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'Long-Tail' Theory Faces the Music

And so DMG's IPO plans are worth noting for two reasons. For one thing, it's a clear announcement that the long tail is no longer simply a buzzword describing an idea that everyone only sort of understands. It's quite possibly a lucrative business -- and investing -- venue that startups are building around.

For another thing, it's a clear warning that not every long-tail investment is worth investing in right now.

DMG is pitching itself as a growing catalog of songs, currently around 17,000, that are available only through downloads on online music stores such as Apple's iTunes, Yahoo!'s (YHOO) music site and Napster (NAPS). In fact, 80% of its revenue to date has come from iTunes. In the first six months this year, it brought in $234,000 in revenue from such sales.

The company is smart enough to see there will probably be a huge land grab for the rights to songs as more people grow comfortable buying music online, and as they cultivate an appetite for songs outside the mainstream.

Take a look at DMG's best-selling titles in June: Fats Domino's Ain't That a Shame, The Tams' Be Young, Be Foolish, Be Happy and The Foundations' Build Me Up, Buttercup. None of these will ever again be bestsellers, but there's pent-up demand to buy them online, because buying them on a CD usually means buying a dozen other songs you probably don't want. Add up enough of these microsales, and you can end up with a megafortune.

So that's one way to view this IPO: as a tool to carve out an inexpensive foothold in what could prove to be a lucrative market.

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