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DivX Sues Yahoo! Over Cancelled Advertisement Deal

On Monday, DivX files a suit against Yahoo! after the search engine announced its withdrawal from a two-year long agreement that significantly will damage DivX’s revenues for the next two years.

The agreement stated that DivX would distribute a Yahoo! toolbar and a copy of Internet Explorer 7 featuring several other Yahoo! services along with its freely downloadable software but, since Yahoo backed out from the deal, DivX had to modify its revenue figures for the current year and consequently saw a consistent fall in its stocks the following day.

The media software company had previously stipulated an analogous deal with Google, but switched last September as the company reached an agreement with Yahoo!. However, possibly because of the failure in the Yahoo-Google advertising agreement that would have put money — an estimated $800 mln per year — in Yahoo’s pockets, the search engine had to pull back from the deal to cut back on its expenses and better face its financial situation.

Yahoo spokesmen recently stated that the companies tried to reach a renegotiation of the deal on November 11 — according to DivX, negotiations included reducing the payment terms and eliminating restrictions on terminating the deal — but an agreement could not be found: “Yahoo is disappointed with DivX’s decision to pursue legal action rather than renegotiate this agreement […] We intend to vigorously defend ourselves in court, but will reserve further comment until we’ve had an opportunity to review the suit”, it is said in a recent Yahoo press release.

Following Yahoo’s decision, DivX had to drop its revenue estimates by $5 million — from $95-$97 mln to $90-$92 mln, although the total damage derived from Yahoo’s move is estimated at around 20 percent of DivX’s total revenue, as reported by local news website

DivX’s loss was well reflected in the stock market, with the company shares dropping significantly by 22 percent, from $5.53 to $4.30, as investors learned about the news: consequently, the San Diego-based company decided to sue Yahoo!, seeking $25 mln in damages.

The company develops compression software for delivering high-quality video over the Internet, and mainly generates revenue by licensing its product to makers of DVD players and mobile phones, which embed it in their devices so that DivX-coded video — which is becoming an increasingly popular both on and off the Internet — can be played on these machines.

Exclusive agreements with search engines account for the rest of the company revenue: when the deal the company had with Google expired, the company said that many were interested in promoting their own products by stipulate a similar agreement. The DivX media player software, said the company, has in fact been downloaded a total 350 million times since 2003, out of which 110 million were made starting last September, when the Yahoo agreement started to become effective. reports that, according to DivX, “Yahoo’s sole stated ground for its intentional breach of the agreement was that the agreement ‘has not been economically viable for Yahoo'” and that “Yahoo did not contend that DivX had breached any provision of the agreement or had failed to perform any of its obligations”. Although DivX representatives said that, as they understood, Yahoo’s decision was made as one of its necessary cost-cutting measures, it was still “unjustified and a willful breach of a valid contract”.

DivX chief executive Kevin Hell said that the company is already looking to replace the current toolbar deal but, despite the number of companies that have shown their interest, the selection and negotiation process could take long to achieve.

Earlier this week, Yahoo CEO Jerry Yang said that he will resign as soon as a substitute will be appointed. Meanwhile, the company stock dove below the $10 mark and are currently continuing a downward trend that started over three months ago with the refusal of Microsoft’s buyout offer.

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