Digital Music Group's Late Start (DMGI)

| About: Digital Music (DMGI)

Digital Music Group Inc. (NASD:DMGI) went public in early February of this year and the stock moved up to $10.42 within a few days. It now trades at about $8.50. The amazing thing about Digital Music is that it lost money on $1,056,000 in revenue last year, but has a market capitalization of over $73 million. Investors would be hard pressed to find many companies with ratios that high, which lends a lot of risk to the company share price.

The company claims to have 65,000 recordings available to the online music stores, like iTunes, who are the company's customers. However, this is in a market with over 2 million available recordings, most of them coming directly from the major music studios, who are a tough crowd and are hungry to make money online.

Digital Music describes its library this way: "Our music recordings are from various genres and time periods and primarily include back catalogue, out-of-print recordings, past hits, world music, classical music performances, previously unreleased music recordings, live performances, and other music that may no longer be readily available from traditional music retailers". The problem here is that these do not sound like the most desirable titles around. The market for "out-of-print" and "past hits" doesn't appear to be terribly large.

The company got 87% of its total revenue from Apple (NASD:AAPL) iTunes last year. There is nothing wrong with that in and of itself, but a level of concentration that high could be very dangerous, and the Apple contract has less than a year to go.

Under the circumstances, 73 times sales is pretty hard to justify.

DMGI Share Price Since IPO

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. McIntyre can be reached at douglasamcintyre@gmail.com.