There’s been a lot of recent media buzz about Radiohead’s decision to sell their new album “In Rainbows” directly through their website on a “pay what you want” basis and what it would mean for the record industry if this new model were to prove effective. We decided to take a look at what comScore data was showing and issued the results in a press release today.

Some will probably jump to the quick conclusion that with an average price per download (including both free and paid downloads) of just $2.26, the business model is not viable—or at least that a band is better off letting a record label do the heavy lifting in generating album sales. But, I don’t think that would be taking all the important factors into account.

First, because Radiohead is bypassing many of the costs of record label representation, a higher percentage of sales go back into their pockets. So, all other things being equal, even a substantially lower average sale price could still mean more money going into the band’s coffers.

Now if you look at the average price per paid download, it was actually $6. You could argue that many of the consumers who paid zero would have pirated the album anyway, or may not have had enough interest to try and obtain the album in the first place were it not available free of charge. So this number may actually be a better gauge of price. If you accept this premise, then the $6 in sales per album sounds like a decent sum when you consider that the record labels aren’t getting their standard cut.

Another argument in favor of the Radiohead model is that it actually encourages a higher number of consumers to download the album, potentially increasing a band’s overall fan base, which could generate incremental album (and concert ticket) sales down the road.

But perhaps what I found most interesting in the research was this fact: for every $1 in sales coming from album downloads, sales of their Discbox generated $2. Now obviously not as many people were willing to shell out $80 for the Discbox, but enough of them did to generate a very healthy stream of additional revenue. (Every 1 person willing to buy the Discbox represents the revenue equivalent of roughly 35 album downloaders.) So if this new distribution method drives incremental traffic to their website that is successfully converted into Discbox sales, it could prove to be a major boost to total album sales.

So let’s take a final look at the economics of the Radiohead model. The average e-commerce site converts about 5% of its visitors to buyers, so let’s take that as a lower-bound estimate for Radiohead sales (in reality, the conversion rates we saw on the site were significantly higher). If 5% of their 1.2 million visitors spend $6 per album, that’s $360,000 in revenue. When you factor in the additional sales generated by the Discbox, we’re looking at roughly $1 million in sales during the month. And again, this is based on the lower-bound conversion rate assumption. So I think it’s fair to say that this model, if executed effectively, can be a very legitimate sales driver. In Radiohead’s case, as the first band to venture into this uncharted territory they had the benefit of a media firestorm to help promote the album. If other artists decide to jump on this bandwagon, will they receive the same benefit?

Radiohead released a statement today calling into question the validity of our recent report. Since we released our report on Monday, November 5, there has been a great deal of media coverage, and while much of the reporting has been excellent, there have been instances in both news media and blog postings that indicate not everyone understands how comScore arrives at its market projections.

comScore reports are derived from a representative sample of 2 million Internet users, who opt in to our panel and allow us to observe their actual online behavior, including e-commerce transactions. Because the data are based on passively observed consumer behavior, as opposed to polls or survey responses, there is no potential for recall error. When we observe an e-commerce transaction in our panel, the value we observe represents the actual price paid by that consumer.

As an affirmation of the validity and representivity of our panel, we regularly release quarterly U.S. e-commerce spending estimates, several weeks in advance of the U.S. Department of Commerce releasing its own figures, and during the past 7 years our figures have rarely deviated from the official Commerce numbers by more than a few percent.

For the Radiohead study, we observed the activity of nearly one thousand people who visited the “In Rainbows” site, a significant percentage of whom downloaded the album. We ultimately observed several hundred paid transactions, all of which ranged between $0-$20, representing a very robust sample for estimating the average price paid per transaction. It’s true that any sample has natural variability, so these numbers are, in fact, estimates. However, when you have a relatively large sample falling within a narrow range of values (i.e. there’s a small standard deviation), the margin of error in the estimate is minimized.

If you’re not yet convinced that sampling can produce an accurate estimate, think of it this way....

Let’s say you work in an office with 500 people and you want to find out how much the average person in the office spent on lunch today. You decide to randomly select 50 people from the office to get an estimate. Now you could ask them to tell you how much they spent on lunch, and you might get a reasonable estimate if they can remember. Some people might have forgotten what they spent, others may round to the nearest dollar, etc. But if you averaged the response of 50 people, you’d probably be in the ballpark.

