Cabaret Cards, Music Royalties, and Sales Quotas – How to Prevent Unintended Consequences

One of my mantras when preparing contracts or business policies is to “be careful what you incentivize.” This concept is related to the economic principle known as the “cobra effect,” named after a likely fictional story based in Colonia India.

 As the story goes, the governor wanted to eliminate wild cobras, so he incentivized citizens to hunt cobras by establishing a government bounty for cobra skins.  The government received thousands of cobra skins, and there appeared to be a reduction in wild cobras, so the bounty was eliminated.

What the governor did not know is that by placing a bounty on cobras he had incentivized local farmers to breed cobras. When the farmers the bounty was eliminated the cobras no longer had value.  So, the farmers released all the cobras, resulting in more wild cobras than there had been before the bounty was put in place.

There is a similar story based in in colonial Vietnam. In this story, the French, seeking to eliminate rats, paid a bounty for rat tails. However, instead of killing the rats, residents were just cutting off their tails and releasing them to procreate and create more rats.

Although both stories are likely myths, they illustrate why, when negotiating a contract or designing a business policy, it is not enough to focus on the immediate goal. It’s also important to consider the incentivizes the contract or policy will create and the natural consequences that are likely to follow.

This article discusses policies and business decisions that seemed reasonable when established but produced side effects that permanently changed the direction of a business or entire industry and include strategies that can help businesses foresee and prevent unintended consequences of their policies.

The AFM Recording Ban

In 1942, at the height of the Big Band Era, the American Federation of Musicians (AFM), sought to improve the lives of the instrumentalists in the bands. The AFM ordered its members to stop recording until record labels agreed to pay royalties into a union-administered fund. The strike lasted for more than two years. But, eventually, the AFM achieved its goal; the record companies agreed to contribute to what became the Music Performance Trust Fund.

However, the two years of the strike drastically changed the popular music industry in the US. Since the AFM strike only involved instrumentalists, record labels pivoted their focus to vocalists.  New recordings with solo vocalists and vocal ensembles, gave visibility to rising stars like Frank Sinatra. Thus, the strike reshaped American popular music toward singers, rather than bandleaders, starting the decline of the Big Band Era.

Cabaret Cards

In mid-20th-century New York, lawmakers grew concerned about organized crime, vice, and drug use in the city’s nightclubs. Their solution was the cabaret card system, which required musicians to carry a police-issued permit to perform in any club serving alcohol. Any criminal conviction, a drug charge, or even suspicion of drug use could result in a musician losing their cabaret card.

Unfortunately, the system prevented some of the era’s most gifted jazz musicians from performing in nightclubs. Legendary sax player Charlie Parker suffered a similar fate when his cabaret card was revoked after he was arrested on a narcotics possession charge. Despite being a leading figure in the development of bebop, Parker was banned from performing  in New York nightclubs.  After an emotional appeal asking New York to “give [him] and [his] family back the right to live,” Parker was one of the rare musicians to have his card restored.

However, others were not as fortunate. After her 1947 drug conviction, singer Billie Holiday lost her cabaret card. Although she made a spectacular comeback with a performance at Carnegie Hall (which wasn’t subject to the cabaret card rule), Holiday was banned from New York nightclubs for the rest of her life, robbing her of both her livelihood and the opportunity for thousands to hear her music.

Renowned jazz keyboard player Thelonious Monk endured multiple cabaret card suspensions, which created financial hardship and unemployment at the peak of his career. Eventually, he performed unbilled in remote locations in the boroughs and in other cities. Monk’s effective exile may have helped develop jazz outside New York, but it deprived New Yorkers of Monk’s contributions to jazz.

Cabaret cards arguably met the goal of cutting back on drugs in New York jazz clubs, but they also destabilized the lives of some of jazz’s greatest legends and deprived audiences of seeing them perform at their peak. By forcing musicians to perform outside of New York, the cards helped other cities attract top musicians, and as a result, weakened the role of New York’s jazz clubs as centers of music innovation and helped expand jazz’ influence in other US cities.

Per-Stream Royalty Model

Spotify’s per-stream royalty model is another example of a policy that created unintended consequences that changed the modern music industry. Spotify intended to create a fair model, which paid artists based on how many times their songs were played without regard to the length of the song.

