Archive for category Web 2.0

DivX Goes Shopping: Buys Fine Art And Search Technology

Aug 21

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

This amazing video was created by Mogcaiz. You can see more of his work at DeviantART.

Last week DivX released their 10-Q and while I was able to find the time to tune into their conference call, I didn’t get a chance to read through the actual document until this past weekend.

In the filing I didn’t find any bombshells or new lawsuits, but there were a few details on some of DivX’s recent acquisitions that did reward my curiosity. According to the filing, DivX made two purchases over the last quarter.

“In May 2007, the Company made an equity investment in a private corporation that aggregates and distributes art via its web community and facilitates an open forum where artists can exhibit their artwork and build community around that art in an effort to drive commerce. The Companyâ€™s investment consisted of $3.5 million cash for which it received certain shares of the private corporationâ€™s Series A Preferred Stock and entered into an advertising and marketing agreement. The Company has preliminarily allocated approximately $650,000 of the investment to the advertising and marketing agreement, based on its estimated fair value, and the remaining $2.9 million will be carried as an investment.”

DivX doesn’t name the actual artwork site in their filing, but since I already knew that they had purchased a piece of DeviantArt, this one wasn’t hard to figure out. Originally, I had thought that they were only partially behind the $3.5 million investment, but according to the filing, it looks like they put in all of the cash. DivX doesn’t disclose how much of a stake they got for their money, but they do disclose that it is less than 20%.

Without knowing the details behind the acquisition, it’s hard to determine whether DivX received good value for their money, but from a strategy standpoint, I really liked the acquisition. There are a lot of websites that can build a lot of traffic, but the question is at what cost. Newspaper websites get a ton of hits, but take away their print business and the business model can’t support the cost of writers, editors, staff, etc.

The great part about user generated content is that because it’s built around community, the customers are the ones that provide the content. In the case of DeviantArt, they’ve built a very positive environment around people who love art and by connecting artists together in this way they’ve been able to develop a community where creativity thrives.

If DivX wanted to sell art they could have spent $3.5 million on Google Adwords and bought the traffic, but they weren’t interested in selling art, they wanted access to the artists themselves. Through their investment, they will not only get access to DeviantArt’s traffic, but they’ll get the right kind of traffic visiting Stage6, content creators who are looking for venues to showcase their digital creativity. The acquisition won’t do anything to bolster their bottom line, but it does further connect them to the larger web community.

The second acquisition in the 10-Q was a little bit harder to figure out. It’s related to improving the search functionality of Stage6, but DivX didn’t release a lot of details on whose technology they actually purchased.

“In July 2007, the Company acquired all of the assets of a limited liability corporation engaged in real-time digital video processing for the purposes of producing enhanced video search and discovery services. The total purchase price for the acquisition is up to $4.25 million comprised of an initial upfront cash payment of $2.0 million, which the Company made in July 2007, and subsequent cash payments up to $2.25 million upon the achievement of certain technology related milestones. The Company will account for the acquisition as an asset purchase and periodically review for impairment.”

Without knowing whose technology they bought, it’s hard to get a feel for how powerful their new search will be, but I’m glad that they are taking steps to improve their search functionality. Search on Stage6 is one of the many areas that is still in “beta” mode. Sometimes you’ll find what you want, but it’s usually more by luck than query. I’d describe the issues in greater detail, but Neillithan has made a video that addresses the deficiencies better than I ever could.

As Stage6′s media collection continues to grow, relevant video search will be crucial in helping to make sense of it all. Searching by tags and keywords works for now, but it’s far from perfect. I don’t think anyone has perfected video search, but EveryZing is the furthest along and even they still have high failure rates on their speech to text functionality.

One of the frustrating parts about finding details is that they rarely answer more questions than they raise. While I was pleased to find out more about DivX’s search solution, without knowing who they actually acquired, it’s hard to determine how important this could be.

