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'Long-Tail' Theory Faces the Music

A tiny company in Sacramento, Calif., with a pittance in revenue caused an outsized stir this month when it filed for an initial public offering. The buzz started when a few tech blogs crowned the company, Digital Music Group, as the first "long-tail" IPO.

But even if DMG, essentially a digital music wholesaler to online music stores, is a clearly undercooked IPO candidate now, it's worth considering simply because it represents a business model that investors will be confronting more and more in the next few years.

But what is long tail? Because it's still a new, if influential, idea, there's no clear consensus on it. But most agree that it's a gradual reshaping of the demand curve for digital music and other media -- in this case, from an overweening "head," comprising a handful of music megahits, into a growing "tail" of niche-catalog properties, whether hits of yesteryear or new works from garage bands.

In other words, new technology is bringing about changes in media commerce that allow songs, books and movies to keep selling -- modestly, but in aggregate, profitably -- long after their shelf life.

So what's the effect of this new technology? First, there are more tools to produce content, such as Apple's (AAPL - Get Report) Garage Band software, which can remix and create digital music, blogging software, and so on -- all of which puts more niche content out there.

Second, the cost of buying media is cheaper, whether through peer-to-peer software or through Web sites such as eBay (EBAY - Get Report). So it's both easier and more convenient to buy this stuff.

Finally, content that used to be frustratingly hard to find is much more accessible now, thanks to search engines, online user-created reviews, and content-oriented social networking sites such as News Corp.'s (NWS - Get Report) MySpace.

Of course, so-called long-tail businesses aren't anything new. In fact, the most successful ones are well-known, and many tech investors already own them. eBay, with its site allowing you to connect with people selling all kinds of weird stuff, is a clear example, as is Amazon (AMZN - Get Report) with its user reviews, Netflix (NFLX - Get Report) with its recommendation software and Google (GOOG - Get Report), whose sponsored links allow many a niche site to draw in revenue.

But none of these companies actually set out to exploit the long tail. None of them launched an IPO to tap into the realization that this is a busy intersection of media and technology that is going to make a few smart people much richer than they may already be.
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