was plenty, and so magazines and newspapers were very independent because they could annoy any one of them and still have a queue of people who wanted to advertise in the magazine. I think that time has gone with the internet and the diffusion of Facebook and Google and different types of digital ads; mainstream media cannot be this picky anymore, and they are heavily dependent on a few large advertising budgets, and that ends up distorting the news they report.
Kate: I think that’s a really interesting point that you raise about the concentration of your advertisers, I think that it ... I agree it probably has something to do with the way that advertising has changed and the pressure coming from competition from Facebook and Google, but if anything, those are reasons that we need to be supporting our independent media organizations, and so I’m just sort of, I’m at a loss for what to think about that, because on one hand, this heightened competition is leading to adverse outcomes and reduced reliability of the news that we consume, but on the other hand, I want to be supporting our news.
Luigi: Yeah, but the way to support the news is not by hiding a problem that’s been going on for decades, now it’s become worse, but has been going on for decades. Because while it’s true that it was easier to annoy one single advertiser, it’s also true that when there was an entire industry and this industry was important, then even the traditional media in a traditional time did not do that great. There is a study showing that magazines that did not receive any advertising from cigarette companies, at the time where advertising was possible, were 40 percent more likely to report news about the health consequences of smoking than a magazine that did take advertising, and similar stuff has been true about research on passive smoking. I think that the acceptance of tobacco advertising has been correlated to less articles and articles more critical of the research on the damage of passive smoking. So I think that this problem has been going on for a long time.
Now, you might argue that this is simple correlation. It doesn’t prove that they pulled out the articles because they were writing negatively about the industry. It might be that if I am a cigarette manufacturer, I want to advertise naturally in a magazine that has as customers people who like smoking or are more open to smoking, and that’s a natural coincidence. However, even if this is pure correlation, it does have a very strong implication. If I want to maximize my ad revenues, I better not talk negatively about smoking when smoking could advertise, and the same is true for a lot of other products today.
Kate: Yeah, I also think that’s an important point. One of the defenses of payola that was raised earlier, which is that people are used to seeing advertising all the time and so they’ve naturally built up these defenses and ways to recognize advertising, that still doesn’t address the fact that there’s information that’s not being reported, and so on one hand, a promotion may be something that people can defend against, but people can’t figure out bad things about companies if journalists are not willing to uncover those bad things because they’ve been supported in other ways by companies.
Luigi: And actually, what is positive is our academic journals that we normally publish in and read in economics and finance tend not to take ads in any major way, and so at least this distortion is not present, but when you go to medical journals, medical journals do take ads, and most of the ads are from pharmaceutical companies, and there is literature documenting some concern by the editors about the influence of the ad companies or the companies that produce the ads, mostly pharmaceutical companies, on actually the articles that get published in scientific journals. So this is even worse than the bias in the normal newspapers, because this is the academic community that should decide what is good for us in terms of what medicine we should take when we’re sick being distorted, and the major episode, hopefully it’s isolated, but there’s a major episode of the executive editor of the transplantation and dialysis journal that rejected a paper in spite of a favorable peer review, and he said, and I quote verbatim, that “The author went beyond what our marketing department was willing to accommodate.”
Kate: So Luigi, you’ve written a ton in many different news outlets about your opinions about the economy, about politics. Has anyone ever approached you and asked you to accept money?
Luigi: Yes, actually. It was many years ago. It was during actually the Parmalat bankruptcy. You’re an expert in bankruptcy, so you might enjoy that.
Kate: Actually, Parmalat means a lot to me, because my first job having anything to do with finance was looking into the Parmalat bankruptcy, but yeah, go on.
Luigi: So at the time, the international creditors were afraid to be taken for a ride by the Italian judicial system, probably not completely without reason, and so I got a US lawyer who came to my office, and when a lawyer actually comes to your office, you know there is something pretty important, because their time is very valuable and they generally don’t come to your office, they ask you to go their office. So he came to my office actually with a colleague, so two lawyers in my office, and they were trying to convince me to write a piece defending the interests of international creditors, and I said, “Look, you might be right, but because you offered money for this, I’m not prepared to do anything.”
Actually later, I discovered this is more diffuse than you think. For example, after the Iraq war, Qaddafi, then a dictator in Libya, was trying to show himself to the West as a reformed guy, and hired a consulting firm in America. This firm hired a lot of famous academics. One was actually a former dean of the London School of Economics. And these academics started to write articles all over the world where they were celebrating how great the changes in Qaddafi’s regime were, and nowhere to be seen was any disclosure that they’d taken money for that.
Kate: Yikes.
