A promotional effect measures the difference in sales where songs were available to Pandora listeners and sales where the songs weren't available. So, for example, a 2-percent promotional effect means the song's TEA sales were 2 percent higher in regions it was available than in regions it was not available.
Chris Harrison, vice president of business affairs, says the study offers an empirical measure on what had previously been believed only through anecdotes. "Now, via this study, we have clear proof of the 'Pandora Effect,' and its positive contribution to the music economy beyond just our royalty payments as the highest paying form of radio."
Interestingly, the study also found promotional effects grew as plays increased. In new music experiments in which Pandora spins were at least 25 times sales, there was a positive effect of 5 percent. When the spins/sales ratio was 150, the positive effect for new music was 15 percent. In other words, the more people heard a song, the more likely they were to purchase the track or album. Positive effects were also seen for catalog music.
Pandora's researchers also put a dollar -- or cents -- figure on the promotional aspect of the service by adding to the royalty rate the value of the music sales resulting from the promotional effects. Using this approach, the researchers puts the value of new music at 0.265 cents per stream, 104 percent higher than the standard royalty of 0.13 cents, and the value of catalog music at 0.135 cents, 4 percent higher than the standard royalty.
The study was led by two members of Pandora's science team, Stephan McBride, who holds a PhD in economics from Stanford University, and Oliver Bembom, who has a PhD in statistics from U.C. Berkeley. A Pandora spokesperson tells Billboard the members of the research team have PhDs in technical disciples and "substantial experience analyzing data." He added the researchers will prepare the study "for submission to a leading academic journal for peer review and subsequent publication."
For years people have debated whether or not webcasters such as Pandora are promotional, meaning they encourage music sales, or substitutional, meaning they substitute for music sales. Consumer surveys, like those conducted by NPD Group, have indicated Internet radio has spurred listeners to buy more music. A webcaster would present such information to the CRB in hopes of securing a statutory rate that reflects its financial impact beyond royalties. For a company the size of Pandora, even a slight change in the statutory royalty rate would equal tens of millions of dollars in annual royalty payments.
SoundExchange, the performance rights organization that collects statutory digital royalties, seems to have anticipated the thrust of Pandora's study. Its submission to the CRB includes testimony by Daniel L. Rubinfeld, a former chief economist for the Department of Justice's Antitrust Division, which attempts to squelch any argument for the promotional benefit of webcasting. "Any supposed 'promotional benefits' that statutory services provide today should not be expected to continue at the same level in the 2016-2020 rate period, given the decline in CD and download sales," he wrote. Instead, he believes webcasters will be in competition with, and substitutes for, other streaming services.
That's not to say webcasters won't have promotional benefits in the absence of music purchases. What today is an incremental music purchase could tomorrow be an incremental on-demand stream or subscription purchase. And promotional benefits also extend to actions ranging from attending a concert to joining a mailing list. But those are matters for future studies.