Archive for August, 2007

Stage6 Traffic Explodes: Every Dream Has A Price

Aug 10

Posted by Davis in Disclosure - I own stock in co. mentioned, DivX, DRM, DVDs, HDTV DVDs, Media, Microsoft, Movies, Netflix, Technology, TV, VOD, Web 2.0 | 2 Comments

Every Dream Has A PriceDivX reported their second quarter earnings yesterday and from a financial perspective, there really weren’t too many surprises. The core business remains strong, but Stage6′s growth is certainly starting to impact earnings. The company ended up beating Non-GAAP expectations by a penny, while revenue came in slightly above the $18 million, that the analysts had anticipated. The company guided toward higher revenue expectations for the 3rd quarter, but reined in analyst expectations for the fourth.

From a strategy perspective, things were much more interesting. Lots of exciting news to digest. On the call, DivX addressed their opportunity to gain market share in their core licensing business, the future of DivX connected and how other emerging technologies could fit into that, and perhaps most importantly, the reasoning behind their plans to separate Stage6 from the larger company.

Of all the strategies discussed, there was one that surprised me the most though, DivX has made the decision to try and bury their hatchet with Hollywood, in an attempt to get DivX DRM blessed by the studios. I’m less than optimistic on management’s chances, but if they could pull it off, it would make DivX Connected a pretty compelling solution.

Trapped Between DVD and VOD

The DVD player market continues to account for the majority of DivX’s core licensing revenue. At the end of March, DivX had 32% global penetration of the DVD player market. This was up from 21% from a year earlier. During this quarter, $14.2 million of their revenue represented royalties from their OEM partners. Sony actually accounted for over 10% of their licensing revenue and I still can’t find Sony DivX DVD players in the US.

At this point, DivX has achieved 90% penetration levels in France, Spain and Russia. In the US, the percentage of DVD players that included DivX doubled over a year ago and is now at 28%. In Japan, they still only have an 11% penetration level, but this is up from 5% a year ago. Over the last year, they’ve been able to successfully renew their contracts with their top OEMs and have been able to maintain pricing levels.

By growing their market share for the DVD player market, it has allowed DivX to continue to post impressive year over year growth, even though it’s clear that the DVD has peaked. Right now is an awkward time for DivX because there are so many uncertainties as to how the VOD market will end up shaking out. There are many pundits who are worried that DivX won’t be able to replace their DVD revenue as it tapers off.

To me, this seems a little foolish and is a bit like being afraid of the boogie man. The DVD market will not disappear overnight, it will live longer than the VCR survived. As people migrate to digital TV, DivX is in an excellent position to benefit from that. If their OEM partners see that there is no more demand for DVD players, it will make DivX certification an even greater necessity for them.

The transition to VOD will eventually happen on a mass scale, but it will still take years before the next generation of TV gadgets hits the mainstream.

When Greenhall was asked about how long he thought it would be, before the public started to move from DVD players to connected devices, he told analysts that because DivX’s ecosystem was so dependent on their OEM partners, that it was hard to forecast the transition, but that when it happens, the revenue will come quickly because their partners produce goods for the mass markets.

Emerging Technologies Will Open New Doors

Part of what makes DivX such a question mark, is the sheer size of their addressable market. They’ve established a nice business in the DVD market, but now want to expand DivX to a whole host of devices. During the earnings presentation, Hell listed the following technologies as a few of the markets that are on their hit list; Mobile devices, set top boxes, digital still cameras, game consoles, portable media players and digital televisions.

Of these potential markets, the cell phones have the most potential. Over this quarter, Samsung announced their second DivX enabled phone and will be selling the phone in the Chinese market. Since their first Samsung phone announcement, DivX has seen a lot of interest in working with other cell phone manufacturers.

Their OEM partners are excited about the technology and are coming to them for access. There will be more models announced in the future and while they didn’t give a time line, management seemed optimistic that the announcements would come soon.