I have a theory about who DivX may have picked up, but I have to qualify it as even more speculative than my normal unreliable gut feelings. It’s really nothing more than a wild guess based upon the criteria that they lay out. Still, I’ve never been one to be shy about speculating even when I’m probably wrong, so here is my wild guess on who DivX may have acquired.

Of all of the companies that fit this criteria, Veatros seems the most likely candidate to me. Their site went offline in July, but before it went down, I know that they were looking for strategic partnerships for their search technology. One of their former employees, has his resume up on LinkedIn and I thought it was interesting to see him leave around the same time that a DivX acquisition would be taking place. According to his LinkedIn profile, he describes Veatros as having the fastest video search ever developed.

“Startup technology company spinning out of the University of Kansas with the fastest video search technology ever developed. Veatros technology can identify a video clip of as little as 2-3 seconds in length from a database of tens of thousands of hours in real-time.”

Susan Gauch is the owner of Veatros and she would certainly have the expertise to implement video search on Stage6. Veatros is really a side project for her, during her day job,she is an accomplished professor at the University of Kansas. Her entire career has been dedicated to researching and improving search. Her research has already been referenced in several video search related patents.

There’s no way for me to be sure if my guess is right, but if it’s not Veatros, then I would suspect that it would a company with similar characteristics. Irregardless of who the mysterious LLC turns out to be, improving their search is something that I’m glad to see DivX focusing on. Better content filters, mean a better experience for anyone visiting their site. If they can personalize video search, then the content on Stage6 will keep getting better.

Neither one of these acquisitions is a major move on DivX’s part, but it does give us some insight into part of DivX’s growth strategy. The video search investment makes sense from a tactical standpoint, but the DeviantArt purchase is far more interesting.

The passive nature of the investment raises the possibility that DivX is developing a venture capital arm to their business. They’ve already incubated Stage6 and with steady cash flow coming in each quarter, Divx is in a great position to make private investments where they see opportunities. It’s too early to know how aggressively DivX will pursue this aspect of their business, but if they continue to invest in emerging technology, things could certainly start to get interesting.

Update – It looks like my wild guess turned out to be right, but I may have been wrong about how they plan on implementing it. DivX released a press release this afternoon confirming that Veatros was in fact the company that they had acquired. In the press release, DivX says that their plan is to integrate the technology into their connected platform. Interestingly enough, they don’t mention Stage6 once in the release . . .

Davis Freeberg’s Site Of The Week

Aug 21

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

Normally, I’ve got a pretty anti-pet policy in life, but even I had to vote for this week’s winner of the site of the week contest. KittenWars is a website where pet owners upload photos of their kittens and where web surfers can then vote on which ones are the cutest.

I usually try to run and hide when people want me to look at photos of their fuzzy little furballs, but this is a cat fight I don’t mind taking part in. It’s like PickTheHottie, except for kittens.

I’m not sure why I’m so fascinated with games, but I’ve always been a big fan of any site that offers fun contests or challenges. KittenWars is no exception, there is something about the interactivity that really appeals to me. I keep telling myself that I’m going to click just one more time, yet I can’t stop voting on contest after contest. On the site, you can also find lists of the cutest (and not so cute) kittens on the site, but it was the voting that I found the most entertaining.

Congratulations to KittenWars for winning this week’s site of the week contest. The nominations for next week’s site are listed below, please vote in the sidebar. Feel free to contact me, if you’d like to nominate a site worth visiting.

WordPress Theme Generator

iBlocked

Rejected iPod Engravings

Lycos Loses ‘Home Court’ Advantage: Patent Trial To Be Held In Their Own State

Aug 15

Posted by Davis in Disclosure - I own stock in co. mentioned, Netflix, Search, Technology, TiVo, Web 2.0 | Comments off

It looks like TiVo, Netflix and Blockbuster will be packing their bags for Massachusetts, after they won the first of many legal scrimmages in their patent defense against Lycos. Lycos has asserted that all three companies have violated patents they own, on “information filtering technology.” The two patents that are at the heart of the case are related to the recommendation services that the companies provide.

