DivX Looks Outside The Codec For The Future Of Web Video

May 7th, 2008 Davis

DivX reported their 1st quarter earnings on Monday and while I’m still waiting to read the actual 10k before digging too far into the numbers, I did want to comment on what I see as a significant shift in strategy. Over the last 7 years, DivX has done an impressive job of building an eco-system around a single file format. The first time that I came across a DivX file, I actually thought that it was some kind of a virus. It took me two weeks before I worked up the courage to download the DivX media player so that I could play the movie, but once I did, I realized that my fears were unfounded. The file not only offered a superior video experience, but it was a lot smaller than the MPEG files that I was used to downloading. Since I was on a dial-up connection at the time, every little byte made a big difference.

As the P2P networks developed, DivX and it’s open source cousin XviD, became an important resource for file sharers. Initially, my own interest in DivX was driven by it’s technological advantages over other video formats, as well as the wide availability of DivX content on the grey market, but as compression technology has evolved, my reasons for using DivX have changed as well. Since I’m no longer on a dial-up network, compression is less important then what I can actually do with my videos.

As DivX gained in popularity, they were able to forge agreements with consumer electronic manufacturers that allowed you to play DivX files on a wide range of devices. Even though, H.264 is a superior standard for internet video, I still prefer DivX files because I know that I’ll be able to play them on the hardware devices that I own.

By creating an eco-system that supports portability, DivX has been able to lock me into their format in the same way that Apple has been able to use iTunes to keep their customers buying iPods instead of mp3 players.

As H.264, Microsoft, Apple and Adobe all continue to creep into DivX’s territory, there has been a lot of concern over how DivX would respond to these competing threats. Microsoft’s approach has been to batten down the hatches by developing their proprietary Silverlight codec. By retaining full control over the video format, they are able to convince people to buy as many Microsoft supported products as possible. These extra restrictions increase the appeal of Silverlight for DRM hungry Hollywood studios, but it also frustrates their customers in the process. Incompatible file formats are the reason why services like Netflix’s Watch Now doesn’t get along with Apple. Since Microsoft (and Apple) refuse to open up their codecs, it gives them a monopoly on the hardware that is allowed to support their video files.

Apple has at least opened up their system a little bit by adding support for the H.264 format, but they’ve still chosen to wrap their h.264 files inside of the Quicktime container. This prevents other companies from supporting Apple H.264 content, without obtaining a license for Quicktime first. This helps to open up Apple’s eco-system to alternative video formats, but still gives Apple control over the companies that are allowed to play nice with their your media.

Similarly, Adobe has also forged agreements to support H.264 inside of flash, but if you want to take your Flash H.264 files portable, you’ll need a device that can support the Flash format. To their credit, Adobe has done a good job of building momentum for downloadable flash by supporting open source initiatives, a new DRM system, and by removing license fees for mobile providers, but despite their early traction with these efforts, there are still very few hardware devices that are actually capable of playing portable flash content.

With so many companies pursuing proprietary video strategies, one would expect DivX to be focusing on locking consumers into the DivX format, but like most things having to do with DivX, their strategy for dealing with the next generation of codecs is also built on a system of openness.

We got our first real glimpse of this strategy last November when DivX announced that they had acquired Mainconcept for $22 - $28 million. The Mainconcept acquisition gave DivX an immediate footprint in the H.264 space, but it also raised some important questions about how DivX could maintain a monopoly on their community, while supporting a format that is widely available to competitors.

Interestingly enough, while discussing H.264 on their latest conference call, DivX CEO Kevin Hell pointed out that the current state of H.264 really isn’t all that different from the MPEG-4 standard that DivX was built on.

“Looking forward, a real opportunity exists for DivX to emerge as the consumer face of H.264, serving as a trusted brand for users who don’t want to concern themselves with underlying formats or technologies. In fact, the current H.264 market resembles in many ways the early stages of MPEG-4 market.

When DivX first emerged seven years ago there were number of different and incompatible MPEG-4 implementations available. Through our strong consumer adoption and the creation of the DivX certification program, we were able to simplify the experience for consumers and provide a solution that just works across any device. We plan to repeat that strategy by incorporating broad H.264 support into both our software and consumer electronics offerings under the DivX brand. We are on track to release a new version of our software in 2008 that supports H.264 and then extend that support to consumer electronic devices that are likely to hit the market in 2009. We believe that this development will help move the DivX brand beyond one single format and toward promise of support for any video content, on any device.”

DivX’s evolution towards H.264 won’t be a clean and easy transition, but it is the right direction for the company. If they can successfully integrate H.264 into their certification program, it will reduce the threat of their codec becoming obsolete and will highlight their certification process as being the real value added for consumer device manufacturers.

Instead of trying to educate consumers on the differences between MPEG-4 Part 2 vs. MPEG-4 AVC (H.264), CE manufacturers can slap the DivX label onto their devices and consumers will know that it will support their digital video libraries without complications. In fact, during the Q&A section of their conference call, DivX discussed the possibility of pushing this envelope even further by adding Flash support to their certification program.

“In terms of how we think about Flash more broadly, the vast majority of content that is downloaded today is in DivX format or variations of the DivX format, so we don’t see that as being a threat in terms of the use case that we’re really providing, which is high quality content delivered through the internet and then played back on a variety of devices. To the extent that Flash starts to get traction in terms of files that are downloaded at high quality and based on the terms, it would be something that we could actually extend into and offer into our certification program as well and that’s what we’d be looking to do.”

Part of what makes DivX such a difficult company to pin down, is their ability to take competitors and turn them into partners. On one hand, Microsoft is one of the biggest threats to DivX, but if they can get them to extend DivX support to the Xbox, they could become an important customer.

Adobe is currently using Mainconcept to power their H.264 support, but they are also trying to establish their own format as the new standard for internet delivered video. These complex relationships are enough to make anyone’s head spin, but DivX has a way of getting their partners to look at the glass half full side of the equation.

On one hand, It’s hard for me to believe that Adobe would be all that enthusiastic about giving up control over their flash content, but on the other hand, a DivX partnership would create a powerful competitor to Apple and Microsoft’s closed systems.

Adobe would gain access to an established community of video fans and would have one more platform that could drive demand for Flash content. Instead of having to worry about the lack of downloadable flash content, they could leverage DivX’s popularity, while slowly introducing their own standard for web video. While I doubt that older DivX devices would be able to support Flash with a firmware update, any new DivX devices would be able to support their content.

For DivX, they would be able to increase the appeal of their brand by offering support for the next generation of internet video. They could also use Adobe DRM as a way of bypassing studio approval for DivX content. While DivX did mention plans to update their DRM later this year, getting in through Adobe’s backdoor could be a lot easier than buying off the studios. According to DivX’s 4th quarter 10k filing, they paid Sony $1.5 million and gave them 100,000 warrants at a strike price of $16.14, in order to get the studio to bless the DivX format. While it’s possible that DivX plans on buying off all of the studios, this could get expensive really quick, if DivX is serious about going legit.

For consumers, it would be the biggest win of all. Instead of being locked into a single file format, they would have the flexiblity to adopt alternative standards without having to abandon their current media libraries. This would pressure Microsoft and Apple to open up their hardware, instead of maintaining data silos.

