In a recent article in Silicon Valley Insider, TargetSpot’s CEO, Doug Perlson, suggests that the financial savior of Internet Radio might be payola – taking money from record companies or artists to play their songs.  Putting aside any issues of the financial benefits of such a plan, and the creative and aesthetic issues that pay for play may raise, and since this is a blog written by lawyers, we’ll deal with the legal implications.  And as lawyers, we’re forced to play the spoilsport.  As set forth below, such a scheme can be done legally (just as it could be on terrestrial radio with the proper disclosures).  But, while there has been no legal enforcement of such activities, careful Internet radio operators would best be advised to be careful about just taking the money and playing songs, but instead should make some disclosure of the nature of the service that they are providing.

The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves – we’ll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a "radio" service for purposes of this statute).  But that does not end the inquiry.  Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute.  Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage.  Such statutes are in no way limited to radio, but can apply to any business.  Thus, Internet radio stations would need to be concerned.

Second, the FTC has in the last few years expressed concerns about viral marketing and other advertising schemes where the consumer is not aware that he or she is being subjected to advertising.  Whether it be the stranger in the bar who is paid to brag about the taste of some brand of beer or the chain email that endorses some product without revealing that the testimonial was bought and paid for, the FTC has been concerned that these techniques are false and deceptive trade practices.  Again, an all-payola channel would seem to trigger these concerns.

So is the idea a non-starter?  Not at all.  Just as in the broadcast world, the key is disclosure (see our Advisory on avoiding payola issues).  On a radio station, the FCC’s payola rules are not violated if the fact that the plays are paid for is disclosed to the audience.  So disclosure that the "following 15 minutes of programming has been paid for by the Universal Music Group" and the playing of only UMG songs during that period would be fine under the FCC rules.  Under the NY State prosecutions, concerns were also expressed about notifications to automatic airplay monitoring services, so notice to such services might also be required.  The same would seemingly hold true for Internet radio.  If you wanted to create the Sony Music channel sponsored by Sony, and it was branded that way, it would seem as if it would be difficult to argue that there was any deceptive practice.  Disclosure in writing on the website in a manner where that disclosure was clear and conspicuous could also suffice.

The Silicon Alley article does make one good point – that a pay for play scheme would limit royalties that a digital music service would pay – as it is likely that any service that is getting paid to play songs would also get a waiver of the royalties for those songs (see our post on waivers here).  When confronted with a proposal where artist would waive royalties in exchange for airplay, artist groups complained that the waiver of royalties without disclosure, in and of itself, constituted consideration for airplay and would be "payola" if not disclosed.  We’ll save discussion of that issue for another day, but disclosure solves any issue that may exist.

This proposal for "payola radio" is not so far-fetched, even being suggested at a Congressional hearing on the broadcast performance royalty (or, as the NAB refers to it, the "performance tax").  In that hearing, a Congressman suggested that, if artists and labels really wanted a market system, it should be a full market system, where some artists may be able to hold out for payment for the playing of their songs, while others would have to pay to get on the air.  Broadcasters have had concerns about such a system, as small market stations might never get paid for play and might be forced to pay, while large market stations could be important enough to the promotion of a song to demand payment for its airplay.  For artists, small artists on independent labels would also be losers, as they could be cut out of the broadcast world if they couldn’t afford to pay (see our post here about the Congressional hearing and the concerns about this issue).

Payola radio – an interesting idea – but be careful to execute it carefully.