After Lycos filed their lawsuit against the trio, ChoiceStream (the company that created Blockbuster’s suggestion service) filed a separate lawsuit, to have the patents thrown out.

In their lawsuit against Lycos, they argue that the patents are invalid because of obviousness and prior art. Because Choicestream filed their own lawsuit in the Massachusetts’ court system, TiVo, Netflix and Blockbuster sought to have their case transferred there as well. I’m not familiar enough with the legal subtleties to know why Lycos originally opposed the motion, but with Lycos’ headquarters in MA, the judge found the request reasonable enough and granted the motion.

While this development in the case, is only a minor footnote in the larger dispute, the legal filing did contain more background on the case, as well as a few interesting side details.

It turns out that Choicestream may actually end up playing a pretty important role in how this gets resolved. In the legal filing the judge writes,“ChoiceStream has employees in Massachusetts who possess information relevant to this action, and Lycos has indicated that it ‘may need to take some discovery from ChoiceStream.’”

I haven’t read ChoiceStreams lawsuit against Lycos yet, but it wouldn’t surprise me if they did end up owning some prior art. A year ago, they filed an application for their own recommendation patent, so it will be interesting to see what ends up coming out at trial.

It also appears MIT’s Media Lab could be called to give testimony. Part of their research was used to reject some of the original claims on one of Lycos’ patents. Believe it or not, they’ve actually been publishing research on “information filtering” since the late 80′s.

While it appears that this case is heading for trial, there is always the possibility of a settlement. Even though Lycos filed their lawsuit on Jan. 3, they didn’t actually serve TiVo, Netflix or Blockbuster until April 30th because they were engaged in “settlement discussions” with the companies. Since they now appear to be squabbling over who gets home court advantage, those talks have likely cooled off, but it wouldn’t surprise me to see either side at the bargaining table, especially if things start to look bad for them.

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

DivX 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

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

Pfigg

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.

Slicing And Dicing: DivX Considers Breaking Up Company

Aug 1

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

Last 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 theyâ€™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.

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.

Davis Freeberg’s Site Of The Week

Jul 31

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

I love the web 2.0 movement, but I still wince every time I hear a wacky web 2.0 name. I’m not sure how each website or company came up with their name, but it’s fair to say that today’s generation of entrepreneurs, did not get straight A’s in spelling during Elementary school. Whether it’s Joost, Pownce or Zooomr, when it comes to 2.0 names, you can pretty much throw spelling out the window.

Even when you don’t have to worry about spelling though, coming up with a creative name for a business is still not an easy task. This is why I found this week’s winner of the site of the week contest so entertaining. The Web 2.0 company name generator not only semi-randomly suggests fun names for businesses, but they also allow you to check to see if the web domain is available (something that the CW network apparently forgot to do before merging the WB and UPN.)

Over the last week, I’ve played with the site quite a bit, but even though the random button would suggest good names, the domains were always taken. Finally, after my 1,000th attempt, I came across a web 2.0 name, that someone hadn’t already snatched up. Unfortunately though, something about BubbleBridge.com, just didn’t scream Freeberg, so I resisted the urge to register the domain.

Some of the suggestions that I loved, but were already taken, include Yakizio (not sure what it means, but it sounds cool), BlogStorm, Kavu, and Trumba. Unfortunately BlogStorm and Yakizio have been taken by squatters, but it does look like Kavu and Trumba are both being used by legit businesses. I’m not sure if they actually got their names from the 2.0 generator, but it would be pretty funny, if they picked the names for their businesses from the site.

If I was really going to name a business, I’m not sure that I’d depend solely on the web 2.0 generator for ideas, but it’s still a fun site to play with and would be especially helpful, if you wanted to assign code names to your household chores. Doing the dishes may be a drag, but rename them Operation BubbleBridge and start assigning RPG points and who knows, maybe you can con your kids into thinking that chores are fun.