On the set top front, during the quarter Divx announed that both St Microelectronics and NXP were both developing chips for a DivX set top box solution.

The box will allow you to plug in an external hard and play DivX files directly on your TV. This helps to solve the problem of getting DivX content to the living room, but still doesn’t help to add to the DivX content eco-sphere. You can’t take the TV off the box, but at least you can bring DivX to it. Hell also said that there was one more set top chip deal that hasn’t been announced.

Hell also included DivX HD as part of the emerging category. HDTV has been one of the hottest growth areas in consumer electronics. Users are starting to revolt. People love the DivX HD teasers on the stage6 website and from (cough) “others sources” on the innerwebs, but they can’t get it to the TV without some kind of a media center.

DivX wants to license their HD technology on top of HD-DVD and Blu-Ray players, but I think that they’d have a much better shot at convincing their OEM partners to sell a low priced DVD player with “DivX HD.” included. With as much as the studios are charging for the next gen players, a box with DivX HD certification and a dirt cheap price point, would appeal to consumers who know better than to try and pick a side in a Hollywood format war.

DivX Connected: Bringing Partners Into The DivX Community

DivX has talked quite a bit about their Connected initiative, but they’ve always left things a little sketchy on the details. Is it a box, is it not a box? Who could really tell, but after launching a prototype of their connected solution for beta testing, the company is now starting to open up on the details. DivX Connected can be a lot of things, but they see it being a similar experience to Apple TV, except minus the high cost and the restrictions on content.

The whole concept is really a lot larger than the prototype box. It’s about bringing a diverse set of partners together, in order to create a seamless experience for consumers. Hell describe their efforts on the program during the call. “We are engaged in a large cross section of partners to implement DivX connected on existing devices. From connected DVD players and digital televisions, essentially any devices that has connectivity and DivX playback ability.”

This philosophy of openness extends even beyond the hardware devices and includes the companies that are trying to sell internet video, as well as the content producers themselves.

“going forward we will focus on a broad range of content solutions through a powered by DivX model, working with a variety of partners to deliver content. In this model Stage6 becomes one of many partners using our technology. To make this happen we are doing two things, First we are increasing our focus on premium content and re-engaging in discussions with major content providers who want to take advantage of our significant footprint. Secondly, we’re building out our existing video on demand product platform so that we can offer out of the box scalable solutions to any distributor of digital content from online retailers to network operators.”

This is a big shift for DivX and one that could have important ramifications. From early on, DivX has bumped heads with the studio fat cats. In the past, DivX has relied on their users to distribute their codec through the P2P networks, but now that the studios are beginning to warm to internet delivery, DivX is seizing on this opportunity, in an attempt to beef up the content that they can offer their own consumers.

Right now, businesses don’t pick their codecs based on quality, they use the ones that the studios tell them they are allowed to use. People like to complain about internet video services not supporting Apple, but that is because Apple refuses to license their codec to anyone. DivX wants to go the other route to try and work with everyone, but until DivX DRM can get Hollywood’s blessing, they’ll be frozen out of the mainstream market.

I’m skeptical that the studios will be particularly eager to work with DivX, but if they could pull it off, it would open plenty of doors for them and would certainly be a game changer for the company. On the call, Hell said that they are trying to go after this opportunity in two ways.

“First we’re going to be focusing on the studios themselves and other providers of premium content to get adoption and format approval from them. In addition, we’ll also be working with other content distributors, folks like Amazon, Netflix, Movielink, etc. so that we can enable their platforms and again we’re moving into a role here where we don’t want to be a storefront, in terms of the DivX Corp business. We’re looking to power other people’s platform.”

It’d be easy for DivX to try and sell content themselves (in fact that’s part of what Stage6 is about), but this is a low margin business and DivX is better off letting others fight over the content. By charging for access, it leaves room for much healthier profit margins. It also gives them a greater exposure to consumers, than anything that they could accomplish independently.

