The “DivX” brand is distinct from “DIVX” (Digital Video Express), an unrelated attempt by the now defunct U.S. retailer Circuit City to develop a video rental system requiring special discs and players. The winking emoticon in the early “DivX ;-)” codec name was a tongue-in-cheek reference to the failed DIVX system. The DivX company then adopted the name of the popular DivX 😉 codec (which was not created by them), dropped the smiley and released DivX 4.0, which was actually the first DivX version (that is, DivX 😉 and DivX are two different things created by different people, the former is not an older version of the latter). The DivX name is its trademark. It is pronounced DIV-ex.
DivX 😉 (not DivX) 3.11 Alpha and later 3.xx versions refers to a hacked version of the Microsoft MPEG-4 Version 3 video codec (MPEG-4v3, Microsoft internal numbering scheme, unrelated to MPEG-4 parts). The video codec, which was actually not MPEG-4 compliant, was extracted around 1998 by French hacker Jérome Rota (also known as Gej) at Montpellier. The Microsoft codec originally required that the compressed output be put in an ASF file. It was altered to allow other containers such as Audio Video Interleave (AVI). Rota hacked the Microsoft codec because newer versions of the Windows Media Player wouldn’t play his video portfolio and résumé that were encoded with it. Instead of re-encoding his portfolio, Rota and German hacker Max Morice decided to reverse engineer the codec, which “took about a week”.
From 1998 through 2002, independent enthusiasts within the DVD-ripping community created software tools which dramatically enhanced the quality of video files that the DivX 😉 3.11 Alpha and later 3.xx versions could produce. One notable tool is Nandub, a modification of the open-source VirtualDub, which features two-pass encoding (termed “Smart Bitrate Control” or SBC) as well as access to internal codec features.
In early 2000, Jordan Greenhall recruited Rota to form a company (originally called DivXNetworks, Inc., renamed to DivX, Inc. in 2005) to create clean-room DivX and steward its development. This effort resulted first in the release of the “OpenDivX” codec and source code on January 15, 2001. OpenDivX was hosted as an open-source project on the Project Mayo web site hosted at projectmayo.com (the name comes from “mayonnaise”, because, according to Rota, DivX and mayonnaise are both “French and very hard to make.” ). The company’s internal developers and some external developers worked jointly on OpenDivX for the next several months, but the project eventually stagnated.
In early 2001, DivX employee “Sparky” wrote a new and improved version of the codec’s encoding algorithm known as “encore2”. This code was included in the OpenDivX public source repository for a brief time, but then was abruptly removed. The explanation from DivX at the time was that “the community really wants a Winamp, not a Linux.” It was at this point that the project forked. That summer, Rota left the French Riviera and moved to San Diego “with nothing but a pack of cigarettes” where he and Greenhall founded what would eventually become DivX, Inc. 
DivX took the encore2 code and developed it into DivX 4.0, initially released in July 2001. Other developers who had participated in OpenDivX took encore2 and started a new project—Xvid—that started with the same encoding core. DivX, Inc. has since continued to develop the DivX codec, releasing DivX 5.0 in March 2002. By the release of version 5.2.1 on September 8, 2004, the DivX codec was substantially feature-complete. Changes since then have tended to focus on speed, and encouraging wider hardware player support, while the company has also focused its time on the formats and next generation codecs.