Why DivX is Still a Great Long Term Growth Story

So now that all the dismay and disappointment has settled into DivX's (DIVX) stock, we can clear our heads and make sense of the situation. Nothing at all has changed from my analysis weeks back regarding why I see DIVX as a great long term story, which is why I am definitely staying long.

In the conference call, DiVX CEO Jordan Greenhall presented insight on their strategic growth in the CE market beyond DVD players, including their win of 3 set-top IC manufacturers, as well as a new major camera OEM. They are also launching with Samsung the first handset device, noting that the mobile market is 7 times that of the DVD market. Their strategy of expanding their eco system is on track, which Jordan stressed in the call, stating that in the long-haul an open eco-system will always win out over a closed eco-system such as the Apple (AAPL) TV. Their strong growth through the open approach, such as their challenges of expanding in the global community of partners with common media language, proves to be on track, selling over 90 million certified devices last quarter vs. 70 million in the previous quarter.

Disclosure: Author has a long position in DIVX

DIVX 1-yr chart

Comments

[bobbyjoe]

OK so DivX is on set-top boxes. Is this to decode streaming on-demand video or to play DivX-encoded DVDs/CDs?

I think people misunderstand DivX and its applications. I don't think it is a big an industry-changing technology. It has been around for many years now and the market hasn't expanded significantly. The biggest use is people taking DVDs and TV shows and putting them online using BitTorrent. DivX makes hardly anything from this because the people doing the encoding are often using hacked copies of the codec or even use the open-source alternative, XviD (oh look, it's DivX backwards). This is where DivX started and is STILL the biggest application: distributing pirated content.

We need to ask some fundamental questions. Why was DivX invented? When the internet started and bandwidth was a big issue, we needed a way to get high quality video. When DVD burners (and DVDs) were expensive we needed a way to get DVD rips on CDs. Guess what? A lot has changed. We can now burn dual-layer DVDs, eliminating the need for DivX compression in those cases. Internet speeds have increased dramatically and will continue to do so - you can now download DVDs instead of DivX-encoded video on download sites, which speaks to people's increasing desire to download the original high-quality (and format) copy.

Finally, all those flash videos on websites... people think DivX has a piece of that... it's small and likely to stay that way. Adobe has the biggest piece through their compression technology that is integrated with Flash.

[RichardAlvarado]

I have a different View on Divx.
Problems:
1. Where is the content?
-Almost 90% of the online content being creating is being transcoded to Flash.(see youtube)
-ABC (dynamic.abc.go.com/str...) is using Flash for its shows online.
-Website in between ABC and user created are also using Flash(see gametrailers.com)
- Microsoft and Apple dominate online downloads(see iTunes, see CNBC/NBC,)

Note: Look at Dolby (DLB), it makes money not only from hardware(TVs, DVD Players, Speakers, Receivers) but also from the software (Video Games, and DVDs and Movies).

2. With margins shrinking...
Something tells me that with margins shrinking in the cell phone market, Companies aren't going to hope that Dvix gets it act together and gain content.

$17 is a lot of money for one codec....

[Tom B]

H.264 (Appl) is the MPAA standard. DivX is certainly a great codec, but hardly earth-shattering. DivX could chip away at some legacy formats, like wmv, but I'm not sure it's so easy to monetize a codec when there are alternatives.