Now what if, instead of asking them how much they spent on lunch, you asked for their lunch receipt. You would have data based on their actual observed behavior, and you would be able to calculate a much more accurate average. With the lunch receipts of 50 people in hand, how close of an estimate do you think it would produce? Because most people probably spend between $5-$10 on lunch (with a lunch of more than $15 being a rarity), you would get a very accurate estimate. Probably within pennies of the actual average.

This is effectively what we did with the comScore study on Radiohead’s album sales. We observed the actual online spending behavior from a robust sample of hundreds of individuals in order to produce an accurate estimate. If we didn’t have a reasonable sample from which to extrapolate, we wouldn’t have released the data. But we did, and we’re confident in what the data showed.

I hope this helps clarify any confusion on the study.

Let me begin this posting by saying I hope that those in the U.S. had a terrific Thanksgiving holiday. It’s a very special time of year and we have much to be thankful for.

Thanksgiving also marks the beginning of the busiest time of the year for the Marketing Communications group here at comScore, because it’s the kickoff to the media’s intense focus on trends in consumer spending. This scrutiny is understandable, because roughly two thirds of the U.S. GNP is generated by consumer spending. And, since the months of November and December together account for a disproportionately high percentage (20%) of each year’s total spending, there is, understandably, a sharp focus on holiday season spending patterns.

This is the seventh year that comScore has published online spending statistics and each year there is more interest from the media in our numbers. This year, the 2007 holiday shopping season is shaping up to be a particularly important one. And, an especially intriguing one if you’re a researcher like me. Everyone, it seems, is asking the same, fundamental question. Is the economy being crimped by a decline in consumer spending that can be traced to several problems, including the sub-prime meltdown, the decline in home values, higher gasoline prices, and a weak stock market?

To address this issue, a variety of shopping statistics will be discussed and evaluated in the coming weeks, most notably the percent increase versus year ago in retail sales and “same store” sales. While these are undoubtedly important measures, I think they no longer provide the complete view of consumer spending that they once did. The reason is the growing importance of online sales. To understand this, consider that if one excludes food, gas and autos, online sales will represent about 7.5% of consumers’ total spending this holiday season. So, if online holiday sales grow at a rate of 20% (comScore’s forecast), this means that the increase in online spending will represent about 1.5% of consumer spending.

To be sure, it’s likely that a substantial portion of this online growth represents spending that is being pulled from retail. But, the fact remains that traditional metrics which focus only on retail spending and don’t include online buying will understate the strength in consumer spending. We need to be sure to add the e-commerce growth numbers to the retail growth data to get an accurate picture of what consumers are doing. With economists projecting a growth of only 4% in consumer spending, the inclusion of 1.5 points of spending coming from e-commerce could make the difference between a so-so holiday shopping season and a strong one. E-commerce has definitely come of age.

As promised in an earlier blog post, I want to share with you an analysis of the display advertising delivered on MySpace and Facebook that I recently presented at the Forrester Consumer Forum. The data are based on comScore’s Ad Metrix service, which captures and classifies the ads seen by the comScore panelists. We think this is a more accurate approach to measuring the number and types of ads delivered on sites than the spidering approach favored by other research companies because spiders miss much of the targeted ads that sites deliver today.

What the comScore data reveal is that MySpace is far more developed as an advertising platform than Facebook – along a variety of dimensions. For example, in September MySpace attracted 68.4 million unique visitors, 2.2 times the 30.6 million that visited Facebook. But, MySpace visitors also consumed 1.4 times more pages per visitor and MySpace delivered 2.2 times more ads on each page viewed (with each ad being about twice the size of the ads run on Facebook). Cumulatively, this translates into MySpace delivering 6.6 times more display ad views than Facebook.

Clearly, these data point to the huge upside that exists for Facebook to increase its advertising business relative to MySpace by continuing to build its user base (Facebook unique visitors in September were up 129% versus year ago while MySpace increased by a slower 23%) and by increasing the number of ads they’re delivering per page viewed. Of course, it can be expected that, as the number of ads delivered on Facebook increases, astute marketers will also begin paying more attention to changes in the “share of advertising views” that they’re getting within their particular product category and target audience to see if their “share of voice” is declining.

Recently spotted: comScore data in Times Square from our first e-commerce report of the holiday season.