DivX Buys Fine Art And Search Technology

Aug.22.07 | About: DivX, Inc. (DIVX)

Last week DivX (DIVX) released its 10-Q and while I was able to find the time to tune into its conference call, I didn’t get a chance to read through the actual document until this past weekend.

In the filing I didn’t find any bombshells or new lawsuits, but there were a few details on some of DivX’s recent acquisitions that did reward my curiosity. According to the filing, DivX made two purchases over the last quarter.

In May 2007, the Company made an equity investment in a private corporation that aggregates and distributes art via its web community and facilitates an open forum where artists can exhibit their artwork and build community around that art in an effort to drive commerce. The Company’s investment consisted of $3.5 million cash for which it received certain shares of the private corporation’s Series A Preferred Stock and entered into an advertising and marketing agreement. The Company has preliminarily allocated approximately $650,000 of the investment to the advertising and marketing agreement, based on its estimated fair value, and the remaining $2.9 million will be carried as an investment.

DivX doesn’t name the actual artwork site in its filing, but since I already knew that it had purchased a piece of DeviantArt, this one wasn’t hard to figure out. Originally, I had thought that it was only partially behind the $3.5 million investment, but according to the filing, it looks like it put in all of the cash. DivX doesn’t disclose how much of a stake it got for its money, but it does disclose that it is less than 20%.

Without knowing the details behind the acquisition, it’s hard to determine whether DivX received good value for its money, but from a strategy standpoint, I really liked the acquisition. There are a lot of websites that can build a lot of traffic, but the question is at what cost. Newspaper websites get a ton of hits, but take away their print business and the business model can’t support the cost of writers, editors, staff, etc.

The great part about user generated content is that because it’s built around community, the customers are the ones that provide the content. In the case of DeviantArt, they’ve built a very positive environment around people who love art and by connecting artists together in this way, they’ve been able to develop a community where creativity thrives.

If DivX wanted to sell art it could have spent $3.5 million on Google Adwords and bought the traffic, but it wasn’t interested in selling art, it wanted access to the artists themselves. Through its investment, it will not only get access to DeviantArt’s traffic, but it’ll get the right kind of traffic visiting Stage6, content creators who are looking for venues to showcase their digital creativity. The acquisition won’t do anything to bolster its bottom line, but it does further connect it to the larger web community.

The second acquisition in the 10-Q was a little bit harder to figure out. It’s related to improving the search functionality of Stage6, but DivX didn’t release a lot of details on whose technology it actually purchased.

In July 2007, the Company acquired all of the assets of a limited liability corporation engaged in real-time digital video processing for the purposes of producing enhanced video search and discovery services. The total purchase price for the acquisition is up to $4.25 million comprised of an initial upfront cash payment of $2.0 million, which the Company made in July 2007, and subsequent cash payments up to $2.25 million upon the achievement of certain technology related milestones. The Company will account for the acquisition as an asset purchase and periodically review for impairment.

Without knowing whose technology it bought, it’s hard to get a feel for how powerful its new search will be, but I’m glad that it's taking steps to improve its search functionality. Search on Stage6 is one of the many areas that is still in “beta” mode. Sometimes you’ll find what you want, but it’s usually more by luck than query. I’d describe the issues in greater detail, but Neillithan has made a video that addresses the deficiencies better than I ever could.

As Stage6’s media collection continues to grow, relevant video search will be crucial in helping to make sense of it all. Searching by tags and keywords works for now, but it’s far from perfect. I don’t think anyone has perfected video search, but EveryZing is the furthest along and even they still have high failure rates on their speech to text functionality.

One of the frustrating parts about finding details is that they rarely answer more questions than they raise. While I was pleased to find out more about DivX’s search solution, without knowing who it actually acquired, it’s hard to determine how important this could be.

I have a theory about who DivX may have picked up, but I have to qualify it as even more speculative than my normal unreliable gut feelings. It’s really nothing more than a wild guess based upon the criteria that it lays out. Still, I’ve never been one to be shy about speculating even when I’m probably wrong, so here is my wild guess on who DivX may have acquired.

Of all of the companies that fit this criteria, Veatros seems the most likely candidate to me. Their site went offline in July, but before it went down, I know that they were looking for strategic partnerships for their search technology. One of their former employees, has his resume up on LinkedIn and I thought it was interesting to see him leave around the same time that a DivX acquisition would be taking place. According to his LinkedIn profile, he describes Veatros as having the fastest video search ever developed.

Startup technology company spinning out of the University of Kansas with the fastest video search technology ever developed. Veatros technology can identify a video clip of as little as 2-3 seconds in length from a database of tens of thousands of hours in real-time.

Susan Gauch is the owner of Veatros and she would certainly have the expertise to implement video search on Stage6. Veatros is really a side project for her, during her day job, she is an accomplished professor at the University of Kansas. Her entire career has been dedicated to researching and improving search. Her research has already been referenced in several video search related patents.

There’s no way for me to be sure if my guess is right, but if it’s not Veatros, then I would suspect that it would a company with similar characteristics. Irregardless of who the mysterious LLC turns out to be, improving its search is something that I’m glad to see DivX focusing on. Better content filters mean a better experience for anyone visiting the site. If it can personalize video search, then the content on Stage6 will keep getting better.

Neither one of these acquisitions is a major move on DivX’s part, but it does give us some insight into part of DivX’s growth strategy. The video search investment makes sense from a tactical standpoint, but the DeviantArt purchase is far more interesting.

The passive nature of the investment raises the possibility that DivX is developing a venture capital arm to its business. It has already incubated Stage6 and with steady cash flow coming in each quarter, Divx is in a great position to make private investments where it sees opportunities. It’s too early to know how aggressively DivX will pursue this aspect of the business, but if it continues to invest in emerging technology, things could certainly start to get interesting.