Yesterday San Diego based DivX announced the shutdown of popular video site Stage6, to the surprise and dismay of the site’s 17.4 million happy monthly visitors (the post on the shutdown has over 5,000 comments).
There’s lots of speculation around why DivX is shutting the site down, ranging from piracy issues to the spiraling CDN costs of streaming all that HD content. But what really happened, according to multiple sources, is that a ridiculous battle of egos at the DivX board level caused most of the team to simply quit. DivX, essentially, snatched defeat from the jaws of victory.
First a bit of history - just before DivX went public in late 2006 it launched Stage6 as a way to show off the capabilities of the DivX codec. Without any promotion at all the site quickly gathered users. By mid 2007, when the site went into beta, it had millions of users and tens of millions of page views. The high quality video was key - users simply flocked to it.
DivX cofounder and CEO Jordan Greenhall knew he had a potential hit on his hands. He decided to explore a sale of Stage6, and hired investment bank Montgomery & Co. to see who might buy it. He also started pitching VCs on the idea of funding it as a spinoff. Given the conflict of interest, he resigned as CEO of DivX - president Kevin Hell took over the company. Darrius Thompson, (DivX co-founder), Mark How (DivX VP Business Development), Mark Chweh, Chester Ng and about 20 other DivX employees joined him. All shared the title of “cofounder” at Stage6.
Montgomery spent the second half of 2007 pitching Stage6 to buyers, although there wasn’t much interest. But VCs were eager to buy in to the idea of a spinoff. By November they had commitments from Crosslink Capital, Sofinnova France and Mission Ventures to invest $20 million at a $90 million post money valuation. Another $5 million was committed from a strategic investor, plus $2 million more from “friends and family.” All in all, Stage6 was preparing to close a $27 million round. DivX was to retain 20% ownership in the new funded entity.
Not only was DivX to receive a substantial chunk of equity in the new company, they’d be able to get the operating costs, estimated to be around $1 million/month in CDN costs alone, off their books. And Stage6 was to give most of their 2008 revenues back to Divx as well.
Those revenues were not immaterial. Everyone who views a video on Stage6 must first download the DivX player. Packaged with the download was an option to download the Yahoo Toolbar. The revenue from Yahoo to DivX is around $16 million per year. Our sources estimate that half that, or around $8 million/year, was due to Stage6 downloads. And that share was growing - 2008 toolbar revenues may have been as high as $10 million, making Stage6 almost breakeven.
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. DivX made a brief announcement about Greenhall’s departure, and added that it “expects to take additional time to consider the alternatives available to the Company related to the future of the Stage6 service.”
From that point everyone expected DivX to just continue to run the site. But over December and January they may have become concerned again about the costs of streaming the video and running the site without most of the key team there to look after things. Three weeks ago, we hear, DivX re-approached Greenhall and asked if they’d like to do the original deal. Greenhall declined.
So then DivX announced the closure of Stage6. When it shuts down all those millions of DivX downloads and associated Yahoo revenue goes away with it. At the end of the day DivX threw out the baby, the bathwater, millions of dollars in revenue and tens of millions of users. Their board and executive team, in short, look like fools. Investors seem to agree - the stock hit an all time low today.
DivX declined to comment on this post.
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I think they still retain the revenue from Yahoo toolbars or is that a one time only revenue for each install?
I also think Greenhall is to blame here. There is always two sides in a conflict. Perhaps he also became greedy and wanted to give too little to DivX.
Dyde - that’s certainly possible…but DivX isn’t talking.
And no matter what, the DivX board look like fools. If they were going to shut the site down, why not spin it off when they had the chance?
Mike: do more of these analysis articles. This and the old articles where you actually tried out webapps and demoed features were why TechCrunch rocked. Ducan’s rehash of Techmeme/Digg posts should stay on Valleywag, the PR pablum being spewed from marketing should be kept on prwire, and the VC numbers can stay on venturebeat.
