CIRCUIT CITY PULLS DIVX PLUG; IT GETS TWO YEARS TO FADE OUT

DAN ALAIMO

HERNDON, Va. -- Divx, the limited-play variant of DVD technology, is no more.

Citing a lack of studio and retailer participation, Circuit City Stores, Richmond, Va., discontinued the operations of Digital Video Express here this month. Registered customers will be able to continue to use Divx during a two-year phaseout period and the price of software will be cut from $4.49 to $1.99.

Additionally, Circuit City is offering a $100 rebate to people who bought a Divx player, an amount that covers the extra cost of the Divx feature on the hardware, which also plays regular DVDs.

"Sales at participating Divx retailers reflect strong consumer interest in the Divx feature," said Richard L. Sharp, chairman and chief executive officer of Divx and of Circuit City. "The majority of customers purchasing DVD players in Circuit City stores have selected players that include the Divx option. Unfortunately, we have been unable to obtain adequate support from studios and other retailers. Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas."

While the traditional video industry viewed Divx as a threat to rentals and consumer acceptance of regular DVDs, the supermarket trade had mixed views of it. While those with investments in traditional video-rental programs were opposed to Divx, others saw a future opportunity in its low impulse price, said industry observers.

Divx had just begun to explore the supermarket channel, but the penetration level of Divx players wasn't sufficient for supermarkets to carry the software. "One of the issues with supermarkets and drug stores was the installed base," said Josh Dare, a Divx spokesman.

Estimates of Divx hardware sales to consumers range between 100,000 and 200,000. During the January Consumer Electronics Show in Las Vegas, the company reported that it sold 87,000 units in the fourth quarter, the first period following the national rollout. Divx was offered in more than 700 stores, but about 600 were Circuit City locations. About 450 titles are available in the Divx format and more than 1 million discs have been sold in the last year, according to press reports. In contrast, some two million regular DVD players have been sold and more than 3,000 titles are available.

A deal with Blockbuster, Dallas, to carry Divx reportedly fell through at the last minute earlier this spring. One press report said Blockbuster wanted to buy all of Divx, but two movie studios objected.

"Divx was a good product, no question about that," said retail analyst Kenneth Gassman, Davenport & Co., Richmond, Va. "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," he said.

"Divx did offer something to consumers," said analyst Ursula Moran of Sanford C. Bernstein, New York. "What happened was the Hollywood contingent saw that the better thing to do to protect their own interests was to make sure the video-rental model remained in place. Buying Divx meant consumers didn't have to rent videos anymore and Hollywood benefits from the way revenues and profit are set up with videos.".

Divx is a partnership between Circuit City and Los Angeles entertainment law firm, Ziffren, Brittenham, Branca & Fischer. Circuit City owns 75% of Divx. The electronics retailer reported that it has incurred an after-tax loss of $114 million related to the discontinuation of Divx.