Did DivX close Stage6 to duck copyright litigation?

DivX lost a bid for protection from copyright suits just weeks before shutting down video-sharing site.

DivX, parent company of defunct video-sharing site Stage6, on Tuesday disclosed how it came to the decision to shutter the service rather than to sell.

"Potential copyright litigation" was one of management's top considerations leading up to the shuttering of Stage6, Dan Halvorson, DivX's chief financial officer, said during a conference call to announce the public company's fourth-quarter earnings. There was reason for concern. Turns out DivX, a maker of Internet-video technologies, had lost a bid to avoid fighting costly copyright suits just a few weeks before Stage6 was closed, records show.

Halvorson almost certainly explained the reasoning behind the shutdown because of questions raised by Brad Greenspan, the MySpace co-founder. Greenspan, who operates online entertainment network LiveUniverse, attempted to acquire Stage6's assets last month. When he was rebuffed, he went public.

Greenspan suggested in a press release that DixX managers failed to look out for shareholder interests by choosing to close Stage6 instead of selling.

"DivX could have bought its way out of the mess. Universal Music offered the company a chance to license its content for $30 million. The offer was turned down."

The controversy illustrates some of the financial and legal risks involved in operating a video-sharing site. YouTube, buoyed by Google cash, can afford to challenge entertainment conglomerates in court. Not everybody else can.

DivX's problems started this way: last fall, Universal Music Group, the largest of the top four labels was making noise about unauthorized copies of its content posted to Stage6. In a bid to head off a lawsuit from the record company, DivX filed first. In September, DivX sued Universal Music to try to win a favorable ruling that Stage6 was not responsible for illegal acts committed by users under the Digital Millennium Copyright Act.

It didn't work.

On February 5, just three weeks before Stage6 went dark, U.S. District Judge Dana Sabraw (PDF) dismissed DivX's action against Universal Music, according to court records. (Blogger Davis Freeberg was first to report the judge's decision.)

Not surprisingly, a month after DivX filed suit against Universal Music, the label responded by filing against DivX. That copyright case still hangs over DivX's head. One interesting side note is that DivX could have bought its way out of the mess. Universal Music offered DivX a chance to license its content for $30 million, according to papers filed with the court. The offer was turned down.

Beyond the legal questions, DivX also said the "significant costs" of running Stage6 was a factor in its closing.

"Our previous indication regarding the cost of running Stage6 remained accurate," Halvorson said in the conference call. "While the traffic to Stage6 did help generate some revenue...the continued operation of the site would take substantial financial investment."

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