DivX, Inc., a digital media company, today announced that the Company will cease operation of its Stage6.com video service on February 28, 2008.

I was stunned to read it because two weeks ago they were encouraging people to upload video. I’m sad to see Stage6 go, it was my favorite place to watch movies. That said, I sadly agree with their decision to close.

I just think the way they handled it was messed up.

Stage6 was launched to showcase their Divx products. On the surface this might sound like a great idea, users uploading their content using their products. The problem was realistically weighing whether the advantages outweighed the disadvantages. Not only was there a concern of the finances involved with maintaining the services (hardware, allegedly a $1M a month Limelight bill, etc.) but they also had to deal with monitoring the videos to ensure copyrights were upheld.

There was a legality double whammy Divx had to deal with. People pirate their software, unfortunately. I am unsure of the percentage of people pirating their software but if any of those people upload their videos to Stage6, that creates a double loss for Divx. The point of Stage6 was to encourage people to purchase the software but the site also encouraged people to pirate the software.

Divx realized their plight and wanted to spin off Stage6 into its own company. They even allocated $4M to do this, but whatever plans they had fell through.

So why are we shutting the service down? Well, the short answer is that the continued operation of Stage6 is a very expensive enterprise that requires an enormous amount of attention and resources that we are not in a position to continue to provide. There are a lot of other details involved, but at the end of the day it’s really as simple as that.

Now, why didn’t we think of that before we decided to create Stage6 in the first place, you may ask? That’s a good question. When we first created Stage6, there was a clear need for a service that would offer a true high quality video experience online because other video destinations on the Internet simply weren’t providing that to users. A gap existed, and Stage6 arrived to fill it.

Then came all the other companies offering video services, in other formats. Did it make sense for Divx to spend significant resources on Stage6? No, Stage6 was causing a conflict not creating a viable compliment. Stage6 would have to change to seriously compete with the other video sharing sites.

There is a hidden problem with Stage6 shutting down…what about all of the sites that are dependent on Stage6? All the sites that have their videos embedded on their sites or have the option to view those videos? Those sites just lost a hell of a lot of content.

Users will have until Thursday to use the site. Yes, they gave a whopping 3 days notice. Now let’s see which video sharing company steps up to take advantage of Stage6 closing. There are many people struggling to find a comparable service, meaning no YouTube type service that degrades the quality of the video. Some of the videos on Stage6 are literally works of art, with hundreds of hours spent editing to make the resulting video a true piece of work.

And of course it could be the nail in the coffin for one of these newer services if the horde of people using Stage6 started using the new service all at once.

The moral of this story: take the time to really think a business decision through before implementing it. Look far into the future to see where this new idea could take you in a year or two or five. Look at both scenarios, what if the idea is successful, can we monetize it? If the idea fails what will we do?