Right now, Apple wants to lock everyone else out of the market, but this is why AppleTV is such a weak platform. Not only do you pay for it, but then you have to buy only their content. DivX wants to see a world where they can bring Blockbuster and Netflix together and let consumers decide which service they want to use. By maintaining their commitment to keeping their platform open, it improves their competitive position over Apple and Microsoft, but none of that matters, until Hollywood agrees to let companies distribute video content in DivX’s format.

A Start-Up Trapped Beneath The Microscope Of Public Scrutiny

Since the launch of Stage6, it’s been an unbelievable hit. The growth has shown no signs of slowing. Since it’s launch, it’s help to push 35 million DivX web player downloads, but hasn’t generated much in the way of direct revenues. For now Greenhall wants to build up the community, before trying to figure out how to make money off of it.

“Like many sites in a similar stage of their life cycle, we’re not actively trying to monetize this user base, yet. We believe that building a community first will enable us to explore a number of different revenue models in the future, but building the community absolutely comes first.”

Since the the site’s launch, the community has responded enthusiastically to the video sharing portal and what started out as a reasonable $1 million marketing expense during the 1st quarter, has now swelled to a $2.4 million bill for this quarter (of which 70% is bandwidth.) Next quarter DivX estimates that they’ll need to spend $4.5 million and another $5.4 million in the fourth quarter. Stage 6 has about 20 -30 DivX employees that work on the site.

With the traffic and the costs starting to add up, it’s no wonder that the company wants to raise outside funds and operate Stage6 as a separate entity. During the call, their CFO, Dan Halvorson gave the reasoning behind the plan,

“Most businesses, at the same point in their life cycle as Stage6, simply wouldn’t be public or part of a public entity. They need to make investments that don’t have immediate tangible ROI or have too strong an impact on a company’s balance sheet to justify. We believe strongly that Stage6 has built a foundation that not merely be sustained, but rather amplified. As such, our board and management, thought it would be best to value our alternatives and one viable option is that Stage6 would be separated out and run as a private company.”

DivX said tat they’d like to finish the break up as close to the end of the year as possible. I’m not sure if this is for tax reasons or strategic purposes, but in the meantime, they are estimating that they’ll need to put another $10 million into the site. Greenhall wasn’t sure, on how they’d end up valuing Stage6, but was open to possibilities and wanted to do what’s best for DivX shareholders.

They may look for a private equity deal or an institutional investment, but they want to keep their options open. After announcing their intent to separate the the two companies, they’ve already received inquiries from financial and “strategic partners” on making an investment.

Overall, DivX didn’t blow anyone’s socks off this quarter, but they did continue to show that their business is healthy and that their business model is valid. They also continued to demonstrate their commitment toward investing in their growth. The extra R&D may end up bothering some shareholders in the short run, but once they break the two companies apart, they’ll have two businesses exposed to the white hot internet video sector, instead of a house divided.

Disclosure: I own stock in Netflix

Davis Freeberg’s Site Of The Week

Aug 7

Posted by Davis in Site Of The Week, Technology, Web 2.0 | 6 Comments

Walk This Way

This week’s winner of the site of the week contest was Walk2Web. Walk2Web is a site that allows you to analyze outgoing links on a particular website or blog. On the site, you enter a domain name and then you can trace how that site might be connected to others.

This functionality can come in handy in a couple of ways. On it’s most basic level, you can use the site to find new web pages, that may be relevant to sites that you already pay attention to.

On a deeper level, you could also use Walk2Web to help identify connections that wouldn’t seem obvious without being able to see the big picture. While, some of the connections don’t reveal anything, if I wanted to learn more about a blogger’s social network, I’d try running their site through Walk2Web, in order to see which websites are showing up on their radar.

In order to play around with the site, I decided that I’d play a game of Six Degrees of Davis Freeberg, in order to see who I might be connected to, in the vast maze that makes ups the innerweb.