Congratulations to the Web 2.0 Name Generator for winning this week’s site of the week award. The nominees for next week’s contest are listed below, please vote in the sidebar. If you’d like to nominate a site, feel free to contact me and I will be more than happy to look it over.

Chaos Faction

Viral Video Chart

Walk2Web

Profilactic Launches V2

Jul 18

Posted by Davis in Search, Technology, Web 2.0 | 4 Comments

I have to admit that the first time I heard about Profilactic, I was a bit skeptical. After all, I already belong to 50 different social networks, but only have time to interact with half of them. While I like checking out new sites, there are also a lot of things that I sign up for, but forget about later. I didn’t know it at the time, but having to manage so many different social networks, is actually what makes Profilactic so useful to begin with.

When Shawn Morton told me that the site was going to be a place where you could create a profile to show your friends, I thought he was crazy. I mean after all, just about every web 2.0 site has someplace for you to write a quick bio. In my case, I’ve even got a blog where people can find out all kinds of information about me. I couldn’t see a reason why I would need to create a profile on a web 2.0 site, just to showcase my other profiles.

What I didn’t understand about Smorty’s plan though, was that he wasn’t talking about a static profile in the traditional sense. The site is not about what you’ve done or accomplished, it’s about what you are doing now and who are today.

Before I saw Profilactic, I could only think of someone’s profile as a quick bio with some links. I never thought about a profile being multidimensional, but what Smorty built was a dynamic profile that could display all of your day to day social activity on one website.

While conceptually, I couldn’t understand the appeal, after seeing it in action, I now have a different appreciation for how powerful Profilactic’s tools really are. Everytime I Digg a story, it lets people know. When I upload a video to YouTube or fav a photo on Zooomr, I can include that in my feed. Whether you are a MySpace fan or a Facebook user, Profilactic can take your identities there and fuse it into a more cohesive picture of your interests. It’s like Digg Spy, only for all of your social networks.

For every story that I blog about, there are at least 10 that I miss. Everyday, I find great content, but don’t have the time to give it the attention it deserves. Sometimes I will comment, sometimes I’ll bookmark or Digg the site hoping to come back and write about it later. Sometimes, I just find strange tidbits that I’m not really sure where to file.

Normally, these stories would fall through the cracks, but Profilactic allows me to set up a feed, so that people who are interested, can see other parts of my online life. Not everybody will be interested in what I’m doing, but for those who care about what happens away from DavisFreeberg.com, you can now track the various sites and links that I come across online.

As a blogger, I’m probably more interested than the general population in expressing myself online, but I recognize that a lot of people would rather listen in the shadows than stand in the limelight. While I can appreciate being able to build a central profile to share with my friends, there are also a lot of people who have no interest in sharing information about themselves.

While on the surface, you wouldn’t think that Profilactic would appeal beyond the exhibitionist crowd, it’s ability to track other people’s social movement is actually very appealing to my voyeuristic side. The data feeds that you can create allow you access to information that would normally be impossible or pretty time consuming to get at. While I’m not sure if this is a good or bad thing, if you want to cyberstalk someone, I know of few resources that offer more information about what someone is up to.

Intellectually, I know that nothing I do online is a secret, but sometimes it’s easy to forget how much information you really give up. Forget about needing someone’s social security number, with Profilactic, the user name is what’s most important. In an information age, this is both exciting and terrifying. On one hand, I could see this being very useful for keeping tabs on certain key people or even as a social network filter for certain topics or companies that I am interested in.

On another hand though, I’m not sure how comfortable I would be, if someone I didn’t get along with, was using it to track me. While I like having the ability to watch other people’s social activity, when it comes to actually being watched, I feel differently about it. It’s not fair to have a double standard, but it’s part of my human nature I guess.