It’s hard to judge how serious DivX is about adopting flash support from just a few comments, but even beyond flash, having support for multi-formats adds real value to their brand. As new forms of digital transmission unfold, DivX is in a position to attach their brand to a much larger category of web video.

Some of the niche video formats don’t have the ability to negotiate partnerships with the device manufacturers directly, but through DivX could gain access to a much larger audience. If DivX certification suddenly meant that Matroska containers could play on DivX devices, it would open up another community that DivX could tap into and it would change how Matroska fans think about the DivX brand.

Bringing other formats into the DivX program, would add to DivX’s cost of revenue, but it would make DivX certification more valuable to their CE partners. I may enjoy dissecting the nuances between the various competing video formats, but most consumers don’t want to think about it. They want to be able to play whatever file they have without converting it into a single format. By focusing on supporting as many formats as possible, DivX may end up competing with their own eco-system, but they’ll also expand their reach in the process. By taking DivX beyond the codec, it allows their community to move forward with the future, while hanging onto the treasures from the past.

Disclosure - I own shares of Netflix

Posted in Technology, DivX, SA, TV, VOD, Disclosure - I own stock in co. mentioned, DRM, Netflix | 2 Comments »

Stage6 Part Deux?

April 24th, 2008 Davis

Over the past few days buzz has been building over the possible launch of a Stage6 clone. According to the DivxIT.net website, a Stage6 “alternative/clone” will be revealed on April 29th. If this is true, it would be an exciting development for fans who still crave the high quality Stage6 experience.

This isn’t the first time that someone has tried to hype the launch of a Stage6 replacement. As soon as Stage6 announced their shut down, there was a flurry of fake Stage6 clone announcements. Most of those sites fizzled out before they even got started.

NewStage6.com was the first “replacement” to pop up on my radar. Initially they had a timer counting down until their launch, but today, the site is all but empty. Highlol.com was another website that tried to create buzz around the Stage6 collapse. They promised free HD DivX downloads, but there still aren’t any videos on the site today.

Having already been burned a couple of times, you can understand why I tend to be skeptical about these sorts of promises. With DivX Inc. having come out and denied any affiliation with the site, I can’t help but wonder how far they will let this get before they try to shut it down. On the other hand, because DivX benefits from having more of their content out there, maybe they are really better off ignoring it. Still, if DivxIT does gain traction, DivX might not be so happy about someone copying their site, especially when they don’t seem willing to sell it to begin with. If DivX does try to go the hostile route, I think that they may be up against more than they realize.

According to my sources, the creator of DivxIT is a part of the social revolution group, Anonymous. I wasn’t able to confirm whether DivxIT is the brainchild of a solitary fan or if it is part of the larger movement, but I do think its worth noting that Stage6 was hacked earlier this year. Whoever hacked the site posted membership information online, but I don’t know whether or not they would had access to the GUI. April 29th may still end up being a bust or just a cheap knock off, but I wouldn’t be shocked if this turns out to be an exact replica of the Stage6 website.

I was also able to learn that prior to setting his sights on web video, DivxIT’s mystery founder also created the MyVideoTab.com website. MVT looks like a great resource for anyone who is interested in learning how to play cover songs off of the internet, but its ownership is also shrouded in mystery.

Even before Stage6 shut down, there was already a Stage6 clone in China, but trying to watch videos from the US brings back terrible flashbacks of 26k dial up connections. If I was going to launch my own clone, I would have gone with the 6egats.com domain instead, but someone beat me to that one already. We may end up getting punked with some wacky Scientology video on the 29th, but it will be interesting to see how this ends up playing out.

Update - So much for my conspiracies about black helicopters. It looks like DivxIT and DivX have worked out a deal for the new site. DivX must have asked them to change the name to something less confusing though because the new site will now be launched at Vreel.net. The launch was also postponed until May 6. On the Vreel website they have a FAQ where they say that their “database will be built from the ground up from day one onwards.” They also thank DivX for being cool about working out a deal with them.

Posted in SA, DivX, VOD | 2 Comments »

Stage6 Moves Into Stage404

March 5th, 2008 Davis

Over the past week, I’ve spent a lot of time thinking about DivX’s decision to close down Stage6. When I first heard the news, I wasn’t sure how to feel about the decision. On one hand, I believe strongly in the free market system and when DivX choose to go public, they took on an obligation to look after their shareholder interests.

By turning to the public DivX was able to raise more than $140 million in cash from investors who believed in the future of the company. Having access to this kind of capital opened a lot of doors for DivX, but it also came with strings attached. While it’s easy to blame DivX’s insiders for pulling the plug, without their initial support, DivX never would have been able to create Stage6 to begin with. I disagree with the final decision to shut the site down, but I can at least understand the economic realities that drove the decision to remove Stage6 from the core business.

On another hand, I was a fan of DivX long before their IPO and a loyal member of the Stage6 community. Without DivX’s community, they never would have succeeded in the first place and to abandon their fans over corporate profits speaks volumes about the priorities behind the decision makers at the helm of the company. While the cold hearted capitalist in me has no moral high ground to stand on, the fan in me can’t help but be heartbroken by the realization that DivX may have lost their soul in the course of going public.

I’ve been using Stage6 from the very beginning and while its always had its fair share of eccentricities, I’ve found that it’s gotten better and better as the site has developed.

Over the last year and a half, I’ve been able to watch “web” videos on my 60″ television, I’ve been able to discover high quality original content that is more relevant to me, then anything on cable and I’ve even been able to connect directly with the artists who I’ve admired. When the history of Stage6 is finally written, it will be easy to be distracted by Stage6’s problems with piracy or the politics at the corporate level, but to see those independent artists lose this platform is the real tragedy behind the Stage6 story.

Seeing DivX shut down Stage6 has been tough, but watching the fallout from has been even more depressing. Initial reports blamed lack of traffic as the reason behind Stage6’s failure Silicon Valley Insider’s headline on the story read “YouTube Kills Another Rival.” In Gizmodo’s coverage of the news they write “You may only be vaguely aware of DivX’s Stage 6 video site (which probably explains why it wasn’t successful)”

The problem with this theory is that Stage6’s traffic was actually quite impressive. If anything, Stage6 was a victim of its own popularity. From the get go, DivX tried to rein in the growth of the site, but in the end, high quality downloadable video proved too compelling to stop the explosion in their traffic.

DivX first launched Stage6 in August 2006. Initially, it was intended to be a modest experiment where DivX could showcase their technology. After two months and very little marketing, traffic to the site was already in the “hundreds of thousands user range.” On DivX’s first conference call with investors, Jordan Greenhall told analysts that “in 2007 we have specifically modeled Stage6 to spend no more than $5 million, until and unless we specifically decide to do otherwise.”

Had Stage6 remained underground, DivX would likely have treated the site as a minor marketing expense, but as word about the site leaked out, it created momentum that DivX was powerless to stop.

At the time, $5 million in budgeting seemed appropriate, but even Greenhall couldn’t have anticipated how popular Stage6 would turn out to be and by the end of 2006, Stage6’s traffic was clocking in at 2.4 million unique visitors per month. By February of 07′ Stage6 hit 3 million uniques and 2 months later, traffic was at 4.3 million visitors.

By July Stage6 traffic hit 10 million visitors and it was clear that DivX had tapped into something very powerful. In the first six months of 2007, Stage6 had already burned through the $5 million that they had budgeted and expenses were continuing to climb. In order to better capitalize on their Stage6 asset, DivX announced plans to divest the business and Jordan Greenhall agreed to step down as CEO, under the guise that he would take control of the new Stage6 entity.

