Sonic Solutions, owners of CinemaNow and various software tools for producing digital media, announced yesterday that it will acquire DivX in a cash and stock deal valued at about US $300 Million. The deal is expected to close by September.
DivX makes a video format that includes proprietary compression and DRM technology and is suitable for delivery on physical media (such as DVDs) as well as through digital downloads. The format is supported on a wide range of consumer electronics, including DVD players, Blu-ray players, set-top boxes, Internet TVs, various portables, and the Sony PS3 gaming console.
Sonic’s relationship with DivX is not new: CinemaNow has been offering a selection of downloadable movies in DivX format since last December (a few other download sites also offer the format). Still, this move represents Sonic’s latest attempt to make the big move from a provider of professional media tools to a serious competitor in the home media marketplace — which is still relatively nascent and fragmented.
DivX has had a tortuous history. It started out in 2000 as a “rebel” format, positioning itself as an outsider to the Hollywood/DVD establishment. The company went public in September 2006, and its fortunes started to turn upward several months later following the departure of controversial founder and CEO Jordan Greenhall.
About half of the major Hollywood studios have licensed DivX. One reason that has been cited is to fill a need for a competitor to Apple, in fear that Apple will dominate digital movie economics the way it has dominated digital music downloads. Whatever the reasons, the virtuous cycle of network effects has benefited DivX, which is now supported on thousands of consumer electronics devices from all of the major manufacturers.
The combination of CinemaNow and DivX should give Sonic a better route into the digital home, which is potentially far more lucrative than Sonic’s original software tool business. Sonic’s strategy also includes its partnership with Best Buy, now the leading standalone retailer of consumer electronics in the US market. But that leads us to a kink in the story: DRM. The CinemaNow/Best Buy partnership has been developing around content protection (and other technologies) from Widevine. It’s possible that Sonic could retain both DRMs, e.g. DivX’s for downloaded content and Widevine’s for streaming. But the two technologies overlap, which could lead to some confusion and some hard decisions.
In the end, Sonic Solutions is gambling that its combination of tools (Roxio), online distribution (CinemaNow), format and CE tie-ins (DivX), and retail (Best Buy partnership) will be synergistic enough to add up to a full digital video ecosystem to challenge Apple and other contenders, including Wal-mart/Vudu, Amazon/Adobe, Blockbuster/Microsoft, and the emerging DECE consortium. In other words, Sonic is betting $300 Million that DivX will not end up among HD-DVD, SACD, DVD-A, ATRAC, and other formats that form the scrapheap of digital media history.
It’s a big gamble, given that six “ecosystems” is about three or four too many for the market to ultimately sustain. But the Internet video industry is far from mature and there’s plenty of room for competitors to establish themselves.