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The Meaning Behind Pandora's Brilliant Legal Maneuver

Stocks in this article: P AAPL CCMO

NEW YORK ( TheStreet) -- Pandora (P) bought a FM radio station in Rapid City, S.D.

I'm not joking.

It's an absolutely brilliant legal move in (one of) the fight(s) over music royalties that just got a little more confusing. Billboard does an excellent job explaining the ins and outs of what we know so far. I'll hold comment on the legal aspects until a motion Pandora filed Tuesday in association with a complaint from November against ASCAP becomes public in about a week. Plus, I want to talk to a few people in the know.

For now, let's look at other important components of the radio station purchase.

Consider the last paragraph of an op-ed piece Christopher Harrison, Pandora's Assistant General Counsel, wrote for The Hill:

Certain powerful music incumbents see Internet radio as a threat to the status quo. We see Pandora, and Internet radio, as a transformative way to connect listeners with music they love. Every day we introduce artists to scores of new listeners who can't find them on the traditional FM dial. The status quo is a dead end for the vast majority of working musicians and the Internet is driving a sea change that will fundamentally shift the equation away from big industry players toward a more democratic and inclusive industry for both listeners and artists. For this to become reality, Internet radio must be embraced -- not discriminated against.

Well-stated. And while Pandora aggressively postures by becoming owner of a broadcast radio station, it can get quite a bit more out of the move.

First, Pandora will provide the Rapid City station -- KXMZ-FM -- with local listening data (number of spins in the market, thumps up data, etc.) so programmers can personalize their station for their city. This doesn't happen in major markets such as New York and Los Angeles, let alone South Dakota.

This programming approach coalesces with Pandora's ability to execute local promotions. When KXMZ finds out which independent artists receive the most "thumbs ups," for example, it can encourage these acts to make Rapid City a tour stop. This eliminates a great deal of the anxiety working musicians experience when they hit the road. How do we bring people out to venues so something we absolutely have to do -- tour -- doesn't turn into a money-losing proposition?

Assuming Pandora takes this approach in Rapid City -- and I would be shocked (and disappointed) if it didn't -- we will be able to see the power of its fine-grain local data in action. Because, remember, Pandora plans to share streaming data with artists so they can leverage it as a promotional tool.

Second, the number of listeners Pandora has in Rapid City is astounding. In a market of roughly 107,000 people aged 12 and up (according to Arbitron), more than 42,000 residents use Pandora.

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