Can Anyone Explain the Difference Between Payola and Product Placement?

Philip Stone July 28, 2005

Two major advertising stories hit this week – Sony/BMG agreed to pay $10 million to settle a payola investigation by New York Attorney General Eliot Spitzer. And PQ Media says that the value of US product placement advertising excluding TV and movies in 2005 has gone up 18.1% and is now worth $384.9 million.
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And what is the difference between payola and product placement? Just the all-important name used to describe the practice. Payola is illegal; product placement is not. There is a US federal law dating back to 1960 prohibiting the buying of radio airtime for music (payola). But for product placement in any media the Federal Trade Commission (FTC) just this year gave an advisory opinion that the practice was perfectly ok and it was not necessary to tell the public when a product was being “placed”.

The Federal Communications Commission (FCC) had been urged to review the FTC decision, but it seemed reluctant to do so. Now that Spitzer has given chapter and verse  -- one FCC commissioner called it a “smoking gun” -- on how the world’s second largest music company has given away free gifts to program directors, disc jockeys and others in a position to influence what music gets aired, the FCC is showing renewed active interest in taking another look at payola, and it should not surprise anyone if that investigation spread to product placement in general.

In the US product placement is rampant in all forms of media, as the PQ Media survey details, but it was thought until the Spitzer investigation that the payola law killed that practice in the 1960s although if you said that to someone in the radio business they would laugh in your face. 

In many European countries television product placement is not allowed  -- in some countries not all and in others just public broadcasters are prohibited.

When Sky Television earlier this month in a sports program appeared to be heavily promoting a particular pair of basketball sneakers the UK Ofcom regulator issued a stern warning not to do it again. Ofcom is being urged by UK commercial television to review its product placement ban

As for payola in Europe, well, there are lots of nods and winks when that subject is brought up.

.And while payola prohibits the buying of US music airtime, that doesn’t mean that radio is not in on some product placement. When your favorite disc jockey keeps talking about a particular product or upcoming event is it because he/she likes it so much or is there some financial consideration at stake?

The PQ Media report lays bare that almost all US media are active in product placement, and that includes the country’s largest newspapers and that in turn poses obvious questions about editorial integrity.

According to PQ Media, in 2004, $55.6 million was spent on product placement within US newspapers, and 23% of that went to the top five markets – The Wall Street Journal, The New York Times, USA Today, The Los Angeles Times and the Chicago Tribune.

The biggest non-TV/movie segment for product placement is magazines, especially women’s general interest. Earlier this month a new planned food magazine, Relish, told the advertising community it encouraged sponsors to buy brand mentions in recipes prepared by editorial staff and also product placement was welcomed in editorial copy recommending home and kitchen gadgets.

US magazine product placement is expected to expand 17.5% to $160.9 million in 2005 and newspaper placement is set to grow 16.9% to $65 million. Videogames are projected to be the fastest growing sector surging 22.2% to $40.4 million.

“Advertisers and marketers are scrambling to compete for consumers’ time and money in this era of audience fragmentation, advertising clutter, media multitasking and ad-skipping technology,” according to Patrick Quinn president of PQ Media.  “Alternative marketing in on the rise, and marketers are using product placements in other media to reach target demographics and strengthen return on investment.”

The company projects that such product placement will grows at 12.9% annually through 2009 reaching $598.5 million.

But for all that, it is still a pittance when compared with what is being spent on television and movies.   PQ Media estimates the 2004 movie/television product placement spend at about $3.45 billion – some 91% of the total. Television product placement took about  $1.88 billion, up 46.4% over the year earlier. And the business continues to grow.

Leslie Moonves, head of CBS, told Broadcasting & Cable magazine: "We're making more and more of those deals: the kind of cars they drive in CSI; the kind of orange juice they drink in Two and a Half Men."

PQ Media estimates the total 2005 US product placement spend will increase 22.7% to $4.24 billion.

Television now leads movies in product placement revenue and that trend is set to continue with it controlling some 61.2% of the product placement spend by 2009.

