Sean Donnerwood's assessment, at his blog Shark Jumping, of the Digital Music Group's S-1 filing (the paperwork submitted to the SEC when a company plans on going public) is witty and insightful. But I really love it for its uses of the concepts "long tail" and "bubble," and for raising the topic of irrational exuburance in digital music. As Coolfer detailed the other day, there's a lot of investment in music right now, and much is in digital music.

DMG, he explains, is a 20-month-old shell company that owns the digital rights to a catalog of music. Such a company hopes to leverage the scale of digital distribution to capture value that is impossible and/or inefficient with physical distribution and physical retail. Its competition, he estimates, the other small content owners, do more business than DMG and have annual revenues of $20 million between the four of them. It's a business of small margins and high volume, and he's not sure how much volume is out there.

"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."

More on the mysterious company with doubtful potential after the click...

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