This thread has a much better discussion of the actual numbers. https://news.ycombinator.com/item?id=5935183
In short, Pandora is small right now and that's why the payout seems small. But by paying per-listener as opposed to per-broadcast, it has the potential to scale to higher payouts than traditional radio.
You can find the info on where the 85% comes from in this story[1] but the important paragraph is below.
"Pandora CEO Joe Kennedy appeared at a hearing on Capitol Hill in support of the Internet Radio Fairness Act, or IFRA, which would lower the amount of royalties that Pandora and other Internet radio services pay to artists. The industry has estimated the act would allow Pandora to reduce payments to artists by as much as 85 percent."
[1]http://www.huffingtonpost.com/2012/12/04/pandora-artist-roya...
More effective, I'd argue; sure, its likely that a smaller percentage of the Pandora listeners are new listeners, but the targeting of Pandora stations is more focussed better than radio so a larger percentage of the Pandora listeners that are new listeners are likely to become fans.
Do you think Amazon would be more or less effective without personalized product recommendations? Which is better for niche products, Amazon or Walmart?
I would way rather have my product sold in Walmart. That's why Walmart suppliers are willing to accept such thin margins. Amazon's great for consumers. As a consumer, I like it that they have pretty much anything I would want to buy.
As a content creator, put me in Walmart any time, as I will be surrounded by a much smaller number of competing products. Being on the same shelf as big sellers Justin Bieber and Skrillex is a dream scenario for an emerging artist. My needs as a producer are way different from my needs as a consumer.
What's interesting is that even for the top 100 the Pandora model has the potential to scale to higher royalties than the radio model, which pays the same whether 1 or 1 million people listen to a broadcast. Less popular bands find niche audiences, more popular ones get paid for every single listen.
In other words, radio is focused around the head (big hits in any genre) while Pandora reaches the "long tail".
In another universe: "Pink Floyd gets paid for every person listening to their music on Pandora. Band claims it's a win over traditional broadcast from which they received nothing"