By the 3rd quarter of 07′, DivX was spending $4 million a quarter with about 2/3rds of the expense going towards bandwidth. To help control these costs, DivX started an aggressive campaign to remove porn and copyrighted content from their servers, but their efforts were of limited success. When they updated their web player to block certain sites from playing Stage6 content, the pirates were quick to point out that users could get around this restriction by installing older versions of the software. When they started to aggressively remove copyrighted content, people built automated uploading tools that where able to overwhelm the Stage6 staff. Their efforts did help to slow down the growth rate at the site, but by October traffic had still risen to 11.4 million visitors.

With traffic continuing to rise, DivX warned investors that they were budgeting another $6.5 - $10 million in Stage6 expenses for the 4th quarter/second half of 2008. When DivX finally pulled the plug on Stage6, they had likely spent $17 - $20 million on the “experiment” and had over 19 million unique visitors to show for it.

To help put this growth into perspective, 19 million uniques is roughly two thirds the number of US visitors that YouTube was getting when they were acquired by Google for $1.6 billion in stock.

With DivX facing the prospect of having to fund another $20 million in 08′, just to keep Stage6 running, I’m not surprised that the traffic eventually proved too bitter a pill for shareholders to swallow. From the outside, its easy to blame YouTube for Stage6’s demise, but in reality, the site was far more popular than most observers realize.

Given the growth trajectory and the size of the Stage6 community, I had expected that Stage6 would have no difficulty in raising capital to fund the venture, but in December DivX unexpectedly announced Greenhall’s resignation from the board of directors and warned that the Stage6 divestiture would not take place in the time frame given to investors.

At the time, I had a lot of trouble making heads or tales of this announcement and it wasn’t until Michael Arrington leaked the sordid details behind the breakdown of Stage6, that I realized the significance of Greenhall’s departure. According to Arrington, DivX had raised commitments for $27 million in capital at a $90 million valuation. Given that my own internal valuation had pegged the site at $85 million, it would appear to me, that this was a fair valuation for both DivX shareholders, as well as Stage6 investors. Why this deal broke down, isn’t exactly clear and the devil really is in the details, but Arrington pins the blame on massive egos getting in the way of shareholder interests.

“At a meeting in late November the DivX board was asked to approve the spinoff and venture financing. But at the last minute the board decided to cancel the spinoff and retain control of Stage6. It’s not clear why they did this - perhaps they were surprised at the valuation and wanted to keep control of the assets. Or perhaps the revenue from Stage6 was too material for them to let it go over the long run. From what we hear a massive battle of ego’s ultimately killed the deal. But when the decision was made, the key Stage6 founders resigned.”

Arrington speculates as to why DivX’s board turned down the offer, but the reasons he cites don’t really mesh with what the company was trying to do from a financial perspective. It could be that DivX’s board simply didn’t like the terms of the deal or that the financing was never really in place to begin with, but my own conspiracy theory is far more insidious.

I think that the board wanted out of DivX and engineered a coup to take over control of the company.

Greenhall always had grand visions for DivX and clearly wasn’t afraid to take risks. Starting Stage6 was both a brilliant and stupid move on his part. In a very short period of time, he created a valuable asset for the company, but it’s cost structure punished shareholders who didn’t buy into his long term vision. The very reckless nature that was crucial to his success as an entrepreneur, understandably made Wall St. more than a little nervous.

Knowing that Greenhall would never willingly cede control, the board tempted him by offering him control over the Stage6 spinoff. Stage6 was Greenhall’s brainchild to begin with and the bait proved more than he could resist, so in July 2007, he stepped aside as CEO to begin raising funds for the venture. Initially, I don’t think that the board planned on shutting down Stage6, but when financing failed to materialize, they ran out of patience and began to dismantle the team behind the community. When Greenhall found out about their plans, his emotions likely got the better of him and after cornering himself into an ultimatum, he was tricked into giving up the little remaining control that he had left.

While there is no way to know the exact details behind what really happened, amidst the backdrop of the Stage6 revolt, there were two noteworthy public filings that hinted of the trouble brewing in Shangri La.

The first was the revelation that Insight Venture Partners had unloaded their shares on the open market. The second was an amendment adopted by the board that provides significant financial incentives for management to engineer a sale of the company.

At the time, I had trouble reconciling these two filings because if DivX’s board was trying to shop the company, then it wouldn’t have made sense for Insight Ventures to bail out of the stock. Given what we now know about the Stage6 implosion, it doesn’t surprise me that Insight Ventures took the quick exit on this one.

One of the more interesting clauses buried in the change in control agreement is a provision that limits the rights of shareholders to elect new leadership at the board level. If a majority of the incumbent directors are replaced within an 18-month period, it triggers a provision that would cost DivX shareholders dearly. With 3 of the original board members having now resigned, it doesn’t surprise me that the board back dated the agreement prior to Greenhall leaving, so that Hell’s appointment to the board would count against this limit.

It’s easy to overlook this fine print as business as usual, but I think the board implemented these measures to ensure that they would remain in control, in the event that DivX’s long term shareholders objected to their short sighted decisions.

No one enjoys having their dirty laundry aired publicly and it’s easy to get distracted by the drama surrounding the closure of Stage6, but I think it’s important for investors to look past the soap opera and focus on what these decisions tell you about the priorities of DivX management. It’s hard to know the exact details behind Stage6’s failure, but there are a few facts that you can verify.

Whether intentionally or by accident, the DivX board removed Greenhall as CEO. In December DivX saw a mass exodus of their founders. Why they left may be open to interpretation, but the fact that they left together underscores how significant of an event this is. Given its traffic and growth, Stage6 had real value to the right investor, yet DivX’s board wasn’t willing to take the short term earnings hit, in order to maximize the value of the asset. During the time that Stage6 was falling apart, the board adopted an executive compensation plan that encourages management to sell the company even if it means sacrificing DivX’s long term future.

Now it’s entirely possible that I’m reading too much significance into the rift between the board and the Stage6 founders, but the only justification that I can see for the board leaving this kind of money on the table would be if they were trying to dress DivX up for an acquisition. For as much as Stage6 was potentially worth, it was just as much of a liability. Spinning off the site would have allowed DivX to maximize their investment in Stage6, but it would have involved a long legal fight that would have certainly scared off potential suitors.

Figuring out a way to monetize all that traffic would have been the best solution for Divx’s long term strategic positioning, but by closing the site, DivX choose to manipulate two important financial levers instead. Not only do Stage6’s expenses now translate directly into net income for the company, but DivX has decided to use the $20 million it would have cost to keep Stage6 running to boost the price of their stock through a share buyback program.

Normally I would be a fan of these sorts of shareholder friendly initiatives, but as a growth company, I think that DivX owes more to their investors. The company is in the middle of one of the hottest sectors of the new economy and to see them use their cash to buy back stock is a startling admission of how little conviction they have in the long term potential of their business. If DivX’s management really believes the company is undervalued, then why has there only been one insider purchase over the last six months? DivX may cite maximizing shareholder value as the rationale behind these moves, but closing down Stage6 to buyback their stock reeks of desperation. I may be misjudging the board’s motivation, but I can’t help but be suspicious that the real purpose behind the buyback announcement is to boost their stock price, so that their insiders can try to unload the business.

