More layoffs today at DivX, the publicly traded video codec supplier that recently sued Yahoo over canceling a contract that makes up as much as 20 percent of its revenue. According to a tip that came into our Layoff Tracker, 21 people were let go. I just confirmed that until-now unannounced number with DivX investor relations. It represents just under 10 percent of the workforce in San Diego, where DivX is based (although there were some cuts globally as well).

Its stock is trading under $5, about a third of where it was a year ago.

This follows the resignation of its CTO Markus Moenig earlier this month. And some readers may remember the drama surrounding DivX’s shutdown of its video site Stage6 back in February.

Keep those layoff tips coming.

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According to a release from LiveUniverse, the company offered to acquire Stage6 prior to the site being shut by DivX 25 February. The offer was $11 million in cash & carriage plus an equity Stake in Stage6 and Promotion of DivX Software. LiveUniverse then claims that the DivX Board “refused to engage in any direct dialogue with LiveUniverse for over 5 days, and during this time, DivX shuts down Stage6.”

Despite the site being shut for nearly 2 weeks, LiveUniverse still wants to buy it and is appealing to DivX shareholders to pressure the company into selling. DivX shareholders can visit www.livevideo.com/SaveStage6” to take initiative and proactively push the Board to do the right thing for shareholders.”

LiveUniverse is claiming that “despite daily outbound calls and emails, LiveUniverse was and is unable to reach any of the DivX executives including General Counsel David Richter who LiveUniverse was originally referred to for the purposes of buying Stage6.” The go on to say that “Directors of public companies have a fiduciary duty to shareholders to try to get the best deal and represent their interests, first and foremost” and “DivX Board’s decision to destroy website and its community when there was and is a firm superior offer on table from LiveUniverse raises questions of whether proper sales process was followed.”

The one part missing from LiveUniverse’s statement is why? why do they want to buy Stage6? Sure, it was a great site with a ton of traffic, but it was only great because it offered a BitTorrent style smorgasbord of pirated content without the need to download it. Without the pirated movies, the traffic on Stage6 means nothing. Either LiveUniverse knows something we don’t about the site, or they’re taking a big risk.

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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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The site won’t be around long, though, Uploads have already been shut down, and the site itself will go offline on February 28. The official reason: “So why are we shutting the service down? Well, the short answer is that the continued operation of Stage6 is a very expensive enterprise that requires an enormous amount of attention and resources that we are not in a position to continue to provide.”

Translated, that may be that the pirates took over the site. New movies and tv shows were constantly being uploaded and then taken down by the site staff. Sites like Joox.net took all that pirated content and repackaged it on their own site. The combined costs of hosting, plus all the monitoring for infringement, may have been more than Divx was willing to deal with.

Update: Ok, we’ve been shaking the trees on this story a little. According to one source, the planned spinoff of Stage6 from DivX apparently had $24 million or so in committed venture capital but negotiations with the DivX board broke down over ownership percentages. We’re still digging.

Update2: Comscore says Stage6 has 17.4 million monthly unique visitors and 360 million page views. We also hear that their monthly CDN bill from LimeLight is $1 million, about 11% of their revenues. That’s going to hurt them.

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