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Circuit City Ends Costly Venture Into Divx Video Format

Electronics: After investing $200 million, company finds little support among consumers, other retailers and movie studios.

June 17, 1999|JENNIFER OLDHAM | TIMES STAFF WRITER

After losing more than $100 million, electronics retailer Circuit City on Wednesday abandoned its costly venture into single-use DVDs that was regarded as a threat by the video industry and that found little support from other retailers and the movie studios.

Known as Divx, or digital video express, the format was introduced only nine months ago as an alternative to renting videocassettes or buying digital video discs--the CD-sized digital movie format that provides better pictures and sound than conventional videocassettes.

But the venture never connected with consumers and represented a major miscalculation of both the market and the video industry by the nation's second-largest consumer electronics retailer.

The failure of Divx is an embarrassment for Richard Sharp, chief executive of Circuit City Stores. Sharp fought an uphill battle to promote the venture, which became a significant drag on Circuit City's bottom line.

Sharp declined to comment Wednesday, but the market cheered the decision to junk Divx. Circuit City's stock closed at $90.38, up $8.38 on the New York Stock Exchange.

The Divx format was backed by an unusual partnership of Circuit City and Los Angeles entertainment law firm Ziffren, Brittenham, Branca & Fischer. The law firm didn't return calls for comment Wednesday.

Circuit City invested more than $200 million in Divx and said it will take a $114-million fiscal first-quarter charge to liquidate the venture.

About 200,000 Divx players have been sold to consumers. Divx owners could buy DVD movies on a disposable disc for about $5 and play them during a 48-hour period. They could then throw away the disc or buy the movie for an additional fee. Divx players also play conventional DVD movies.

Divx's introduction in September kicked off a battle between the two formats reminiscent of the clash between the VHS and Betamax videocassette formats.

Controversy surrounded Divx from the start. Conceived by partners at Ziffren Brittenham, who represent producers, directors and production companies, Divx was meant to exploit the public's desire for video on demand.

"If you had a video-on-demand system you could dial up any time you want, it would definitely put a damper on how many movies you would buy from Warner or Disney or anyone else," said Tom Adams, president of Adams Media Research, a Carmel Valley, Calif., media research firm. "Divx was the best the retail pipeline could come up with to answer video on demand."

But Circuit City, which held a 75% stake in the Divx partnership, was unable to convince other retailers to distribute the players, which were priced as much as $100 more than conventional DVD machines. Only Good Guys, Dow Stereo/ Video, and several independent retailers eventually signed on to distribute Divx players and disks.

"Despite the fact that consumers were enthusiastic about this product and it got a significant share of the DVD market, we weren't able to translate that enthusiasm at consumer level to other retailers," said Josh Dare, director of communications for Divx. "Circuit City said all along they didn't believe they would be able to sustain this alone."

Most retailers hesitated to carry Divx because they didn't want to line the coffers of a major competitor or to confuse their customers.

"It's the Beta-versus-VHS argument. Until one format comes out stronger and on top, people may hesitate to buy either," said Laurie Bauer, a spokeswoman for Best Buy. "We think consumers made the decision that DVD was the format that they wanted. DVD is easier to understand."

Video rental stores saw Divx as a threat to their business model both because consumers had to purchase Divx movies at other outlets and because the discs did away with late fees that comprise a significant portion of rental stores revenues.

In addition, Warner Home Video and Sony's studios--which together provide about 40% of video rental titles--refused to release movies in the Divx format. The parent companies of both studios have a financial stake in the DVD format.

Divx also raised privacy concerns because it required consumers to hook their players up to a phone line and provide a credit card number so that the company could charge them for the number of times they watched a movie after the original 48-hour rental period. Consumers also had the option of buying the movie outright.

Some analysts said Circuit City's announcement would accelerate DVD player sales, which already have exceeded expectations. More than 1.8 million DVD players have been sold since the format was introduced in April 1997.

"We think this will accelerate market acceptance of DVD and eliminate any level of confusion among consumers about what is the best format for them," said Mike Fidler, vice president of the DVD marketing department at Sony Electronics.

Manufacturers who made Divx players, including Zenith Electronics Corp., Panasonic (a unit of Matsushita Electric Industrial) and Thomson Consumer Electronics, said Divx's announcement would not affect their DVD sales.

Divx players that are in production now and scheduled to ship this summer will be sold as DVD players, said John Taylor, a Zenith spokesman.

To compensate consumers who have paid more for the Divx feature, Divx will offer a $100 cash rebate to consumers who purchased Divx players before the Wednesday announcement. Retailers are expected to cut Divx movie prices in half and to slash prices on Divx players. Divx will keep its server up until June 30, 2001, for Divx owners who wish to play their movies until then.

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