This is nothing short of embarrassing for DivX, having managed to ship over 100 Million DivX Certified Devices and compete effectively against the incumbents of the consumer electronic industry, they have completely squandered their chance to see similar success online. Perhaps it speaks to the decidedly different set of core competencies demanded by the consumer electronics industry (in which a physical product is at least part of the play) and the content delivery and distribution industry (no physical products and substitute products seemingly pop up over night). In any event, DivX needs to seriously re-evaluate the opportunity it has with Stage6, not just to see revenue from Yahoo and possible pre/post roll ads, but to compliment the large number of DivX Certified devices as well.
They are definitely morons
DivX needs to come clean or they may suddenly find themselves with a talent pool the size of a puddle on the executive team.
Great post, Mike! I find many of these stories, your “TC! True Silicon Valley Stories” so to speak, some of your most entertaining. Thanks for the investigative journalism.
Michael,
Please elaborate on the Yahoo revenue. Is this toolbar (download) affiliate revenue or something else? Thanks
@8
It’s the same type of deal that Google made with Firefox.
As in, I’m sure it’s a price per install and a share of the search ad revenue
Im an italian blogger and this seems to me a perfect italian story. Btw, i am really embittered. Stage 6 was one of the main reason why i cutted definitively the TV wire in my house.
Somebody know good alternatives to Stage 6?
Alex, I’m not totally sure. Heard it was a negotiated rate based on cliffs for impressions and installs, but I don’t know enough details to include it in the post.
OK. Either way that’s lots of $$$ left on the table. Thx
They should have outsourced the running of the site to India.
Liquidation sale maybe. Someone will get this on the cheap and make out like the bandit they will become.
Rajiv - they should have done the spinoff.
So it costs $1m/month in bandwidth, but it’s bringing in $8m/yr in revenue, and they lost the core team. Sounds to me like they did the right thing.
Well, if we assume that at least half of revenue was coming from Yahoo toolbar search revenue, that means DivX will be getting $5mln this year. Since the VC deal didn’t go through they of course had no choice but to turn off the site. This way they’ll get $5mln - $2mln = $3mln profit.
No doubt they are morons though as they could have made at least $15mln plus whatever ownership they’re getting plus whatever money VCs paid them.
Michael, great post. Some time ago Divx had plans to license its encoding technology. In discussions with them the business model was not ripe (read: solution not enterprise ready, more idea than software). That was over two years ago. One would think some headway was made on that front over these years and perhaps we may see Divx streaming, just not from Stage6. Too bad.
DivX screwed it Big time, stage6 was a very good entry point for DivX codec/Player into users. I dont see any use of divx player (or to encode into DivX) if I dont have to upload to stage6.
It has been the best place to upload high-quality user generated content on the web. I’ll miss it.
Their quality was amazing! Without Stage6 my life feels so empty! Anyone know any good alternatives?
I don’t have anything substantive to add to the discussion but I do want to say, great reporting, and please keep more like this coming Mike!
Talk about shooting yourself in the foot. And I agree with the other comments, excellent post!
Stage 6 was quickly becoming THE model for high-res tv + movie distribution online and what YouTube, Google Video, Veoh and most of the rest should aspire to be. This turn of events is surprising and somewhat shocking. What is going to happen to Divx?
no offense to India but our office’s electricity in Bangalore still goes down once a week….
This post rocks. I agree with commenter #3. These posts are awesomeeeeee
@Anonymous
If we start using your metrics of investment analysis the VCs should just pack up and go home. Young companies and start ups aren’t exactly profit generating machines from day 1. Hell even a proven business model like a restaurant posts losses in its first and second years of operations.
If you read the post, the revenue stream coming off of Yahoo Toolbars bundled with DivX download from Stage6 were continuing to increase and would have proved profitable.
Gotta love the toolbar business.
So many companies burning money like crazy trying to fight each other in video, no clue on how to monetize, when toolbars have always proven to be really good as a business model. I love how many entrepeneurs put an ugly face when you propose them to do a toolbar based business and they say no, more for us.