When I put my domain into the site, it gave me several paths to go down, but I decided to pick, Just Talking Out Loud as my first step. From there, I discovered Andreas Viklund’s internet blog. Andreas is a 27 year old blogger and web developer from Sweden.

From there, I found Kelly’s World. The cats on Kelly’s World are a little bit freaky, but I did like the technology and video game coverage on the site. On Kelly’s World, there is a link to site named 54 North.

54 North is still in development, but there is an interesting link to Centro Flamenco on the web page. Centro Flamenco is an oasis for Salsa dancers. They dance company was founded in 1989 and performs throughout Canada each year. Salsa dancing isn’t my particular cup of tea, but that’s only because I was born with two left feet.

On Centro Flamenco, there was a link to web photographer, David Cooper. I’m not sure if David has set up a Zooomr account just yet, but on his website you can see some examples of his work.

Normally, David’s website isn’t something that I would stumble across on the net, but thanks to Walk2Web, I was able to see that I’m actually connected to his site in a convoluted way. Part of what makes the web such a unique experience is the ability to travel deeper and deeper into a story. By creating an easier way to understand the link relationships that exist between websites, Walk2Web has made a filter that is entertaining and useful.

Congratulations to Walk2Web for winning this week’s site of the week contest. If you’d like to nominate a web page for the site of the week, please contact me and I’ll be happy to look at it. The nominations for next week’s site are listed below, please vote in the sidebar.

Six Degrees Of Kevin Bacon

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Cell For Cash

Ebaum Sells Out: Pockets $20 – $50 Million For 10 Million Visitors

Aug 6

Posted by Davis in Media, VOD, Web 2.0 | 3 Comments

Last Thursday, we saw another major deal in the internet video space when Eric Bauman agreed to sell Ebaum’s World for anywhere between $17.5 – $50 million, depending on performance considerations.

The site was purchased by a small company named Handheld Entertainment (ZVUE). Handheld is a microcap company that makes a low end mp3 player. Over the last 9 months, they’ve had a pretty rough run in the market. After announcing the acquisition of Dorks.com for $1.5 million last November, the company saw their share price spike to $7 per share before settling to a little under $2, prior to the Ebaum purchase.

During that time, the company also purchased Putfile for $7.1 million, FunMansion.com for $1.1 million and Yourdailymedia for $1.06 million. By themselves, these sites seem trivial, but collectively, the traffic does start to add up.

Before the Ebaum purchase, I had never heard of Handheld, but over the weekend, I dugg into their conference call announcing the buyout and found a lot of good video stats buried in the presentation.

-Ebaum’s traffic is incredibly sticky. They average close to 22 page views per visit. Of all the video sites, they are ranked #2 in the amount of time that their users spend on the site. #8 in terms of traffic. With Nielsen changing the way they measure traffic, this could add an edge in attracting advertisers.

-Ebaum averages about 3.2 million unique visitors per week. A lot of these visits come from organic traffic. They estimate that 65% of their visits are repeat visitors. To help put this number into perspective, on Local.com’s (LOCM) most recent conference call, they said that they were getting a measly 10% of their traffic from organic sources. This is an important number to keep an eye on because when you have to buy your clicks, it eats into profitability.

-The number of 18 – 35 year olds that visit the site each week, is the same number that tunes into CSI or Law and Order each week. I found this stat to be the most fascinating. As media continues to develop, these micro communities will play an increasingly important role in media. I don’t have any data to back it up, but I would bet that the 18 – 35 year olds, who are visiting Ebaum’s World, are the ones who are less likely to be watching Law & Order to begin with.

-Handheld paid 6 times EBITDA for the site. If the site quits making money, then Bauman’s piece would be capped at the $17.5 million. If it does earn money, then he can earn another $27.5 million from a 60/40 split of the earnings. As part of the deal, Bauman will end up owning 2.5 million shares of the company. These will vest over the next 3 years.

