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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 - Get Report) 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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