So, a play of Queen’s five-minute Bohemian Rhapsody would receive the same royalty as Queen’s one-minute Lazing on a Sunday Afternoon from the same album. As a result, artists were incentivized to keep songs short to encourage repeat plays and began releasing albums that focused on a large number of short songs, rather than focusing on a cohesive artistic statement comprised of longer songs.

The number of plays a song receives also is important in Spotify’s algorithm, which helps determine songs for playlists. Emerging artists, who are especially focused on getting content on playlists so they can gain exposure and increase plays, quickly started creating content designed for the algorithm, rather than artistic value.

Spotify’s model delivered on the promise to pay artists for the number of plays. But by incentivizing volume over vision, the model reshaped how popular music is created and consumed. The consequence is a flood of content created to exploit algorithms rather than engage in musical expression, thus changing the focus (and arguably, muting creativity) of the recorded music industry.

Great Recession of 2008-9

The 2008–09 real estate market crash, which led to the Great Recession, is a quintessential example how a well-intended policy can change an entire industry and disrupt an entire economy. Incentivized by government support for homeownership and fueled by deregulation, banks and mortgage lenders dramatically loosened underwriting standards for home loans. With the rise of the CMBS market around the same time, mortgage lenders were selling loans shortly after the closing, so they had no incentive to be concerned about whether borrowers could pay off the loan.

The result was that borrowers were approved for subprime mortgages that they could not afford to pay.  Sometimes, lenders or their employees engaged in fraud by falsifying income statements or colluding with appraisers to inflate the home’s value.

Unable to pay off their loans, millions of homeowners went into foreclosure and real estate values plummeted.  Major financial institutions that were invested in the CMBS market collapsed or required government bailouts, triggering the worst recession since the Great Depression.

Laws like the Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau emerged in the aftermath, permanently changing how mortgages are originated, sold, and supervised. What began as a policy push for greater homeownership ended up destabilizing the entire real estate and financial industries and resulted in permanent changes to how mortgage loans are originated and approved.

Sales Quotas

For many years in the early 2000s, Bank of America used sales quotas either for employee incentives or as part of its performance review program. These programs were undoubtedly designed to encourage employees to cross-sell Bank of America products so that, for example, existing bank account customers were encouraged to apply for credit cards. 

However, the sales quotas also incentivized employees to illegally apply for and obtain credit card accounts for customers who didn’t authorize them. These unauthorized accounts affected customers’ credit reports and sometimes, resulted in customer fees. Bank of America abandoned sales quotas after the Consumer Financial Protection Bureau and state agencies brought actions against Bank of America.

Conclusion

The AFM recording ban, New York’s cabaret cards, Spotify royalties, homeownership initiatives, and sales quotas all were established with good intentions, but they all created unintended negative consequences which forever changed their industries. In each case, careful consideration before adopting the policies could have avoided the negative consequences.

When adopting cabaret card requirements, New York focused only on stopping organized crime; it didn’t consider how the police would implement the requirement or the impact on the entertainers. Spotify likely didn’t consider the algorithm’s impact from the artists’ perspective to determine their likely response, and the government and mortgage lenders didn’t consider how loan originators would react to policies designed solely to put people in houses.

With more advance planning, the policies in these examples might have included such guardrails. Cabaret card requirements might, like some drug possession laws, have limited revocation periods based on the nature of the drug offense so that entertainers who possessed drugs for their own use didn’t receive the same treatment as major traffickers. Spotify might have created an algorithm based both on play time and number of plays. Bank of America might have implemented fraud identification procedures. Or, the CMBS marketplace might have required that loans age before they were acquired or might have required that mortgage lenders retain a stake in the loans’ long-term performance.

Preventing unintended consequences requires thinking beyond the goals of the policy. Those creating policies or making business decisions must mentally walk through policy implementation. Along the way, they should view policy implementation from the perspective of all categories of stakeholders and examine every group’s incentives at each stage in the process. This evaluation may take some time, but it also will reveal where the policy needs “guardrails.” Without this evaluation and guardrails, history has shown that misplaced incentives can destroy a company or derail an industry.

© 2025 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality.

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