-Prior to announcing the deal, Handheld not only secured financing that shareholders are allowed to vote on, but actually priced the warrants at a premium (albeit modest) to the current share prices. I still don’t have a good handle on the full impact the warrants will have on the company’s capitalization, but I can’t remember the last time I saw a microcap company actually price a private placement deal above market, let alone secure financing that didn’t have complicated contingencies attached. This shouldn’t be all that unusual, but sadly it is.

-Ebaum’s World earned $5.2 million in revenue last year and $1.6 million in net income. Personally, the ads are a little too aggressive for me, but it apparently hasn’t stopped others from spending time there. While the ads can be spammy, they also appear to be quite profitable. $1.6 million isn’t a huge number, but it does prove that online video can make cash.

With any microcap stock, there is always a high degree of risk and over the last 9 months, Handheld investors have had to learn that lesson the hard way. While I do think that there are some legitimate questions about the company’s hardware business, after the haircut they’ve taken, it’s hard to argue that this isn’t priced in.

Between the Ebaum purchase and their past acquisitions, the company has developed an impressive portfolio of web communities. The challenge now, is to find cost synergies and better ways to monetize these impressions. Because of the uncertainties surrounding their business model and the complexities of their previous financing, it’s hard to know how to value this one early on, but it’s one that might be worth keeping an eye on, even if it’s just for the juicy online video statistics.

1 Vs. 100 – What Would You Do?

Aug 1

Posted by Davis in VOD | Comments off

Slicing And Dicing: DivX Considers Breaking Up Company

Aug 1

Posted by Davis in DivX, Media, Technology, TV, VOD, Web 2.0 | Comments off

DivX LogoLast week, DivX dropped a bomb on investors after they announced that they were planning on divesting their Stage6 website and that CEO Jordan Greenhall would be leaving DivX, in order to run the new entity. The company promised to provide more information on their upcoming earnings call, but this unexpected bizarre move was too much for skittish investors to handle and Wall St’s initial reaction was to sell.

DivX investors weren’t the only ones who have been scratching their heads over the announcement. Coverage on the net, raised more questions, than answers. NewTeeVee interpreted the move as a sign that the video sharing industry was in trouble and was struggling to find a business model.

“This is bad news for video-sharing sites, showing they’re having trouble holding their weight without the subsidy of venture capital or Google-level resources. Stage6 appears to have been too much to handle for its moderately successful public company parent.”

Zatz Not Funny appropriately enough, titled his post, DivX Dumps Stage6, but described the spin off more as a divorce, than a child weaning itself from a parent. 24/7 WallSt offered an even more bearish assessment of the move and called the spinoff “more than strange.”

While I can’t argue that DivX’s decision isn’t unusual, I do think that the market may has misread the implications on this one. In thinking through how the spin off would play out, I’m of the opinion that the move makes financial sense in the short run, but have to question whether future growth is being sacrifice for short term gratification?

Wall St’s Fuzzy Math

Whether you are talking about business, baseball or technological synergies, it is often the case, that the whole is greater than the sum of its parts. This philosophy has driven mergers, it’s forged partnerships, it’s even saved industries from collapse. By working together, businesses are able to earn profits that would elude them otherwise.

What happens though, when things get turned upside down? When an investment in one part of the businesses, actually causes another part of the business to lose a greater value? This is the exact situation that DivX finds themselves in. The sum of their parts, is actually greater than the whole.

This creates an interesting dilemma for management, because the more they invest in growing their Stage6 business, the more it impacts their current shareholders. On one hand, they want to see this growth asset continue to be successful, but on another hand, each dollar they are spending is eating into precious net income.
Dirivixtized
Because DivX earns such a high profit margin on their licensing business, investors have been willing to pay 25 times their profits, even though their revenue is miniscule compared to companies with a similar market cap. While this works in DivX favor on the money they bring in, it also works against them on the money that they spend to develop new businesses.

