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Jrme Rota invented-if that’s not too grand a word for improving other people’s technology-DivX in 1999. Rota, known at the time only by his Internet tag Gej (a Occitan word that means “crazy”), was a 27-year-old freelance video technician living in the southern French city of Montpellier. Over the summer of 1999, he had been using a beta-test version of Windows Media Player to compress and play his videos. When the official version of Media Player was released that October, however, Rota found it inferior to the earlier version. What had been a flexible tool, capable of adapting a variety of video formats, now worked only with Microsoft’s proprietary software, and the files it produced were so big, he couldn’t fit a movie onto a standard CD.

“I decided to set the information free,” says Rota. He changed the installation instructions-a minor bit of programming-so that the new and old versions could work together. Then, by mixing and matching tools already on his desktop and by adding a few tweaks of his own, Rota created a codec-software for compressing and decompressing digital media-that married MP3 audio compression to MPEG-4 video compression. Named DivX;- (that’s DivX followed by a “wink,” ironic homage to a failed video system developed by Circuit City), Rota’s codec was engineered to fit movies into packages small enough to be sent over the Internet, downloaded, and played on a personal computer. He set up a Web site for distributing DivX in late 1999, and in the first week alone, the program was downloaded by 50,000 people.

After he released DivX, Rota, who was still known to the world only by his nickname, began receiving messages from people who wanted to form a business with him. The most intriguing proposal came from Jordan Greenhall, a Harvard-trained lawyer who had worked for MP3.com, an Internet music site, and InterVU, a company that specialized in streaming media over the Web. After corresponding by e-mail and instant messaging, Rota, Greenhall, and a third partner, Joe Bezdek, an engineer who had been Greenhall’s college roommate, incorporated themselves in March 2000 as Project Mayo. “It’s not easy to make nice mayonnaise,” Rota explains. “It’s like video coding. It may look easy, but it’s not.”

Project Mayo was a virtual company. The two Americans had never met their French colleague. The idea was to stay small and secret while they perfected DivX and figured out how to commercialize it. Rota had just landed a full-time job, and he had no intention of leaving France-until a reporter from the Wall Street Journal tracked him down. Afraid that Rota was about to be “outed,” the three partners agreed in April 2000 to meet in San Diego and go public.

The Journal article appeared under a headline that announced that Hollywood was facing “The Napsterization’ of Movies.” (At its peak, Napster’s estimated 80 million users were downloading 100 million songs a day.) Greenhall started fielding phone calls from venture capitalists, and by summer’s end he had raised $5.4 million in seed money to start a company called DivXNetworks. A second round of financing has since pushed investment close to $12 million. Because it is inadvisable to found a company using technology borrowed from Microsoft, the first thing Rota had to do was throw out his software and start all over. The company released DivX Deux, or Open DivX, in January 2001. The software was free, and this time Rota included the source code.

But Rota and his partners had ambitions beyond being another outlet for open-source software. So while continuing to give away the basic DivX codec for free, DivXNetworks began building other products it could license or sell. In March 2002, DivX 5.0 debuted at a splashy party in a Los Angeles hotel. Even the basic free version of DivX 5.0 promised to shrink movies into ever smaller packages, transmit them at faster speeds, and play them back at higher quality. Over the next two days, Rota watched in amazement-and Hollywood watched in horror-as the new software was downloaded more than a million times.

Hollywood’s panic is well justified. Apart from small distributors and a few other exceptions, none of the major studios has yet to release its films online. Last year, the Motion Picture Association of America mailed 54,000 cease-and-desist letters to Internet service providers that were found to be hosting pirated movies. This year the association expects to mail more than 100,000 letters.

But, the overall trend seems inevitable. “You can’t file enough law suits to shut down all these sites,” says Gartner’s Batchelder. “There is a huge shadow economy, a parallel universe devoted to swapping DivX movies.”

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