9 times out of 10, I’d argue that having the founders leave a company is a bad sign for investors, but in the case of DivX, I don’t think that this is true. The people who really cared about the future have abandoned ship and Wall St. now controls DivX’s destiny. For investors to react to these events by selling off the stock 25%, makes very little sense.

It’s hard to know what DivX would be worth to the right buyer, but I think that their recent sell off leaves them vulnerable to a low ball offer. If you strip out DivX’s cash, they are currently trading at an enterprise value of less than $200 million, their trailing 12 month P/E is at 18.50 and they are now trading at slightly more than 2 times book. For a company bringing in $80 million a year at 90%+ gross margins, this seem ridiculously undervalued in my opinion.

Whether DivX wasted money on Stage6 or not, their current valuation completely ignores the impact that the Stage6 savings will have on their earnings and certainly doesn’t reflect the potential that DivX’s board may be open to selling to the highest bidder. When you compare DivX’s current valuation to potential suitors, it’s easy to understand why DivX’s trojan horse into the living room, would be worth a premium to the right strategic investor.

I hope that I’m wrong and that DivX’s attempts to maximize shareholder value only represents a temporary set back for their community, but when I connect the dots I see a board that is more interested in engineering short term profitability, then in making the tough decisions necessary to ensure the long term success of the business. If the board was really in DivX for the long haul, it would have been easy for them to overlook DivX’s short term valuation while they tried to find a buyer for Stage6. If their goal was really to sell the company, then it was to their benefit to sacrifice Stage6.

Hopefully, I’m wrong about their plans and DivX will refocus on bringing innovative products to the market. Still, I can’t help but fear that the breakdown of Stage6 really represents the beginning of the end for a brand that I’ve come to love. I’m in no position to pass judgment on DivX for thinking exclusively of their investors, but as a member of their community, it’s painful to lose one of my favorite web destinations over corporate profits.

Posted in DivX, Technology, Media, VOD | 2 Comments »

Lawyers Guns & Money: Can DivX’s Safe Harbor Protect Them From Stage6 Pirates?

February 7th, 2008 Davis

DivX took a step closer to being forced to walk the plank after suffering their first legal setback in their copyright dispute with Universal Music Group. In a legal filing published late Tuesday night, Judge Dana Sabraw dismissed DivX’s request to declare Stage6 legal, ahead of their UMG piracy trial.

The dispute originally started in December 2006, when UMG notified DivX that several of their videos were showing up on their Stage6 website. In the original cease and desist letter, UMG didn’t provide DivX with a list of the infringing videos, but still demanded that DivX remove all Universal content. A month later, UMG sent a second letter, only this time identifying specific videos that they had problems with. DivX promptly removed the videos in question and didn’t hear from UMG’s legal department for another 8 months.

After this 8 month period of awkward silence, UMG approached DivX and agreed to license their content, albeit at a very steep cost. In order to atone for their past sins, UMG wanted DivX to pay them $30 million.

Sensing a shakedown, DivX balked at the deal and decided to take their chances in court. They had fully complied with all of the provisions of the DMCA and if UMG wanted to punish them, they’d need to attack the DMCA’s safe harbor provision to do it. After calling their bluff, UMG dragged their heels on filing a lawsuit, but the potential threat for conflict still created a real problem for DivX. With the company trying to spin off their Stage6 asset, these storm clouds of uncertainty cast a long shadow over the legality of their Stage6 operations.

With UMG threatening legal action against the site, DivX was forced to choose between trying to sell the asset at a discount or trying to see if they could ride this storm out. With UMG seemingly content to continue to accrue alleged damages, DivX felt compelled to ask the courts to rule on whether or not Stage6 was protected under the safe harbor provision.

DivX took a huge risk by pushing this issue. If they are right then their wager will certainly pay off. If the courts can establish the legality of their Stage6 website, it would remove a lot of the uncertainty surrounding the business and would allow potential suitors to feel more comfortable about its long term potential. If DivX is wrong though, the consequences could be severe.

Six weeks after DivX filed for declaratory relief, UMG finally made good on their threat and filed a lawsuit against DivX accusing them of piracy. By bringing DivX up on charges, they were able to successfully argue that their trial was a more appropriate venue for this question to be answered. While this does represent a set back for DivX, I doubt that the result was entirely unexpected.

Still, through legal maneuvering, UMG has been able to regain control over home court advantage and they’ve put themselves into a position where they can always settle or walk away if things start to look bad. Even if DivX sticks with the full court press, they may not end up with the declarations that they were hoping for. In the discussion section of the judgment, Sabraw sympathized with DivX, but couldn’t justify running a separate trial now that DivX is facing legal action.

“Defendants argue declaratory judgment is an incomplete remedy since this action does not include all parties to the lawsuit pending in the Central District. Furthermore, since Plaintiff cannot identify all copyrights at issue, Defendants argue the remedy in this Court is limited to adjudicating only the copyrights named.

The Court agrees with Defendants. Athough the fear of uncertain litigation may have initially justified Plaintiff in filing this action, Defendants have since filed a lawsuit in the Central District that eliminates the uncertainty. Moreover, the DCMA [sic] safe harbor analysis Plaintiff seeks here will be more completely and efficiently undertaken in the Central District, where the court will be able to determine Plaintiff’s compliance with respect to particular copyrights that Defendants identify in the course of those proceedings.”

While it may appear that DivX has lost round 1, the dismissal of this case won’t be the end of this dispute by a long shot. With the declaratory issue now out of the way, DivX will need to focus on defending themselves against UMG’s lawsuit. Even though DivX’s initial lawsuit has been dismissed, they’ll still get an opportunity to defend their website. Still, until DivX can reach some kind of resolution, the lawsuit will certainly make it more difficult for them to separate their Stage6 assets from their core business. With rising bandwidth bills, the credit crunch and legal questions surrounding this asset, it may be difficult for them to find a buyer who is willing to get involved in this kind of a dog fight.

Sensing that conditions weren’t right, DivX pulled back on their plans for Stage6 in December and in a press release announcing the resignation of Jordan Greenhall, they also warned that their Stage6 transaction wouldn’t be finished by the end of the year like they had planned. The company promised to update investors in the first quarter of 08′ and with DivX expected to report earnings soon, you can bet that Stage6 will be a hot topic on their next conference call. The plan that DivX management lays out, will be critical in determining how investors interpret their financial results.

Last quarter, investors rewarded DivX by focusing on their non-gaap growth and ignoring the Stage6 and compensation expenses. If DivX still plans on spinning off Stage6, then it’s fair for investors to ignore the rising bandwidth costs and focus on the value of the underlying asset.

If DivX’s legal battles really mean that they need to hold onto Stage6 in order to maximize its value, then investors may be in for a shock when they realize that Stage6 is really a long term investment. Facing the prospect of a drawn out legal battle, they may not take as much comfort in “one time” charges or expenses.

The answer to the Stage6 riddle isn’t an easy one, but after years of profiting from their popularity in the pirate community, it’s ironic to see DivX’s finally starting to feel some heat over the activities of their community. Even beyond the copyright liabilities, there is a significant cost for DivX to foot the bill for pirated Stage6 content and I suspect that DivX isn’t anymore enthusiastic about piracy on Stage6, than UMG is. There’s no way to know how this all will end, but I have a feeling that its going to take longer than people expect, in order to sort it all out.

