Key points:
- 7Digital shares are up 15% on a contract win
- This is after the 23% fall on the annual results
- The key issue is how many people can 7Digital persuade to use them in the technology stack?
7Digital (LON: 7DIG) shares have jumped 15% this morning on the announcement of a contract win. Which is nice, new business is always a good idea. The thing is, only two weeks back, 7Digital slumped 23% so, given the way percentages work, we're not even back to the starting point as yet. Further, given the 80% or so slump from prices back last autumn of above 90 pence, where do we think this is going overall?
We can see that 7Digital is in an interesting area of business, this very deal announced today shows that. The detail is: “7digital (AIM: 7DIG), the global leader in B2B end-to-end digital music solutions, is pleased to announce it has won a new two-year contract with Singapore-based Lomotif, one of the top worldwide social video-sharing apps.” To unpack that a bit. Everyone's interested in mimicking the massive success of TikTok. Short clips of video shares as a social network, who wouldn't want to get aboard that bandwagon? 7Digital provides one of the necessary building blocks, the library of licenced music clips plus the technology to both integrate them and also track rights payments.
It's an interesting part of the technology stack to be providing. And, as the old saying about gold rushes go, selling the tools is often more profitable than going to dig for the gold. Levi Strauss made much more out of selling denim to miners than the average miner made out of mining.
On the other hand, as we noted when we looked at 7Digital's results, there's no great evidence of money being made – quite the contrary in fact. And while there is growth it's not at the sort of speed we might hope for for someone in a market booming like this. Which is also the problem with being part of a technology stack.
Being a part of the infrastructure is great. As the market expands there's that little – tiny perhaps – slice of each and every transaction to be taken. Costs don't scale with volume as much of the cost is in the original system production, not use of it. The other way to put this is that the marginal cost of a transaction is hugely below the marginal revenue from one. Thus, as system usage expands so margins widen out delightfully. Gross margins are already in the mid 60%s, the need is to get volumes up over and above system writing costs.
Super – but that does depend upon getting chosen to be that layer in the technology stack. And chosen by people who are going to be doing the high volumes too. Which is where the sales effort is expended of course. But it's the success of that which is the determinant of the success of 7Digital as a whole.
It's not that they're in an expanding market. It's how many of the would be TikTok competitors that they can convince to use the 7Digital platform? Which is where the uncertainty comes in.
