Actually, it’s not quite as bad as your numbers suggest – they didn’t “spend” $63 million in the first 9 months of 2009 (but it’s not great either)

They had gross revenues of $45.5. 80% of those revenues were really the revenues of their distributed labels/artists – so $33 million goes straight the the labels. This left them with a gross margin of $12 million – although in reality as a distributor this is really what you should think of as their revenues – the distribution income they generate. They had $15.7 million in operating expenses. So it cost them $15.7 million to run a business that generated $12 million in net revenues. So they are still losing $3 million on an operating basis.

On top of that – they took a $14 million goodwill write down related to the purchases of the Orchard and DMGI. This is a non-cash expense – a realization they overpaid for these assets when they purchased them.

If you look at the comparable #s for 2008, they generated $11.7 million of net revenues on $14 million of operation expenses – so they were still losing a couple of million on an operating basis.

Here’s the real problem. 2/3 of their revenue comes from iTunes and eMusic. So in reality for any indie label that is doing significant revenues it’s not that hard to a do a direct deal with those to accounts and save on they distribution fee. You might work with the Orchard for everyone else – but the volumes are a lot lower. They’ve set up a distribution that requires scale/volumes to generate profit – but in a world where 2 accounts represent 2/3 of the revenues – how much value are they really adding?

They had almost 1.5 million tracks in their catalog – so call that the equivalent of 150k albums. They generated $45 million in gross revenues in those 9 months. That works out to $300/album on average. Obviously, there’s large pieces of the catalog that aren’t selling at all. When you factor in the costs of licensing the content, getting it into their system, and accounting to artists/labels – they are probably losing money on a large percentage of the catalog they distribute.

Bottom line – you can’t base a distribution business on product that doesn’t turnover.