Posted in SA, DivX, Technology, Media, VOD | No Comments »

The Pros and Cons Of Media Center Vista

January 31st, 2008 Davis

Over the past few months, I’ve finally started to get a feel for Media Center Vista and while I haven’t tried out every feature in the program, I have played around with it long enough to have some initial thoughts. Before I tried the software, I had low expectations, but after actually using the program, I’ve been really impressed with what the Media Center team has put together.

Media Center Vista allows you to perform some pretty advanced tasks without having to be a computer geek in order to figure out how to use it. I initially had some reservations about the user interface, but it only took about a week, before I found it growing on me. There are still improvements that Microsoft needs to make, but they’ve made a giant leap forward, compared to the original XP version.

Pros

-Media Center Vista is wicked fast at finding new programs. In the XP version, the software was painfully slow at trying to search for shows. As soon as I would start typing in the name of a show, XP would freak out from trying to sort through so much information. In Vista, the program still starts searching immediately, but the indexing has been turbocharged. Instead of having to wait for the menu, the results will appear as fast as you can type. This faster indexing shows up in a number of areas. When you are browsing, you can hit page down and scroll through programs as fast as you can read them. If you want to rearrange the priority of your recordings, you can make changes and move onto other areas of the program without having to wait forever while the system checks for conflicts.

-The interface looks fantastic. Microsoft has done a good job of creating a clean and intuitive DVR experience. The program is easy to navigate and has lots of extra features. On the surface the design appears relatively simple, but you can tell that Microsoft has paid a lot of attention to the little details. Whether it’s being able to double click on the picture in picture window, in order to bring up the full screen or being able to see the DVD art for upcoming movies, there are a lot of subtle features that make for a more enjoyable media experience.

-Vista comes with 30 second skip enabled. TiVo fans know that you can hack your remote to add this feature, but the big studios were able to scare TiVo into disabling it for the masses. In the past, I’ve never really used the 30 second skip feature because it meant giving up the skip to the end button on my remote. After spending some time with it on Media Center, I’ve been really surprised at how much I’m enjoying it. Hitting a button six times is a lot easier than trying to guess when the program is about to start again.

-There is minimal interference between you and your recordings. One of my biggest frustrations with the generic DVR was that it required too many unnecessary steps, before I could interact with my content. It felt like I had to hit ten buttons before I could schedule a movie, delete a recording or even watch a show. With Vista Media Center, it’s an entirely different story. The entire experience is built around the content that you are interacting with. You can’t do everything from all levels of the software, but each step is intuitively linked to the task that you are focused on. If you are watching a TV show, then by right clicking you can delete the program or burn it to DVD. If you are playing music it’s one click to pause, skip, repeat, shuffle . . . .

-You can watch TV while surfing the web. Media Center is really designed for the living room, but I’m primarily using it in a desktop setting. I didn’t think that I’d watch a lot of TV at my desk, but I’ve found it to be the perfect compliment to streaming Netflix and YouTube. This isn’t ideal for shows with intense action and complex story lines, but its perfect for tuning into the news when you see a story break online or for listening to late night talk shows, while you’re multitasking on the web. This feature won’t benefit you, if you plan on using Media Center on your TV, but it’s a good reason to add on a TV tuner, the next time you upgrade your PC.

-You can use the XBox360 as an extender. I’ve read a lot about the Xbox extenders, but I had never actually seen one in action. Connecting my Xbox to Media Center took an extra registration step, but it was well worth the time to get it set up. When I first heard about Microsoft’s extender strategy, I was skeptical that it would stream videos without problems or program lock ups. While I didn’t test the connection using WiFi, my experience using the Xbox was almost identical to having the PC directly connected to the TV. No lag, no stuttering, just instant access to my content on my big screen tv.

-You can watch TV while using the menus. TiVo uses picture in picture technology on their Comcast download, but you won’t find it on their stand alone DVRs. I had forgotten how much I enjoyed this until I started using Vista as a DVR. Whether it’s a live show or a recording, Vista will minimize whatever program that’s on, when you want to dig deeper into the menu settings. This isn’t good if you’ve accidentally stumbled onto a football game and are desperately trying to avoid the score, but it is nice for when you’re not exactly sure what you want to watch.

-It will help you find programs that are on right now. Vista Media Center allows you to search for programs in a number of ways, but its their support for upcoming television, that impressed me the most. When it comes to searching for things like TV series, kid shows, etc., it allows you to browse alphabetically or by date. They’ve also built a separate section for movies and for sports where they’ve packed in some extra bonus content. In the TV and movies section, they offer plugins for various movie download services and in the sports section Vista will let you check the box scores or add fantasy players to track.

-You can skip automatically skip commercials. DVRs make it easy to skip commercials, but Vista Media Center takes things one step further by supporting plugins, that can edit out those pesky little ads entirely. It’s not easy to set up and it’s not something that is enabled by default, but it’s still a pretty sweet feature to add.

-You can placeshift your TV. The Slingbox is great if you have a cable DVR or a TiVo, but with Media Center you can download a free plugin that will let you watch your content wherever you can connect to the net. I haven’t actually used the program yet, but it’s still a great feature to have access to.

-You can burn DVDs. Normally, I’m pretty good about watching all of the shows that I record, but when it comes to boxing, I just don’t have time to see every fighter. It’s my favorite sport, but since I record every fight (even the ones on the Spanish channels), there isn’t enough time/hard drive space, to get caught up. Since I’ll never really know which fighters will end up making it big, I’ve decided to use my Media Center to archive all of the fights. By saving them to DVD, I should be able to go back and watch the fights that mattered.

-It supports external storage. Media Center gives you a lot of control over how you want to set up your storage. Since I’m using it as a secondary DVR, I’ve set it up to record a maximum of 100GB on my internal drive. If I need more, I can add an external drive or increase my internal hard drive allocation.

Cons

-You shouldn’t have to reboot your TV. One of the things that I love about my TiVo is that it just works. You don’t have to be a tech geek to figure it out, you plug it into your TV and it records everything. In the entire time that I’ve been a TiVo customer, I can think of very few occasions where TiVo failed to record my programing. When it comes to Media Center, it’s important to remember that it’s a PC first and a DVR second. Over the last few months, I’ve found the program to be mostly reliable, but it hasn’t been smooth sailing either. Whether it’s been dealing with poor DRM design, troubleshooting a bug that refused to let me download the guide data or having my computer crash while recording television, there have been several times where I’ve missed recordings, because of PC related problems. While I can’t blame Microsoft for all of my problems, it’s still frustrating to miss a show because of technical difficulties.

-Internet video support is weak. Media Center includes support for services like Vongo and Showtime on Demand, but it involves registering and downloading a separate program before you can get it working. As a Netflix subscriber, I was looking forward to being able to use Watch Now inside of Media Center, but Microsoft has left it up to the fans to build support for this. Microsoft includes some MSN internet video content, but they make you watch pre-roll ads before knowing whether or not it’s something that you are interested in. The Xbox may unofficially support DivX, but you can’t access it inside of media center. If you prefer to use a media extender instead, it will support your XviD files, but it’s set up to block your DivX content.

