Underwhelming studio, retail response kills DVD rival

The plug has been pulled on Divx.

A lack of support from the major studios and retailers led Circuit City Stores Inc.-owned Digital Video Express LP to cease production of the pay-per-view homevideo system and discs on Wednesday.

The move makes DVD — which has dominated the arena since its launch in late 1997 — the sole player in the digital video market and forces Circuit City, with a 75% stake in Divx, to take a $337 million hit. The company said it will incur a $114 million loss just to discontinue the Divx operation. It has been less than a year since Divx was introduced.

Richmond, Va.-based Circuit City, which owned Divx with the Los Angeles entertainment law firm of Ziffren, Brittenham, Branca & Fischer, said it will cease marketing the system and discontinue operations, but existing, registered customers will be able to view the pay-per-view discs during a two-year phase-out period.

“The demise of Divx removes the uncertainty in consumers minds about DVD,” said Kenneth M. Gassman, retail analyst with Davenport & Co. in Richmond. “Now that we’ve settled on one format, it should be full-speed ahead for DVD.”

Investors and analysts embraced Circuit City’s move, sending shares of the company up $9.38 to close at a 52-week-high of $90.38, a gain of 10%.

In fact, Circuit City’s decision to shutter the troubled unit led analysts to upgrade 1999 estimates for Circuit City.

Richard Sharp, chairman of Digital Video Express and Circuit City Stores Inc., said there was no lack of consumer affinity toward Divx, but problems in selling the format came elsewhere.

“Unfortunately, we have been unable to obtain adequate support from studios and other retailers,” said Sharp. “Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas.”

Format wars

Divx has been mired in controversy since its launch in September with the fight between DVD and Divx bringing back memories of the power struggle between VHS and Beta in the 1980s.

Divx players allowed users to view movies on $5 encrypted discs for up to two days. Users were allowed to keep the discs and purchase additional viewings for an extra $3.25 or convert the discs to unlimited play for an additional $20.

But few studios agreed to support the technology, with DreamWorks and 20th Century Fox only jumping on board in the last few months. Still fewer electronics retailers, besides Circuit City, sold the players.

Lack of content

While DVD has more than 3,000 titles in stores released by every major studio, Divx released only 494 titles –due largely to the fact that the format didn’t have deals with Sony, Paramount and Warner Bros., which together account for nearly 75% of all software titles released. Retailers have sold more than 30 million DVD titles, while Divx only passed the 1 million mark in February.

The discs that were released came in the pan & scan format only and featured few to no extra features common on DVDs, such as film trailers, featurettes or actor bios. DVD films typically are available in both pan & scan and widescreen.

And while Divx initially released its own players, the Divx technology later became a feature built into pricier DVD players — usually for roughly $100 more. More than 2 million DVD players have made their way into homes since late 1997; Divx has sold 200,000 players.

Many consumers who purchased the Divx-enhanced players opted not to purchase the Divx discs, using the players to view DVDs, instead.

Although Warner Bros. has been outspoken in its opposition to the Divx format, the studio said it was looking forward to a relationship with Circuit City to expand DVD’s reach.

“Circuit City has consistently demonstrated an outstanding ability for promoting the benefits of new technologies to consumers,” said Warren Lieberfarb, prexy of Warner Bros. Home Video. “We look forward to working with them in furthering the development of the DVD market.”

Consumers will be able to view Divx discs on currently registered players until June 30, 2001. New players, however, will no longer be registered, and the discs can no longerbe upgraded to unlimited viewing.

As part of the shutdown, Digital Video Express will provide a $100 cash rebate to all consumers who purchased Divx-enhanced players prior to Wednesday.

“Divx was a good product; no question about that,” said retail analyst Gassman. “But because the movie studios didn’t totally buy into it and because of the lack of retail distribution beyond Circuit City stores, this product simply didn’t have the potential for long-term growth.”

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