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Since going public, DivX (DIVX) has identified a few areas as key to their future growth. They are looking to expand by signing new contracts with DVD manufacturers, by increasing their geographic footprint beyond Europe and Asia and by beginning to license their codec across new categories in the industry. To date, most of DivX’s success has come from their DVD licensing activity, but today the company took an important step towards realizing a new key area for their growth. Cell phones.

For sometime, we’ve know that DivX has been engaging in alpha testing of a cellular phone program. We may not have known the details or the time horizon for deployment, but, for the first time, we now have concrete evidence on the headway that DivX is making into the industry.

At a press conference in Hong Kong, Samsung unveiled their Ultra Video F500 cell phone, their first phone to officially support DivX. It will retail for $350 and will be publicly available beginning in January. There was no mention as to which markets Samsung plans to release the phone, but with DivX’s highest penetration in Asia and Europe, it wouldn’t surprise me to see Samsung launch the product outside of the US. Michael Douglas - DIVX

The cell phone will have a 400MB internal drive and support for 2GB’s worth of storage through a MicroSD card. By my rough calculations this means that a user could have 3 - 4 full length feature movies on the phone at any given time. The phone also supports .wmv, mpeg-4, .avi and a whole host of other codecs, but it’s support for DivX is what makes this phone truly unique.

The cellular market is one of the most important markets for DivX to expand into and will represent one of the most crucial challenges that the company has faced since going public. Because of DivX’s highly efficient compression technology, it offers consumers the ability to store more content on a smaller hard drive, which could be a key differentiator for the cell phone manufacturers. While their compression technology is a huge advantage when it comes to the smaller drives, it is by no means a slam dunk for the company. Apple (NASDAQ:AAPL) is currently set to unveil a competing iPhone that uses their own codec, and it remains to be seen as to whether or not DivX will be able to convince consumers to force manufacturers to add support for DivX codec.

If Samsung sees strong demand for their F500 because of the DivX support, then you can bet the other cell phone manufacturers will sit up and take notice; but if Samsung finds that consumers really aren’t all that interested in getting their video onto a cellular phone, then DivX could take a backseat to other codecs that have made better in-roads into the cellular industry.

There is no doubt that the stakes are huge. With Microsoft (NASDAQ:MSFT) currently dominating the smartphone category, and with Apple gearing up for a major launch of their own, it won’t be an easy task for DivX to break into this industry, but with an estimated 960 million phones being sold in 2006 alone, DivX will face a large addressable market if they able to penetrate into the industry.

While their plans are ambitious and they still face an uphill battle against incumbents established in this industry, DivX’s technology will, at the very least, give them a seat at the bargaining table and could hold the key to their success or failure. With cellular manufacturers always looking for a way to encourage consumers to upgrade, DivX support could be a key selling point. If DivX is able to actually take their technology one step further and incorporate their video compression into the recording capabilities on the cell phones, then you could very well see an industry standard quickly develop. If they succeed, it will certainly end up meaning great things for the company; but if they fail, then DivX could face dark days ahead as they look towards less lucrative product categories to expand into.

DIVX 1-yr chart

DIVX

Source: DivX and the Cellular Market: Can They Hack It?