-It won’t record radio. XM may have just settled a lawsuit over their radio DVR, but recording radio shouldn’t be any different than television content. Media Center will let you listen to OTA radio, but it doesn’t let you record any of the programs.

-Fast forward is a little too powerful. It may be, that I’m just used to TiVo, but Vista’s fast forward speeds are hard to adjust to. They’ve got slow, almost fast and then it jumps to hyper speed. I can’t tell whether or not they are using a five second skip back, but when I hit play, I’m usually way past the start of the program. If you stick to the 30 second skip it’s not a problem, but it’d be nice if there was some kind of a way to adjust the timing on this.

-You can’t skip to the middle of a program. One of the things that I like about downloaded video is being able to immediately jump to the middle or the end of a program. Since this is a key feature in Window’s media player, I was surprised to see this missing from Media Center. There is also no way to jump 15 minutes ahead. If you happen to fall asleep during the middle of a program, you’re stuck with fast forwarding in order to get back to where you were at.

-You can’t rate your television. As television continues to involve, it’s becoming increasingly personal. Media Center does a good job of recording TV, but it doesn’t do a very good job of getting to know you. You can sort movies by the highest rated, but its using someone else’s criteria. Because you can’t tell Media Center what you do and don’t like, there are no suggested recordings or personalization.

-It doesn’t support auto-recording of wishlists. I’m a big basketball fan, but I’m really only interested in seeing the Laker games. Media Center will let me search for the next time that they are playing, but it won’t automatically record the game. It would be nice to be able to use media center to record programs that are customized to my interests.
Al pointed out in the comments that you can actually uses wishlists, you just need to set it up from the add recording field. Thanks for the help Al. This one definitely should go in the pro category.

-Vista’s DRM doesn’t play nice with HD. I’m still fuming over this one. I knew that recording HDTV on Vista would be a hassle, so I stuck with standard tuners when I customized my computer. After upgrading to an HD monitor, Vista disabled my Netflix Watch Now and put Media Center into lock down. If Apple’s DRM wasn’t just as bad, I would be thinking differently after this experience.

-It takes forever to burn a DVD. I was really jazzed up over being able to archive shows onto DVD, but the sluggishness of the DVD burning capabilities has me rethinking this game plan. It took me 2 and a half hours to burn a one hour program to DVD. It’d be one thing if I was using lousy hardware, but it takes less then 4 minutes for me to burn a 2 hour DivX film. It’s nice to be able to save your TV, but it should never take more time to burn the disc, than it does to watch it.

-Good for early adopters, complicated for everyone else. Vista Media Center offers a lot of unique features, but it takes too much tweaking to set these up. Placeshifting and auto commercial skipping are available, but it’s up the consumer to find and install these programs. Even if you know what you are doing, the setup can still be complicated. Instead of making consumers seek out these programs, Microsoft should be including them as part of the package. It wouldn’t be popular with the media companies, but it’d win the company a lot more fans.

-The recording quality is terrible. It’s probably not fair to compare a cablecard connected TiVo with an analog cable media center set up, but the TiVO SD recordings on my 60″ screen, look way better than the Media Center recordings on my 22″ monitor. This probably has less to do with Media Center and more to do with the tuners that I’m using, but it still takes away from the user experience. Unless you want to spend the big bucks on a cablecard media center, you may end up having to deal with poor resolutions.

-There’s no turning back once you delete - As careful as I am, sometimes my DVR instincts go on auto-pilot and I’ll accidentally delete a show before watching it. With TiVo I can recover that program, but in Media Center it is gone forever. The file isn’t even in the Recycle bin. Media Center will always ask you to confirm before deleting, but this also creates one more button to push when you are done with the shows that you have watched.

So there you have it, the good, the bad and Media Center Vista. There are some rough spots around the edges, but it really is a fantastic program. I’m hoping that we’ll see better support for HDTV and for online video as the program continues to evolve.

Posted in TV, Media, DivX, Slingbox, DRM, Disclosure - I own stock in co. mentioned, Microsoft, TiVo | 5 Comments »

How The Sith Stole Christmas

December 18th, 2007 Davis

Posted in DivX, VOD | No Comments »

Twas The Night Before DivX

December 10th, 2007 Davis

‘Twas the night before Christmas, when all through the house
Not a computer was stirring, not even a mouse;

The sockets were open, to the internet with care,
In hopes that St. DivX soon would be there;

The children were nestled all snug in their beds,
While visions of torrents danced in their heads;

Mamma with her ‘dial up, and cable’s internet cap,
Had just settled down for a long winter’s nap,

When out of the innerweb, there arose such a clatter,
I sprang from my ZZZ’s to see what’s the matter.

Away to computer, I flew like a flash,
Tore open my network, before my Window’s PC could crash.

The files that appeared, in the monitor’s glow
Gave the lustre of completion to the videos below,

When, what to my wondering eyes should appear,
But a miniature video file from eight tiny mirrors,

With a little old driver, so lively and quick,
I knew in a moment, it must be St. DivX!

More rapid than the video store, his coursers they came,
And he whistled, and shouted, and called them by name;

“Now, Wedding Crashers! now, Dirty Dancers! now, Tropic of Cancer and Wrestling Vixens!
On, Bill Haley and the Comets! on Two Gun Cupid! on, Donner’s Pass and Mp3 Blitzes!

To the top of the pirate’s bay! to the top of my hall!
Now dash away! dash away! dash away all!”

As subpoenas before the RIAA fly,
When you meet with an obstacle, blame the neighbor’s WiFi,

So up to my desktop the coursers they flew,
With a tray full of videos, and St. DivX too.

And then, in a twinkling, I heard on the roof
The prancing and pawing of the MPAA’s burden of proof.

As I drew in my hand, and was turning around,
Down the chimney St. DivX came with a frown.

He was dressed in encryption, from his head to his foot,
But his clothes weren’t all tarnished with DRM soot;

A bundle of codecs he had flung on his back,
And he looked like a peddler unzipping his pack.

His files — how they twinkled! his Warez how binary!
His gifts were ones and zeroes, that made my eyes teary!

His droll little mouth was drawn up like a bow,
Ready to deliver a holiday message from Sheryl Crow;

The stump of a pipe, he held tight in his teeth,
His smoke encircled the media, just like a sheath;

He had long tail distribution for the little round telly,
That shook, when he laughed like a bowlful of jelly.

He was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself;

A wink of his eye and a twist of his head,
Soon gave me to know, I had nothing to dread;

He spoke not a word, but went straight to his work,
And filled up my folders; then turned with a jerk,

And laying his finger aside of his nose,
And giving a nod, up the broadband he goes;

He sprang to the web, to his team gave a whistle,
And away they all flew like a judgment dismissal.

But I heard him exclaim, ere he drove out of sight,
“Happy pirating to all, and to all a good-night.”

To celebrate the holidays, DivX is currently giving away free copies of their Pro, Converter and Player software. Normally, this bundle would cost $20, but if you act fast enough, you don’t have to pay anything. In order to get the promotional deal on the software, all you’ll need to do is download and activate the program using the following instructions.

Posted in DivX, Media, TV, VOD, DRM | 1 Comment »

DivX On The PS3: Is Sony Selling Consoles or Sabotaging HD-DVD?

November 13th, 2007 Davis

When I found out that DivX was going to be supported on the PS3, I was pretty much floored by the announcement. I can see lots of reasons why Microsoft would want to add DivX to the Xbox, but with Sony’s studio assets, I never expected them to embrace the format.