There was talk about a UMG suit where they tried to have it dismissed or have stage6 declared a legal business … something to that extent. The judge denied their motion.
I dont buy this was due to egos! Copyright goons are to blame!
Mike, thanks for the story. It is a sad story.
This is good writing, kudos.
The story itself really just sounds like Divx got dollar signs in their eyes, rescinded the spinoff, then had to save face when running it themselves was untenable. Jump the gun then drown the kitten.
I think the story is not over. I’m sure there is someone out there that can make this work. They should go and find this person.
They obviously got a lot of things right, and obviously messed up. Now they are getting a lot of free publicity. Use it.
Get this story rolling over the next two weeks. Get offers, get rejections fire people. Who cares just keep it rolling.
Then start figuring out how to partner to make the bandwidth cheaper and monetize better. Partner with cachefly, partner with bittorrent. Yes, bittorrent.
Embed rollover commercials on the video itself.
We are way past stage5 but I believe stage6 is not done yet.
Awesome post Mike. Made great reading…
ok all you stealth video startups with HD streaming… now’s the time to come from behind the curtain it sounds like… hehehe.
What’s going to happen to the DivX webplayer? I’ve never uploaded a video to stage6 so I don’t know exactly how it worked. Are people still going to be able to use the DivX codec and just host their videos elsewhere?
The DivX web codec created the highest quality streaming video I’ve ever seen on the web. To watch dvd quality videos straight from the browser almost instantly was a giant leap for the web.
Gah! I can’t go back to Youtube!
Even though a board brings balance and experience to a company, that board can also be its undoing. This is a cautionary tale to all startups that choosing a board is serious business. Find people who are passionate about your product and have the time to understand your business. Don’t bring in big names just to have big names. It may seem intoxicating to have some noteworthy names on your board, but a lot of times those big names come with bigger egos. In the end, the people who began the business lose big while the bozos on the board find a new place to pad their resumés.
It’s ironic how success can be your biggest enemy.
Their forum are saying that a lot of peoples are moving to VEOH.com
VEOH vid quality is the same as YouTube - sucks compared to Divx and Xvid!
Some1 needs to make a BitTorrent client that streams rather then downloads! Were sure to see this …. hopefully soon!
oh stupid, i willl miss it so much, hope some alternative will start soon!
This was a really nice site, too bad.
Anyone know how long it took YouTube to become profitable? or if they’re even profitable today?
This is the most behind the scenes info about the drama yet, but the numbers you give are suspect. Most of your numbers are from ‘multiple sources’ and not availiable elsewhere, but the ones that can be checked in the latest 10-Q do not jibe. You could have been more accurate and ballanced if DivX management had commented from their perspective.
Toolbar revenue for the Nine months ended September 30, 2006 before Stage6 provided any fuel to the fire were $8.1 million.
Nine months ended September 30, 2007 were 11.8 million
So atribute 3.7 million to Stage6 as a maximum (the number was growing before the site launched) while expences for the site durring the period were 7.4 million in the same period. the last 3 months of the year they projected 6 million in costs. How fast would the site have burned the 27 million if traffic continued to grow? The Year end report comes out on March 11.
I’m disapointed to see the end of the site, but all of these sites are losing money, unless they hot link to others like Joox did to Stage6, so more of them are sure to follow. More ’success’ in the video distribution business seems to equal more losses. It would be interesting to see the split out figures for YouTube.
can you say “shareholder lawsuit coming soon to a courtroom near you”?
im not surprised at all about this.
just look back a few years.
Xvid is and always was superior to Divx anyway !
Looks like someone else is trying to capitalize on this whole deal… lol http://www.newstage6.com/
They can’t afford to run stage6.
Mike do you think there is a opportunity for merger talk between TC and stage6?
Idiots, all idiots. Destroy half of your revenue in one selfishly-infested swoop.
idiots had the best video site on the web and shut it down.
With Microsoft looking at a hostile takeover of Yahoo, I’m thinking there is a lot more to this story.