Can DivX’s Safe Harbor Protect It from Stage6 Pirates?

DivX (DIVX) took a step closer to being forced to walk the plank after suffering their first legal setback in their copyright dispute with Universal Music Group. In a legal filing published late Tuesday night, Judge Dana Sabraw dismissed DivX’s request to declare Stage6 legal, ahead of their UMG piracy trial.

The dispute originally started in December 2006, when UMG notified DivX that several of their videos were showing up on their Stage6 website. In the original cease and desist letter, UMG didn’t provide DivX with a list of the infringing videos, but still demanded that DivX remove all Universal content. A month later, UMG sent a second letter, only this time identifying specific videos that they had problems with. DivX promptly removed the videos in question and didn’t hear from UMG’s legal department for another 8 months.

After this 8 month period of awkward silence, UMG approached DivX and agreed to license their content, albeit at a very steep cost. In order to atone for their past sins, UMG wanted DivX to pay them $30 million.

Sensing a shakedown, DivX balked at the deal and decided to take their chances in court. They had fully complied with all of the provisions of the DMCA and if UMG wanted to punish them, they’d need to attack the DMCA’s safe harbor provision to do it. After calling their bluff, UMG dragged their heels on filing a lawsuit, but the potential threat for conflict still created a real problem for DivX. With the company trying to spin off their Stage6 asset, these storm clouds of uncertainty cast a long shadow over the legality of their Stage6 operations.

With UMG threatening legal action against the site, DivX was forced to choose between trying to sell the asset at a discount or trying to see if they could ride this storm out. With UMG seemingly content to continue to accrue alleged damages, DivX felt compelled to ask the courts to rule on whether or not Stage6 was protected under the safe harbor provision.

DivX took a huge risk by pushing this issue. If they are right, then their wager will certainly pay off. If the courts can establish the legality of their Stage6 website, it would remove a lot of the uncertainty surrounding the business and would allow potential suitors to feel more comfortable about its long term potential. If DivX is wrong though, the consequences could be severe.

Six weeks after DivX filed for declaratory relief, UMG finally made good on their threat and filed a lawsuit against DivX accusing them of piracy. By bringing DivX up on charges, they were able to successfully argue that their trial was a more appropriate venue for this question to be answered. While this does represent a setback for DivX, I doubt that the result was entirely unexpected.

Still, through legal maneuvering, UMG has been able to regain control over home court advantage and they’ve put themselves into a position where they can always settle or walk away if things start to look bad. Even if DivX sticks with the full court press, they may not end up with the declarations that they were hoping for. In the discussion section of the judgment, Sabraw sympathized with DivX, but couldn’t justify running a separate trial now that DivX is facing legal action.

Defendants argue declaratory judgment is an incomplete remedy since this action does not include all parties to the lawsuit pending in the Central District. Furthermore, since Plaintiff cannot identify all copyrights at issue, Defendants argue the remedy in this Court is limited to adjudicating only the copyrights named.

The Court agrees with Defendants. Although the fear of uncertain litigation may have initially justified Plaintiff in filing this action, Defendants have since filed a lawsuit in the Central District that eliminates the uncertainty. Moreover, the DCMA [sic] safe harbor analysis Plaintiff seeks here will be more completely and efficiently undertaken in the Central District, where the court will be able to determine Plaintiff’s compliance with respect to particular copyrights that Defendants identify in the course of those proceedings.

While it may appear that DivX has lost round 1, the dismissal of this case won’t be the end of this dispute by a long shot. With the declaratory issue now out of the way, DivX will need to focus on defending themselves against UMG’s lawsuit. Even though DivX’s initial lawsuit has been dismissed, they’ll still get an opportunity to defend their website. Still, until DivX can reach some kind of resolution, the lawsuit will certainly make it more difficult for them to separate their Stage6 assets from their core business. With rising bandwidth bills, the credit crunch and legal questions surrounding this asset, it may be difficult for them to find a buyer who is willing to get involved in this kind of dog fight.

Sensing that conditions weren’t right, DivX pulled back on their plans for Stage6 in December and in a press release announcing the resignation of Jordan Greenhall, they also warned that their Stage6 transaction wouldn’t be finished by the end of the year like they had planned. The company promised to update investors in the first quarter of 08′ and with DivX expected to report earnings soon, you can bet that Stage6 will be a hot topic on their next conference call. The plan that DivX management lays out will be critical in determining how investors interpret the financial results.

Last quarter, investors rewarded DivX by focusing on their non-gaap growth and ignoring the Stage6 and compensation expenses. If DivX still plans on spinning off Stage6, then it’s fair for investors to ignore the rising bandwidth costs and focus on the value of the underlying asset.