While there is no way for me to know what really motivated Sony, I do have my suspicions.

On a basic level, Sony obviously adopted DivX as a competitive strategy for the console market. Announcing support for a popular codec among hardcore gamers, makes a lot of sense, especially going into the holiday season. Whether or not Microsoft ends up adding DivX to the Xbox 360, Sony’s support for DivX will certainly provide a boost for the console.

On the surface, this explanation seems to make a lot of sense, but the tin-foil hat part of me, can’t help but wonder, if this really had more to do with Blu-Ray.

The current state of the HDTV DVD market is a mess. The Blu-Ray and HD-DVD camps seem to have settled for a stalemate and consumers are getting shafted in the process. By choosing a side in this battle, consumers risk ending up with obsolete technology, but that isn’t the greatest obstacle to adoption. The real reason why consumers are sticking with the standard DVD, is because they can’t get all of their content on either format.

It might be great that you can watch James Bond on Blu-Ray, but it’s a serious weakness when consumers can’t watch Universal, Paramount or Dreamworks content. If Sony was only certifying the PS3, I would dismiss these thoughts as paranoid delusions, but at DivX’s most recent investor presentation, they did say that they hoped to announce the first Blu-Ray/DivX chip before the end of the year.

Now I would never expect Sony to come out and openly endorse piracy, but if you think through the implications of PS3/DivX support, you might understand why I think that they are really engaging in a form of HD-DVD sabotage. By supporting DivX, consumers won’t get the same HD experience, but they will get access to all of the forbidden HD-DVD content and that has huge value to the consumer.

DivX support won’t be enough to end this silly war, but it could prove to be an important band-aid for the Blu-Ray camp. By partnering with DivX, Blu-Ray is now able to offer all content, even if some of that happens to be illegal. I don’t believe that DivX support will change the format war, but it will certainly put pressure on the HD-DVD format. Their advantage so far, has been based on the exclusivity of content and if Blu-Ray consumers are denied the programs that they want, I have no doubt that they’ll turn to DivX as a solution.

Whether Sony adopted DivX to help jump start PS3 sales or to gain a guerrilla advantage in the HD wars will remain a mystery, but either way the move is so shrewd, that I’m surprised to Sony make it. After seeing so many failed attempts at trying to maintain a proprietary system, it is a welcome relief to finally see cracks appearing in the Blu-Ray defenses.

While DivX support on the PS3 isn’t an admission that Blu-Ray has failed, I do think it’s a sign of how far Sony is willing to go, in order to win this battle. If both camps would just agree to cross-license their content, we could end this stupid war, but in the meantime, at least consumers will soon have illegitimate options, to get at the content that the studios don’t seem to want to sell them.

Posted in Technology, DivX, Media, TV, VOD, HDTV DVDs, DVDs | No Comments »

Is DivX and the Xbox 360 About To Become A Reality?

November 6th, 2007 Davis

DivX followed up last night’s earnings report, with a presentation at the JP Morgan SmMid cap conference. After having just undergone their quarterly confessional, I didn’t expect to hear any new information, but wanted to tune in anyway.

Luckily, I was rewarded when midway through the Q&A session, JP Morgan analyst Paul Coster, coyly probed Kevin Hell about whether or not we were about to see DivX support on the Xbox 360. The question seemed to catch Hell off guard and while his initial reaction was enthusiasm, there was something about his tone, that suggested that Coster might be onto something.

Here is the exchange verbatim, but in order to appreciate the awkwardness of the exchange, you should really listen to the quote at the 24 minute mark of the presentation and make your own decision as to whether or not you hear a sense of urgency in Hell’s response.

Coster - “Just a minor point here, but there was a recent Microsoft conference where I believe their media extender now incorporates the DivX codec on it, is that correct? Can you confirm that and does that mean we’re soon going to see Xboxes with DivX on them?

Hell - “Yes! that, uh, we’re in discussions with Microsoft on that at this point in time, so I can’t go into any great detail on that. Um that is not a certified, that is not a certified or licensed product at this time.”

At that point DivX CFO Dan Halvorson jumped in and quickly changed the subject.

It was only a brief exchange, but after pretty much giving up all hope of seeing DivX on the Xbox, I found the news to be very encouraging. When I originally saw that Microsoft was going to support DivX on their media extenders, but not on the 360, I took this as a sign that negotiations were over and that Microsoft didn’t want to pay for their entire Xbox360 population. In retrospect, Microsoft may have really been engaging in the subtle art of negotiation.

In thinking about some of the leaked XviD/360 rumors over the past summer, I can’t help but wonder if Microsoft could have intended to leak this information, in order to gain leverage in their discussions. An Xbox that supports XviD, but not DivX, is a less then optimal experience for consumers, but the downside would be far worse for DivX then Microsoft. Could Microsoft have been flexing their muscles in an attempt to get a better licensing deal with DivX? I don’t have the answers to these questions, but I do have advice for both companies.

DivX - I know that you have responsibilities to your shareholders, but as a fan, I urge you to engage in some fiscal irresponsibility and give in to whatever Microsoft is demanding. DivX support on the Xbox is one of the top requests from your community and would make a killer extension for your codec. Don’t make us hack into our Xbox to get at the DivX love. The platform would give you instant access to millions of television sets and would energize your entire community.

Microsoft - Have you looked at how much cash you have in your bank account? Why are you even playing this game of chicken? We should have had DivX support years ago. Offering XviD, but not DivX would be a huge hassle for your customers and isn’t worth the money you would save on royalties. The publicity from adopting an open strategy would more then pay for your investment. Your strategy to treat media extenders differently from the 360 is an obstacle to mainstream adoption and one that should be abandoned. You should listen to consumers, even if it means overpaying DivX for their certification. With a consistent extender strategy and DivX support on the Xbox 360, you could crush the PS3 and create a more compelling reason for people to adopt your Media Center technology.

It’s hard to say how negotiations will turn out, but I have a feeling that it won’t take long to find out. The “fall” update is rumored to be taking place sometime in December and if it doesn’t include DivX support, it will likely mean that these discussions broke down. If it does include DivX support, it will be a huge win for DivX, for Microsoft and most important, for their customers.

Posted in Technology, DivX, Video Games, TV, VOD, Microsoft | 2 Comments »

DivX Thrives As The DVD Continues To Die

November 6th, 2007 Davis

The market for DVD players may be in decline, but you wouldn’t know it by looking at DivX’s latest quarterly results. On a day where the press was reporting a 15% drop in the number of DVD players sold, DivX surprised investors by announcing better then expected revenues, driven largely by gains in the DVD player category.

During the quarter, DivX took in $20.9 million in revenue, of which $17.1 was related to their core licensing business. This jump in revenue represents an increase of 44%, over the same period a year ago.

During a conference call discussing the results, DivX estimated that as of June 30th, they had captured 37% of the global DVD player market. This compares to a 25% penetration rate, from a year ago. During the more recent 3rd quarter, they saw their market share for US based DVD players, climb from 20% to 31%, over the past year.

Kevin Hell, DivX’s newly appointed CEO, attributed the growth to top OEMs, reacting favorably to greater consumer demand for DivX products.