Luigi: If it wasn’t for the fact that eventually Qaddafi was killed and this stuff was exposed, we would never have known about this.
Kate: So the FTC explicitly has rules against unfair or deceptive business practices, and we may think that, “All right, it’s a government organization, it’s slow moving, it’s not up with the times,” but actually just recently, they sent out 90 letters of censure to what they called influencers on Instagram and YouTube, saying, “You’re not disclosing your endorsements or your sponsorship. You need to be doing this,” and they even followed up with 21 of them who didn’t listen to the FTC. So these investigations are going on. I don’t think that the FTC has been harsh enough in enforcing actions against people who may have accepted payment for endorsements, but I imagine ... I mean, these rules have existed for a long time and they’ve applied to journalists, as well.
On top of that, there are plenty of organic rules within journalism that maintain codes of ethics or maintain the quality of the journalism that’s produced. Like for the first time, I published a few weeks ago something on The Hill, and I had to sign a contract to be an independent contributor with The Hill, and very clearly in a couple paragraphs of that contract, it said that you cannot have accepted any money for this, “We have the right to state in your article that you have accepted money in order for sponsorship, or we have the right to just not publish anything altogether if you’ve accepted money,” and I would’ve had to disclose that. I mean, I didn’t, but it was there in the contract, and also, if you’re working for a reputable news organization, then your ass is going to be fired if your bosses find out that you’ve accepted money from anybody, and I think that they maintain, at least at the highest levels, very strict codes of conduct.
Luigi: It’s true, but those codes of conduct were not able to prevent, for example, those articles I mentioned about Qaddafi. So I’m not so sure that they’re so effective, and now, some mainstream media accept endorsed or sponsored content written by actual journalists of that newspaper. If you on one article write sponsored content paid by somebody, how can you be independent on the other articles you write?
Honestly, the newspapers made a mistake in the early 2000s thinking that they will make money with online ads and that the only game in town was to conquer eyeballs and you will be done. What they didn’t understand is that there were two or at least three major trends that killed them. Number one is the supply of ads increased tremendously. The media industry used to be a fairly oligopolistic industry with ability of some market power. With the internet, you can reach customers in so many ways that you lost on market power.
Number two, that Facebook and Google can do targeted ads so much better than the traditional newspaper that it’s not even funny. So at the same time, the demand went down and the supply went up and prices of traditional ads went to the bottom, and this destroyed the traditional media industry.
And the last coup de grace, the last sort of killing aspect, was the fact that the media industry was living a lot out of classified ads, and Craigslist killed that goose with the golden eggs, and so now the media industry is competing on very thin margins, and the only way to resurrect it is to have people realize that content is valuable and you have to pay for it.
Kate: Yeah, there was an interesting survey conducted by some polling firm called Toluna. They asked people whether they agreed that there should be no charges to access news websites online, and 96 percent of people think that news online should be free, which is pretty shocking.
Luigi: But the point is, what is the quality of what you’re getting? I think that what we need to do is to educate people, and I think it’s a lesson that we all have to learn, which is if you don’t pay for something, it means you are the product. You are the one being sold, and there is an agenda underlying, and that’s a problem. And I think that we should all make an effort in paying for news, because if you don’t pay for news, you get what you pay for.
Kate: I agree with that, and I have noticed this trend in more paywalls, which can be a little annoying, but I think like five years ago, every article that I looked up, I could find some way to get it for free. Whereas today, that seems to be less and less the case, and I think it’s because it took awhile for major news organizations to get used to shifts in technology, and it wasn’t really obvious right away what the best way to preserve their integrity would be, and I think what’s arising is that these subscription models have become the way for news organizations to maintain their independence as well as the quality of their journalism. It’s really easy for people to be considered sources of news even if they aren’t actually, which makes it that much harder for actual news organizations to compete.
Like Snapchat is now under the FTC’s guidelines. Podcasts are not. Podcasts are still sort of a gray area, and as a result of that, if you listen to other podcasts ... So we haven’t accepted any advertising yet. That’s not to say that we won’t necessarily in the future, but other podcasts that do advertise, you’ll notice that when you hear an advertisement, oftentimes they’re read by the host him or herself. Right? They’ll just be like, “I use Harry’s razors and Stamps.com because I love it so much for my small business and my armpits,” or whatever, and it doesn’t need to be disclosed. So I think that it’s important for the government to pick up on this and to pull in podcasts, as well, under their supervision.
Luigi: Full disclosure, I’m not being paid by Wine Advocate. I wish I were. No, I’m just joking, and by the way, Kate is not paid by the famous makeup artist.
Kate: Yeah. I promise.