And assuming that is not all new money flowing into product placement then what is the outlook for television station revenues depending on the traditional advertising spend? Procter & Gamble put the real fear into the industry when it cut its Q1 traditional television spend by 8% to $678 million. It is not lost on anyone that P&Gs products are exactly the type that fit well into television product placement campaigns. 

No wonder major media groups are looking at their TV holdings. Bob Iger, the incoming Disney president, says television currently is” fragile and vulnerable.” That sentiment could explain why a major group such as Emmis Broadcasting says it wants to concentrate on its radio business and is looking to sell all its television stations. 

But with the payola scandal not going away-- Spitzer was investigating four music groups plus some big radio companies and so far he has made a deal with just one – and the FCC wanting now to get into the act, it may well be that product placement for television may come under closer scrutiny.

But at the end of the day product placement is here to stay. The only possible change might be that you’re told what is happening..

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US Payola Settlements Continue - October 21, 2006

CBS Radio is the latest to make a settlement deal with New York Attorney Elliot Spitzer’s crusade to stop payola – the broadcasting of certain songs in return for financial rewards, which is against US Federal law.

The agreement calls for CBS, which does not admit liability, to pay up to $2 million to New York non-profit groups to fund music programs.

CBS said two employees had been terminated after it was discovered their activities were “inconsistent” with policies. Spitzer said that some CBS-owned stations sought payments from record labels including vacations, gift cards, and the like in exchange for playing their music.

Another US Payola Settlement – Universal Agrees to $12 million Settlement - May 15, 2006

Universal has now joined Sony/BMG and Warner Music in saying “sorry” for payola activities and has agreed a $12 million settlement with New York Attorney General Eliot Spitzer.

Spitzer said Universal paid radio stations to frequently play Universal artists by providing cash, contest prizes, expense money and the like in exchange for air time. Such activities in the US are called payola and are banned under federal law. Spitzer said Universal executives understood what its underlings and middlemen were doing, indeed they pressured them into such illegal activities. He said the company has now agreed to cease such marketing.

Universal said that the reforms agreed with Spitzer were actually voluntarily implemented more than a year ago.

Spitzer has now gotten $27 million from music labels for payola activities -- $10 million from Sony BMG, $5 million from Warner Music, and now the highest amount, $12 million, from Universal

Second Recording Company Settles Spitzer Payola Probe – November 23, 2005

Warner Music Company became the second major recording company to settle an investigation by New York Attorney General Eliot Spitzer into payola – payments and inducements by recording companies to radio station personnel to play their music.

Warner Music Group settled the case by agreeing to pay $5 million and reform its ways. Sony-BMG was the first to settle last July paying a $10 million fine.

Last summer Spitzer asked for documentation from EMI and Universal Music Group. He indicated in announcing the Warner settlement that his investigation is continuing.

The Federal Communications Commission also said after the Sony-BMG settlement that it was investigating how pervasive payola might be.

FCC To Investigate Sony/BMG Payola Settlement - August 10, 2005

With many people wondering why it was taking so long, the FCC finally has announced it will investigate the Sony/BMG agreement to pay $10 million to settle a payola investigation by New York Attorney General Eliot Spitzer

Two weeks after the settlement details were made public, FCC Chairman Kevin J. Martin finally announced, “The Commission will not tolerate non-compliance (with the payola laws)” and the agency would open an investigation into the findings of the Spitzer probe. Depending on the commission’s findings, civil and criminal proceedings are possible.

The FCC chairman has been pressured on at least two levels to open an investigation. Spitzer himself at his July 25 news conference announcing the Sony/BMG settlement said “It would have been good if the FCC had looked at this.” And a Democratic FCC member, Jonathan S. Adelstein, said the commission should be more aggressive fighting payola. “This payola scandal may represent the most widespread and flagrant violation of any FCC rules in the history of American broadcasting,” he said.

The Spitzer investigation into practices by other music labels and by some radio groups continues.