Even though all of the data that Profilactic uses is public, I’m not sure that I’d want an ex-girlfriend to be able to watch all of my social activity or see that I had set up an account on HotorNot.com. People already freaked out when we saw tools introduced, that could notify you if your MySpace crushes became single. Profilactic can take this to a new level.

If you actually think about the amount of information that you give away online, it’s a little bit scary. If I upload a photo to Zooomr and geotag it, someone will know the date, time and location of where I was when I took the photo. If I bookmark a recipe, then it would be easy to guess about what I’m having for dinner and whether it’s taco night with the guys or a romantic dinner. While most of this information is pretty harmless, in the context of a bad relationship, it could be a little awkward.

It took me a while to reconcile the part of me that sees Profilactic as an excellent data mining tool with the part of me that is concerned about it being a not so good date mining tool. Eventually though, I realized that all of this information is already out there and that part of being in a social community, means that for better or worse, people get to see what you are doing.

If I’m not comfortable with Profilactic, than I shouldn’t be anymore comfortable with Digg, Del.icio.us or Pandora, but all of these sites are valuable resources and sometimes sharing what I’m doing is the best part. When you combine these various web 2.0 services with Profilactic’s ability to filter and aggregate this activity, you can get a much more comprehensive look at someone’s personality. If I have a problem with something showing up there, than I probably shouldn’t have dugg some drunk stripper orgy story to begin with.

At the end of the day, Profilactic’s technology may be a little unnerving, but only because it shatters the false illusion that you actually have privacy and anonymity to begin with. There is a saying that if you can’t beat them, join them and in this case, I’d rather take advantage of the social networks than to hide from them. If Profilactic can make finding and sorting this information easier, than I am a fan, even if I do end up embarrassing myself once in a while.

Davis Freeberg’s Site Of The Week

Jul 17

Posted by Davis in Media, Music, Site Of The Week, Technology, Web 2.0 | 2 Comments

This week’s winner of the site of the week contest was a site that got in early, on the Podcasting craze. Podcast Alley was quick to recognize that people wanted to express themselves via radio and from the start, they built their community around these content creators. Whether it’s been interviewing other podcasters, highlighting some of the best podcasts out there, or creating forums for fans to interact in, they’ve done a great job of creating a positive environment where podcasters can share information and ideas.

One of the things I love about the web 2.0 revolution, has been how multidimensional it’s made media. When the net first started, we saw flashes of what would come, but it was nothing like I expected. There was an occasional audio or video clip, but the quality was substandard and there was no interaction.

Now we have whole social communities that form around content. As the barriers to entry have been lowered, we’ve seen a proliferation of individuals who are eager to contribute in one way or another. I knew that one day, radio and video would make it’s way to the internet, but I didn’t expect a social revolution to drive it. It hasn’t happened overnight, but YouTube is disrupting TV, blogging is taking over the newspapers and podcasts are displacing radio.

People say that content is king, but when you have such a large explosion of information, content quickly becomes commoditized and it’s the businesses that can make sense of it, that become the new king. This gives the aggregators a lot more control, than the professional content creators like to admit.

I don’t normally listen to a lot of podcasts, but I do enjoy the format. Many of them are just as good as talk radio, except instead of mindless banter, I get to hear them talk about things that I’m actually interested in. This weekend, I had an opportunity to listen to Podflix’s review of George Romero’s Night of the Living Dead series.

Having recently watched the entire series, I was thrilled to be able to listen in on a bunch of guys, who enjoy talking about zombies eating people’s entrails. I know that not everybody is into horror films, but I love them and that is the beauty of podcating. What other’s consider amateur content, is A level material to someone who is interested. The key is matching up the listener’s interest with the content creators. Podcast Alley does a great job at this.

Congratulations to Podcast Alley for winning this week’s site of the week award. If you would like to nominate a site, feel free to send me an email. The nominations for next week’s contest are listed below. You can make your vote in the sidebar.

McAfee’s Site Advisor

No Phone Trees

Candy Wrapper Museum