Big Tech as Payola

Supermarkets charge manufacturers slotting fees for shelf space, paying premium rates for eye-level placement and end-cap displays. A product placed at eye level is there because its manufacturer paid for the position, not because it is the best option in its category, but consumers have no way to know this. The US Federal Trade Commission investigated slotting fees in 1989 and again in 2000; both times it concluded that the practice harmed competition and hurt small producers without benefiting consumers. Neither investigation resulted in prohibition.

The practice of purchasing prominent placement but presenting it as editorial judgment isn’t confined to supermarkets. In the 1950s and 1960s, record labels paid disc jockeys to play their records, presenting purchased airplay as their independent opinion. Congressional hearings in 1959 exposed the practice, the Federal Communications Commission made payola illegal, and Alan Freed, one of the most prominent DJs of the era, was prosecuted and his career ended.

However, the hearings focused on individual wrongdoers rather than on the structure that made the wrongdoing rational. The practice therefore continued more or less uninterrupted through intermediaries that technically complied with disclosure requirements while achieving the same result. Record labels hired independent promoters whose provided radio stations with promotional materials. These promoters’ income depended on getting records played. Payments to DJs and program directors were restructured as consulting fees and appearance fees to stay within the letter of the law. Because the independent promoter was a third party, companies could argue that the direct link between label payment and airplay had been severed.

The FCC’s failure to enforce its own regulations is an example of regulatory capture. The broadcast industry is tight-knit and cares enough about the outcome to spend significant money; in contrast, listeners are dispersed, and payola isn’t their highest priority. This disparity tilts the balance of power such that the agency charged with overseeing an industry becomes more responsive to the industry’s interests than to the public interest it was created to protect.

A related problem arises when a platform operates as both a marketplace administrator and a competitor within that marketplace. Amazon uses granular sales data from third-party sellers to identify profitable product categories and then introduces competing Amazon-branded products into those categories. The seller who developed the market and generated the data that revealed its value has no equivalent access to market-wide information and no means of preventing Amazon undercutting them. Similarly, Google places its own vertical search products at the top of search results while ranking competing services lower, and Apple controls the ranking system on the App Store that determines how visible its own application and competing third-party applications are. This is not payola, but the consumer’s position is nevertheless identical: prominent placement is a false signal of quality.

Securities law prohibits an analogous conflict known as front-running. A broker who executes customer orders is prohibited from trading against clients using client order information because taking advantage of insider information takes value from the customer. Funnily enough, the standards that financial regulators apply have not been extended to platform markets, even though the identical conflict of interest produces the identical harm.

The small labels on paid search results meet legal requirements for disclosure, but don’t have redress the imbalance between platforms and their users. What would actually work is structural separation: a search engine that derived no revenue from placement would have no incentive to blur the line between paid and organic results. Short of this, accurate disclosure would require prominence and clarity that platforms have no incentive to provide, since their business model depends on users not knowing that the game is rigged.

See the whole series

Doctorow2022

Cory Doctorow and Rebecca Giblin: Chokepoint Capitalism: How Big Tech and Big Content Captured Creative Labor Markets and How We’ll Win Them Back. Beacon Press, 2022, 978-0807007068.

Khan2017

Lina Khan: “Amazon’s Antitrust Paradox.” Yale Law Journal, 126(3), 2017.

Segrave1994

Kerry Segrave: Payola in the Music Industry: A History, 1880-1991. McFarland, 2013, 978-0786476145.

Stoller2019

Matt Stoller: Goliath: The 100-Year War Between Monopoly Power and Democracy. Simon & Schuster, 2019, 978-1501183089.