If DivX’s legal battles really mean that they need to hold onto Stage6 in order to maximize its value, then investors may be in for a shock when they realize that Stage6 is really a long term investment. Facing the prospect of a drawn out legal battle, they may not take as much comfort in “one time” charges or expenses.

The answer to the Stage6 riddle isn’t an easy one, but after years of profiting from their popularity in the pirate community, it’s ironic to see DivX’s finally starting to feel some heat over the activities of their community. Even beyond the copyright liabilities, there is a significant cost for DivX to foot the bill for pirated Stage6 content and I suspect that DivX isn’t anymore enthusiastic about piracy on Stage6 than UMG is. There’s no way to know how this all will end, but I have a feeling that it's going to take a lot longer than what people are anticipating.

Comments

[Short Cable:]

Google was sued by Viacom on roughly the same grounds four months before. Since then The Premier League has introduced a class action suit on these grounds and included the argument that Google willfully purchased YouTube with full knowledge of the ongoing violations. Both of these earlier cases are far from resolved. They cover the same provisions in the DMCA and will likely create precedent for each other.

Had DivX prevailed and been given the judgment in the preemptive action that was dismissed it would have also been a win for Google. The Judge took the safe way out.

I would think the music industry actually has the most to lose in these cases. Surely a deal to legally distribute the videos wrapped in advertising and/or for a small charge would be a better long term solution for everyone. Even if the studios win it all they still lose to P2P. They need to make a solution that makes them some money, easier for their customers than piracy somehow.

Excellent write up.

2008 Feb 07 09:01 AM

[KevinH:]

As can be seen on the home page of stage6 (stage6.com) the service is gone, gone, gone baby.

The nice, friendly note from Spinner explains it was just too costly to continue to operate the service. Although that is obviously true, I believe the real reason is discussed in this article: the Music Industry has good lawyers, and they use 'em to squash innovation. That's why DivX is getting out. That's why DivX couldn't "spin off" the business (who wants to buy it with the attached operating costs and a whammo of a pending lawsuit?).

And now back to your regularly scheduled programming ...

2008 Feb 25 01:06 PM

[Roarke:]

I loved Stage6, piracy or not there's some damn good music vids on there. I think the first commentor is right, the music industry needs to do a 180 and stop crushing all the people who are just trying to provide some good entertainment, and instead find a way to collect that DOESN'T involve laywers...

I wish people would stand up to the UMG and those bullies! Stop paying them and they go away ! Then let someone else step in that has more of a brain than "Sue that guy.. oh and next week I have to sue him.. Oh yeah, I have to sue them, too.. Who else do I have to sue?"

Why are they still getting the copyrights to music?
If I headed or was in a band I would -never- let UMG get at any of my music. -EVER-.

/rant

Roarke

2008 Feb 25 01:34 PM

[Shakir Razak:]

Hi,
<br></br>
There are and will continue to be other solutions, because youtube is the warehouse not the boutique, and will never care about specific users or their needs, just the mass, lowest-common denominator.
<br></br>
For example, SUMO.TV that operate with a different model to youtube and has local operations from Brazil, israel, India to China.
<br></br>
As long as limits can be put in place to make piracy inconvenient;
However, sometimes, companies/people just don’t want to fight on.
<br></br>
Yours kindly,
<br></br>
Shakir Razak

2008 Feb 25 04:37 PM

[Depressed I...:]

This is a sad day. But Stage6 (or at least a varient) will rise from the ashes of this day. All this has happened before, and all this will happen again.

So say we all

2008 Feb 25 06:37 PM

[PaleRider:]

The only thing that we have to ask is if it is Stage6 today, what will it be tomorrow? YouTube? LiveVideo? If pirated videos are the problem, why don't they go after the individuals who place illegal videos on their site, and not after the site itself. There are many people who just want to simply share their own artwork, video work etc..

2008 Feb 25 08:50 PM

[NorthernFalcon:]

There is nothing on the web comparable to DivX’s Stage6. It efficiently streams original content up to 2gb in size. And the DivX codec does an excellent job reproducing original quality.

What will replace it? We'll have to wait and see.

I expect Stage6 was launched to create awareness of their product. To this end Stage6 served it's purpose. Many hardware manufacturers have since incorporated DivX with their product.

I suggest DivX re-launch the Stage6 program, Make it available through paid membership and police it rigorously for copyright infringement. In addition they could possibly make a deal with UMG for the occasional post that may slip through the cracks, until discovered and removed.

DivX could quite easily turn a liability into a profitable venture and retain worldwide exposure at the same time.

Take Skype for example. They initially came out with a no cost VOIP service and have now migrated to a user fee for land / cell phone use. Any time you check there is 8 to 10M people on line worldwide using their service.

DivX could easily achieve the same level of success.

