Serious Drama, And Lots Of Stupidity, Behind Stage6 Shutdown

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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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