“These penetration gains are a direct result of our growing relationships with the key OEM partners, as they react to increasing consumer demand for DivX devices. In Q3, our top 5 OEM partners, taken as a group, increased unit shipments of DivX Certified products by 55% relative to the same period last year. What’s more, we are especially pleased that we have been able to achieve this growth while maintaining our historically strong average royalty rates.”

What I find so fascinating about this aspect of DivX growth, is that they are seeing it come from their existing partners. If new partners were coming on board, it would be easy to dismiss their gains as being driven by OEM competition, but to see 55% growth from your existing customers, would suggest that DivX’s market share is either being driven by consumers directly choosing DivX devices over non-certified products, or from OEMs recognizing the value that DivX adds in a more competitive environment. Whether it’s the chicken or the egg that has been driving demand, these gains represent a strengthening of DivX’s core business and offers further proof, that DivX certification can drive the adoption of consumer electronic devices.

In addition to seeing progress in their core DVD licensing business, DivX also saw key developments in their emerging products category. During the quarter, they successfully launched their DivX Connected platform, they formed a strategic relationship with Qualcomm to help drive DivX mobile, and they signed an important advertising agreement with Yahoo!

On their conference call, DivX didn’t unveil any new customers for their Connected platform, but they did announce that Connected would begin shipping on November 12th. Initially, it will only be available in the UK, Germany and France, but DivX expressed hope that we could see a North American launch sometime in 2008.

One area where DivX continued to struggle, was in securing the rights to premium content. When asked about their progress, Hell said that DivX remained committed to the idea, but that negotiations with studios tend to take a lot of time.

“we continue to aggressively pursue Hollywood content and believe that there is a strong rationale for a deal. Of course, these sort of deals take time, particularly with our open approach, where we’re working across a number of different device types and a number of different brands, but we think that the rationale for the studios and other premium content owners is compelling. We have over 100 million devices out there that are certified. All of those devices have our DRM inside and so ultimately we believe, it’s just a matter of time. Once we do get these folks on board, the studios and other premium content owners, we’ll then be working with other folks like Amazon or Netflix to enable services for distribution in the powered by DivX model.”

There may be strong rationale for a deal, but it appears that DivX is finding out the hard way, that studios don’t always behave rationally. DivX may still be committed to trying to secure the digital rights to content, but you wouldn’t know it by looking at their their legal department. During the quarter, DivX sued Universal music group, in order to help establish the legality of their Stage6 video sharing site. On October 22nd, UMG fired back by filing a copyright complaint against DivX, as well as ten John Does who are accused of uploading infringing content to the Stage6 website.

When asked about whether or not the lack of premium content would impact the popularity of DivX Connected, Hell didn’t seem to feel that it would be an issue.

“I think Connected in its current form and the sense that it has access to all of your music, your photos and, of course, your video, as well as access to Stage6 and other services is a compelling offering and I believe that its something that solves the problem out there, unlike any other platform that’s out there today. That said, of course, I do see Hollywood content as being an accelerator to Connected.”

For most digital media companies, being denied access to premium content would make or break your business, but because DivX’s core customers already have access to premium content, this really isn’t all that significant of an issue. Customers may have to steal their movies off the P2P networks, but DivX consumers have already demonstrated a willingness to take content, especially when legal downloading isn’t an option. Premium content will be an important part of Connected, but it doesn’t necessarily have to be legal content, in order for the platform to succeed.

During the quarter, DivX saw three major developments for their mobile strategy. As part of a new multi-year agreement with LG Electronics, they introduced another DivX certified cell phone, they expanded the global availability of the Samsung F500, and they formed a strategic partnership with Qualcomm.

Of these events, the Qualcomm deal was the most important, because it lays the infrastructure for mass deployment further down the road. Qualcomm is a major player in the cell phone chip market and if DivX can achieve interoperability with their technology, it will accelerate the mass adoption of DivX mobile, once the phone companies finally warm to the technology.

Of all the questions that the analysts raised, I was most surprised by the confusion surrounding their Yahoo! agreement. Over the quarter, DivX reported that they had replaced Google with Yahoo!, as their advertising partner on DivX software downloads. While I can understand why people might be concerned by the end of the Google agreement, I also believe that the move makes perfect sense for Yahoo! and DivX.

Over the last several years, DivX has bundled the Google toolbar as an option, when you download or update their software. Even before, DivX went public, there were concerns that Google’s toolbar would be less effective, as market saturation set in. As more and more people download the Google toolbar, it becomes increasingly harder to find new customers to cross sell to.

From DivX’s perspective, I have to believe that they’ve been experiencing diminishing returns on this revenue stream. By partnering with Yahoo!, they are not only able to cross sell a less saturated product, but Yahoo! will also get a chance to directly steal current Google toolbar customers, every time, someone updates their DivX software. By swapping out advertisers, DivX is able to help keep this revenue stream fresh and relevant, despite their success with the Google software.

When it comes to Stage6, DivX was understandably tight lipped about their progress towards spinning off the asset. For negotiation reasons, they didn’t want to discuss the valuation or the format of the spinoff, but did give some background metrics on the development of the video sharing service.

During the quarter, DivX spent $4.0 million on Stage6. Of this amount, $2.6 million was directly related to bandwidth costs. While this expense was considerably higher then a year ago, it was still less then the $4.5 million that DivX had previously predicted it would spend. DivX CFO Dan Halvorson pointed to infrastructure constraints as a reason for the reduction in spending.

“As we mentioned in the past, the site experienced huge trajectory in 2007, moving from 4 million “uniques” in April to 10 million by July. At the end of October, Stage6 reached 11.7 million unique visitors. Our view is the number of uniques could have been higher, but were limited by infrastructure capacity. To accommodate the increased traffic we have continued to enhance the Stage6 infrastructure.”

Halvorson didn’t elaborate on how they were enhancing the infrastructure, but during the 3rd quarter, DivX did take a $2.2 million charge on their Veatros acquisition from the prior quarter.

While it’s understandable that DivX investors would be worried about the death of the DVD player, DivX’s current results suggest that they will handle this transformation just fine. Unlike the movie studios or print newspapers, DivX should see greater growth from the transition to a digital environment and can still take DVD player market share, even with the industry in decline. As the DVD format begins to disappear, DivX will eventually lose this business, but if they can transfer this licensing revenue into new product categories, they should see a dramatic increase in the demand for DivX devices.

When he was asked to rank the importance of these emerging technologies, Halvorson pointed out that the potential market for DivX devices is 10 times larger then the current DVD opportunity.

“In terms of the ranking of those opportunities, I would say, mobile, given its size obviously, is probably the largest. We are also thus seeing DTVs, HDTVs, set top boxes and gaming consoles all being interested to us over time as well. Cameras, of course, are important not just because it’s a large market, but because it is also a generic content in the DivX format, and as I mentioned, I think the addition of H.264 to our overall media language will allow us to penetrate that more quickly as well.”

The death of the DVD business will happen eventually, but whether it takes five years or twenty, DivX is in a good position to take advantage of this shift. In the near term, OEMs are recognizing the value that DivX brings to a more competitive environment and over the long run, DivX will only need to capture 10% of their market opportunity, in order to replicate their current level of success. As consumers turn away from the DVD, they will need to embrace a digital format and DivX has positioned themselves to directly benefit from this evolution in the digital market.

Disclosure - I am a shareholder of Netflix

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