2008 Feb 26 01:12 PM

[SilentNight:]

People can stand up to the music companies if they want to by not buying their music. As long as people pay the outrageous CD prices, Universal and all the others will continue to protect their cash cow. All people have to do is turn their backs on the entertainment industry for a little while and the message will be clear.

Personally, I refuse to pay $18+ for a CD. Either I buy it used or I download it from the internet. Why should I as the consumer pay for a music company's decision to pay artists like Madonna, JLO, Janet Jackson $100+ million salaries. Same with movie stars. I should pay $30 for a DVD so John Travolta can afford to fly around in his own private 747 and get paid $20 million for a movie?! No way!

I am sick of the entertainment industry expecting consumers to finance their ultra lavish lifestyles. Nope, I don't feel guilty one bit for downloading music and videos. When the price is reasonable, I'll pay it. When it's not, I'll find the product elsewhere, be it from Stage6 or wherever.

2008 Feb 27 12:41 AM

[Genade:]

Certainly agree with you there Silent. I'm truly sad to see Stage6 go seeing as they offered the best quality on the web. I personally feel they should try and strike a deal with Microsoft, not so much for themselves, but for the consumers. With the Xbox360 now supporting DivX, it's obvious that there is an interest. There is certainly room for improvement, and with Microsoft's Advertising they could get the full use out of the superior product. They could even develop something that could truly rival YouTube. I love to see companies like UMG go down. It's their on fault when they're spending ridiculous amounts of money on music video's. Everyone in the entertainment industry is overpaid and greedy, and they need a rude awakening, not companies like DivX who release an amazing innovative product only to get crushed by companies who can afford to. I'll continue to download music, music videos, and full movies, and so will all my friends and their friends. Good day to you UMG.

Excellent Article.

2008 Feb 27 04:34 PM

[sanjuro:]

That was an ominous article that proved right when it stated that "if DivX is wrong though, the consequences could be severe", however, the consequences have been turned out to be severe for the users. Stage 6 should be closing today.

2008 Feb 28 04:44 AM

[AngryConten...:]

I used stage6 to host original content, vids i created. It was a valuable resource for me, and it's literally going to change my life now that is gone. Thanks music industry, you ruin things yet again.

2008 Feb 28 09:46 AM

[PersonWithS...:]

We are losing sight of the important fact that the creation of sites like stage6 and youtube we're for the free spread of ideas, expression and audiovisual works. Not wide spread piracy and copyright infringement, it's even in the mission statement of stage6, "to create a high quality form to allow directors to show off and have there work commented on." We can count on UMG and big busness to always be there to try to turn a quick buck and we have to except that.

The only way to fight fire is with fire, and to beat a much bigger opponent then you you'll need to use cunning, instead of refuting all charges under point you could work for a settle under the points the suet it built.

The reason that major industrie doesn't go after individual offenders is its not cost effective. Why trap one or two offenders out of thousands when we can cut off trafficing source and temperarily stop many from putting up further pirated.

But really there is more ways then one to limit despertion of such material, if they put forward a new inishitive to screen new content with a finer eye and increase the police and yes if the major companies want to point out specific content and chase the users god speed to them. By pooling the remaining resources into such an effect might be costly but it would give great leverage and might be worth more in the end.



Also I have to say that feeding the problem by shouting to the world that I'm going to dl full movies and steal music isn't helping the cause. Reporting such things kinda seems like it be more helpful to everyone.

Also take it from someone that knows us actors and artist do not get exorbent amounts of money. Firstly there is something like less then 3% of actors that ever hit the big time the rest of us barely have enough to eat. So yes the lead might get more moeny then they need but the rest of us on set are starving to death. For goodness sake that's what the huge writter's strike was about, so don't feed the problem but don't stand by the morons that think death of free expression is the best way to limit the problem!

Excues me,

This is currently a major issue right now and needs to be taken to highest court to have a proper judgment put down on it. If the bulk of this fight was being held here in Canada then the case would have made it to the supream court by now! Or atleast a case similar to it that would allow some finality to these struggles.

Some new laws need passing, wether posted videos on stage6 and the other major video posting sites is in the domain of freedom of speech and wether it is consitutionaly binding. Under what condition a posting site can operate to an effective degree without being abusively attacked for violators.

As for stage6's perdiciment they could have tryed a united front with some of the more respectable hosting sites like youtube etc. Then gone public and used the weight of the media, and current popularity to put the pressure back down into there opponent's court. Political talk shows, (daily show,cobar report etc) major news print and other forms of mass media to not just gain awereness but to win the masses. The back tension from being a hot issue would then force political hand and something would need to be done, this way its not one small independent company fighting an industry, its a nation fighting an industry,

Sometimes hard things think so simple,

2008 Mar 12 01:13 AM