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Dead medium: DIVX: Stillborn Media
From: bruces@well.com (Bruce Sterling)
jmartin@abs.net)(John Martin)

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Source(s): OnVideo Newsletter, Thu, 17 Jun 1999; http://www.washingtonpost.com/wp-srv/business/feed/a40353-1999jun17.htm

DIGITAL VIDEO EXPRESS, LP TO DISCONTINUE OPERATIONS

Herndon, Va., June 16, 1999 -- Digital Video Express, LP announced today that it will cease marketing of the Divx home video system and discontinue operations, but existing, registered customers will be able to view discs during a two-year phase-out period.

"Sales at participating Divx retailers reflect strong consumer interest in the Divx feature," said Richard L. Sharp, chairman and chief executive officer of Digital Video Express and of Circuit City Stores, Inc. (NYSE:CC, KMX), the majority partner in the Digital Video Express venture. "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."

Digital Video Express will provide a $100 cash rebate to all consumers who purchased Divx-enhanced players prior to June 16, 1999. Rebate forms will be available at www.divx.com, participating retailers and by calling 1-888-639-DIVX. The rebate will ensure that no Divx customers have paid more for the Divx- featured player than they would have paid for the least expensive, comparable DVD player available at the time of their purchase. All Divx-featured DVD players are fully functional DVD players and will continue to operate as such. All Divx discs, including those previously purchased by consumers and those remaining in retailer inventories, can be viewed on registered players anytime between now and June 30, 2001. Subsequent viewings also will be available during that period. Discs can no longer be upgraded to unlimited viewing, known as Divx Silver. Customers who have converted discs to Divx Silver can continue viewing the discs until June 30, 2001, or can receive a full refund of the conversion price at their request. Divx expects to provide registered owners with written notification of the details related to the system phase-out. Effective today, Divx will no longer register new customers.

"We want to thank all our existing Divx customers and regret that this decision was necessary," Sharp said. "We hope to work closely with all Divx retailers and customers to ensure that the closure process is as simple as possible."

Circuit City Stores, Inc. is incurring an after-tax loss of $114.0 million related to the disposal of the Divx business. The loss includes provisions for commitments under

licensing agreements with motion picture distributors, the write down of assets to net realizable value, lease termination cost, employee severance and benefit cost and other contractual commitments.

"I especially want to recognize all of our Divx Associates, who developed a terrific product that has performed flawlessly for our customers," said Sharp. "These individuals have put in countless hours from the early stages of the product's development through market introduction and the early operating phase. They have delivered exceptional customer service, and I cannot thank them enough for the talent, commitment and dedication they have given to this project."

Digital Video Express, LP is a partnership between Circuit City Stores, Inc. and a prominent Los Angeles entertainment law firm.

This release contains forward-looking statements, which are subject to risks and uncertainties, including, but not limited to, risks associated with the development of new business concepts and risks associated with year 2000 issues. Additional discussion of factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations is contained in the SEC filings for Circuit City Stores, Inc.

Circuit City's Slipped Disk

The museum of failed consumer products is filled with exhibits such as the Betamax videocassette player, the eight-track tape and New Coke. And now there's Divx video-rental technology.

Circuit City Stores Inc. and its partner conceded yesterday that their plan to replace videocassette rentals with video disks that don't have to be returned was a resounding failure.

From the start, Divx has been mired in problems. In a battle much like the one in the 1970s and early 1980s between the Betamax and VHS formats for VCRs, Divx competed with the standard DVD format for consumers looking to play digital video disks. Although Divx, unlike Betamax, was able to play videos encoded in its rival's format, it met the same fate.

The Divx format was designed to be a solution to the hassle of returning videos to the store. A Divx disk, which looks like a CD and whose quality of picture and sound is superior to that of a videocassette, costs $4.50 for unlimited viewings during a 48-hour period. After that, the disk won't play unless it is "recharged" for another two days at the cost of $3.25. Billing is done through the phone line that connects to the Divx player.

And that, as it turned out, was a major consumer complaint.

"That was the main thing: I did not want someone keeping track of what I watched and when," said Christopher Blount, an Air Force electronics technician who lives in San Antonio.

The Divx technology ran into resistence from movie studios, even though Richmond-based Circuit City's partner -- the Los Angeles law firm Ziffren Brittenham Branca & Fischer -- specialized in the entertainment industry. Retailers also balked.

"Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas," said Richard Sharp, chief executive of Circuit City.

But attempts to woo retailers were doomed even before they started, said analyst Kenneth M. Gassman Jr. of Davenport & Co. in Richmond.

"Why didn't more retailers carry it, especially Best Buy?" Gassman said. "The answer is: Would you put profits in the pockets of your arch competitor?"

In the spring, rumors that Divx had inked a deal with Viacom Inc.'s Blockbuster video unit in which the movie-rental firm would rent its disks sent shares of Circuit City stock soaring. A company official familiar with the discussions said the agreement was quashed at the last minute.

Blockbuster, he said, wanted to purchase the entire Divx business. But two movie studios, whose approval was required to seal any deal, nixed the idea. They "said no because they thought Blockbuster was already too powerful," he said.

Industry observers expressed skepticism about a possible deal between the two retailers. "It's like mixing oil and water," said Mark Mandel, a retail analyst with the brokerage ABN Amro in New York. "The Divx technology was really an affront to the rental model."

Wall Street cheered the decision to kill Divx, sending Circuit City's stock soaring $8.37 1/2 on the New York Stock Exchange to close at $90.37 1/2. Analysts said Divx's death will allow Circuit City to focus on its core electronics operation as well as its CarMax automobile dealerships.

Also yesterday, Circuit City announced a two-for-one stock split and said it will take a $114 million charge to eliminate the Digital Video Express division in the first quarter ended May 31. About 300 employees will lose their jobs. As a result, the retailer will post a loss of $88.2 million in the quarter, compared with a $12.5 million profit in the year-earlier period. Revenue rose 19 percent, to $2.7 billion from $2.3 billion.

The intense emotional response to Divx has surprised many industry observers. Over the past two years, the video format has inspired jeers, intense hostility and a host of Divx-bashing Web sites. Consumers who bought the first DVD players were upset because the standard players do not play Divx disks.

"The reaction has been consistent from the start, and it was consistently negative and visceral," said Mark Fleischmann, senior writer with Etown.com, an Internet site that follows consumer electronics issues. "I have never seen such a negative to any new consumer electronics product since I began writing about this in 1980."

Consumers just didn't like Divx as much as the competition. Often, DVD offers extra goodies such as director commentary, mini- documentaries about the film's creation and wide-screen format, customers said.

"If you're going to market this new concept, at least make it competitive," said Tom Longo, a retired Foreign Service officer who lives in Ocean City.

Longo and other consumers who purchased Divx players won't entirely lose out, because the machines were built to also accommodate DVD disks, Divx officials said. Additionally, Circuit City is offering $100 rebates to consumers who have recently purchased Divx players.

=A9 1999 The Washington Post Company