SharkJumping

I can't decide if this is Halloween scary or April Fools funny, but a company known as Digital Music Group (I have linked it, but there is no active web site - presumably they will fix this before they go public, at least if they plan on communicating with shareholders) filed an S-1 this month in order to take advantage of the hype surrounding digital music and the "long tail".  DMG is the name of the shell company which acquired a small 20 month-old digital music aggregator called Digital Musicworks International, and then acquired the digital rights to a set of music recordings from another entity called Rio Bravo Entertainment LLC (www.psychobaby.com)

Digital music aggregators act almost like record distributors in the physical world.  Since there are thousands of independent music labels which want to offer their content through the digital (e.g. iTunes and Rhapsody) and mobile (e.g. Moderati and Infospace Mobile) services, aggregators fill in the gap, becoming the single point of contact representing tens or hundreds of smaller labels to the larger music services.  The "long tail" theory of it is that the unlimited shelf space of digital services will allow all of these small content owners to monetize their recordings, and any company which can facilitate that process is bound to do well.

However, it's a slice of a slice business, as many distribution businesses are, and they tend to need massive scale to overcome the very small margins.  My best guess is that DMG is probably 5th in size in this sector - the other bigger ones are The Orchard, IODA, Digital Rights Agency and Iris, and there are no signs that any of them are going public any time soon since the entire group probably does $20M in annual revenue.

So we're left with a 7 month old company with 10 employees (reduced from 15 three months ago), $224K in revenue for the 1st 6 months of 2005, a 9% gross margin (sounds like Loudeye as we discussed in an earlier post), and a brutally competitive sector with multiple larger players where all of the leverage is held by the music services such as iTunes, which currently accounts for 80% of DMG's revenue.  The idea that this company is going to go public is clearly ridiculous and dredges up bad memories of MusicMaker from the last bubble.