DivX has already said that they plan on spending $5 million on Stage6 this year and with no signs of their growth slowing, I expect that this number will only go higher. While DivX does have plenty of cash that they can invest in the venture, even at a $5 million price tag, they are still sacrificing $90 – $125 million in market cap, by subsidizing the site.

Meanwhile, there is real value that is locked into the Stage6 brand, but it can’t be released because DivX’s licensing business is so much more valuable. So far, the analysts have been more concerned about Stage6′s costs, than the 10 million visitors who are using the site each month. Trying to get a premium valuation on Stage6 won’t be easy, but there are certainly things that DivX can do, in order to make the property more valuable.

One move that they have already taken has been to replace their DivX ads with paid banner ads on the Stage6 website. If DivX also includes their stake in DeviantArt in the spin off, it would also help to boost Stage6′s valuation.

Recently, Break.com sold a 42% stake of their site to Lionsgate at a rumored price tag of $21 million in stock. At this price, it would value Break.com at $50 million.

Stage6 and Break.com both receive similar amounts of traffic, but with DivX’s global brand, the superior codec, and a solution for getting into the living room, I think that Stage6 would command a premium to these prices.

If DivX was able to spin off Stage6 for $80 million, then shareholders would not only be able to realize that value, but because they would no longer have to pay the bandwidth, the increased earnings could add $90 – $120 million to their market cap. Add in the $150 million in cash and the current $300 million valuation on the core licensing business and you’ve gone from a market cap of $450 million as a whole entity to $650 million in market cap with the company smashed up into pieces. From a valuation standpoint, the two business work against each other, but separated, it should value DivX at $18 – $19 a share, using the current multiples.

Tortoise Vs. The Hare

I can’t really argue with what DivX is doing. They have a responsibility to protect shareholders and if they can realize more value by splitting up the company, than they owe it to their investors to consider this carefully. From the short term perspective, I can understand why they would want to dice the company up, but if you take a longer term view of DivX, I can’t help but think of all of the things that they are giving up.

There is a part of me, that wants to believe that the two entities, will be able to compliment each other after the divestiture, but after seeing John Tanner leave, Jerome Rota shift focus to “media experience” and now Greenhall leaving to run Stage6, I can’t help but wonder, if the company is really just pruning themselves for the sale of their core technology licensing business.

There have already been rumors that Dolby was interested in buying the company and I could probably think of a few other companies that would at least be interested in kicking the tires. A takeover this early, always seemed improbable to me, but now that Greenhall has agreed to step down, I’m not sure what to think. With the stock down over 50% from it’s highs, I could understand if DivX’s VC shareholders wanted to find an alternative exit strategy over unloading more shares than the market can handle.

While DivX could always just sell the company outright, Stage6 could certainly complicate an acquisition. For years, DivX has remained beyond Hollywood’s legal grasp. While the studios have always expressed reservations over DivX’s technology, because consumers are the ones sharing the pirated films, it’s limited DivX’s liability.

Once they started their video sharing site, it didn’t take long for the lawsuits to start rolling in. In January, DivX reported that Universal Music Group had sued the company over pirated content that was uploaded to the website. While DivX is certain to argue that they were just hosting the video and would have been happy to comply with takedown notices, after years of legal frustration, I don’t see Universal dropping this. By spinning off Stage6, DivX would be able to help minimize the legal liability for an acquiring company.

If DivX isn’t positioning themselves to sell the licensing business than I’ve got to question whether or not this transaction will really help DivX in the long run. In the short run, it could boost their valuation, but DivX doesn’t need to raise money, they already have plenty of cash. If DivX really believes that Stage6 can become a profitable entity, than why not try to maximize the revenue potential of Stage6, without giving up control of the site? This may require some short term pain, but I believe that DivX’s entertainment ecosystem is still much too fragile, to risk giving up the leverage that Stage6 brings them.

When I look at DivX’s potential, I see a lot of opportunity, but I also see one very big risk. Just like it only took a child for the Emperor to realize that he wasn’t wearing clothes, DivX manufacturing partners could just as easily begin questioning whether DivX really adds value to their gadgets.

Early adopters are vocal about demanding support for DivX and as long as there are DivX files and devices to play them on, the ecosystem holds together. If more and more manufacturers start abandoning DivX though, then all of a sudden, their codec has very little relevance. While I believe that DivX is too entrenched at this point, to be fully cut out of the market, there are too many deep pockets trying to keep them out of North America, for the company to not consider this critical risk.

An independent Stage6 will most certainly continue to support DivX’s codec, but because of their responsibilities to their own shareholders, DivX wouldn’t be able to run the site at a loss, in order to shore up support for their licensing business.

Beyond Video Sharing – Stage6 As An Advertising Platform

Since Stage6′s launch, I’ve followed the development of the site with keen interest and during the times it’s been in Alpha/Beta stage, I’ve kept my criticisms limited. With the site considering a public offering though, user bugs and missed opportunities will become even less tolerable.

While the analysts have been more concerned about the potential for DivX to sell advertising on the Stage6 website, I think that DivX needs to thinking more multi-dimensional when it comes to their monetization strategy. Right now the video advertising marketing is still very much in it’s infancy and if the company was able to run Stage6′s ad business at a loss or at breakeven, then I believe that it would make the company a threat/target to sites like Google.

Last January, Greenhall said that he wanted DivX to become the Adsense for video. Since then we haven’t seen any plans launched, but DivX was rumored to be in negotiations to buy Revver at one point.

Even though I’m a fan of Revver, I can’t say that I really like the business model. While I think content creators should be rewarded for making good content, I think that there is easier money to be made by selling video ads with the help of the larger DivX community.

Google Adsense may be easy, but any blogger with a lick of traffic will tell you that the rates they pay are chicken scratch. While a public Stage6 wouldn’t be allowed to payout 90% of their ad revenue, a DivX supported Stage6, could afford to run a business at breakeven, if it contributed to the licensing sales.

Back in the 56k days of the web, I remember there being a lot of debate over whether web publishers should support graphic rich applications like flash. With so few people using broadband, webmasters needed to be sensitive to creating a smooth experience for everyone. At that moment in time, it would have been very easy for Adobe to fail, but instead of hitching their wagon to the content, they instead courted the advertisers. By doing this they were strategically able to position themselves in such a way, that businesses were actually paying money, in order to distribute Adobe’s flash product.

If DivX was serious about wanting to solidify their grip on their eco-system, they would take the same approach with Stage6. Instead of courting the content creators, they should be approaching the advertisers. Given the high quality of their video stream, I think that they would have a natural selling advantage over the current flash video ads. If you were in charge of the marketing budget at Take Two, would you rather have video gamers see a full screen high quality DivX ad or a small low res YouTube copy? To me, this is a no brainer and something that DivX hasn’t taken advantage of.

While there would be nothing to stop an independent Stage6 from trying to create their own ad network, if the company has to be sensitive to profitability, it would limit their ability to attract affiliates to distribute their DivX video ads. By paying out top rates to bloggers and independent publishers, Stage6 could become an advertising powerhouse. If Stage6 is only able to pay Google Adsense rates, than I think publishers will be reluctant to include the ads, when many readers would still need to download software in order to view them.

At this point, it’s probably too early to tell if Greenhall will take Stage6 in this direction, but I believe that placing so much emphasis on content has been a mistake for the company. While it certainly helps to promote Stage6 and DivX’s brand, the margins offer limited upside compared to the longer term benefits of an ad network or a premium service.

There is a lot of potential for the future of DivX and while breaking up the company makes sense on Wall St, I’m not sure that the long term price is worth the short term benefit. While it’s nice to see DivX management focused on enhancing shareholder value, unless they are planning on selling the company, I don’t see how splitting up the company helps their long term competitive position.