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Circuit City pulls the plug on battered DVD cousin

It was a skirmish worthy of a "Mad Max" film: Two formats enter, one format leaves. And when DVD emerged victorious over Divx in the battle for consumer digital supremacy last week, carnage left Divx backers Circuit City Stores Inc. and Los Angeles entertainment law firm Ziffren, Brittenham, Branca & Fischer bloodied, with losses of more than $337 million.

Indeed, the Richmond, Va.-based Circuit City, which held 75% of the Digital Video Express LP partnership behind Divx, says it will incur a $114 million loss just to discontinue the operation.

Wall Street seemed primed for the death of Divx, however: The decision to kill the format sent Circuit City shares up $10.26 to a 52-week-high of $91.25 for the week.

The demise of Divx makes rival DVD the sole remaining player in the digital-video format war.

"(Divx) tried to change the way the consumer tried to do business," says Steve Becks, prexy of Artisan Home Video, which did not release pics on Divx. "It was confusing. It did not support all the existing channels of retail and distribution. It wasn't really a DVD experience or a rental experience."

DVD's emergence as the standard is a move many homevid distribs--especially the major studios--and electronics retailers have been waiting for.

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

While DVD has clearly dominated among consumers since hitting retailer's shelves in late 1997 (see chart), Divx's controversial system was still a player, at least for a short time, attracting studio deals and consumer dollars.

Circuit City's decision didn't come as a surprise, however. The format was 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 fee, or convert the discs to unlimited play for even more money.

The discs came in the pan-and-scan format only, and featured few, if any, extra features common on DVDs.

Analysts say that what killed Divx in the end was its failure to offer a big-enough improvement over existing technologies like DVD or the videocassette.

"These technologies, particularly in entertainment, tend to come to market because they can be brought to market rather than because customers want them to be brought to market," observes Mark Macgillivray, managing director for H & M Consulting.

In fact, few studios agreed to support the technology, with Sony, Paramount and Warner Bros.--which control 75% of the DVD market--refusing to release pics on the format.

And still fewer electronics retailers besides Circuit City sold the players or the discs, saying they wouldn't push a product owned by a rival electronics retailer.

While DVD has more than 3,000 titles in stores released by every major studio, Divx released only 494 titles. Retailers have sold more than 30 million DVD titles, while Divx just passed the 1 million mark in February.

Divx sold 200,000 players, as opposed to DVD's more than 2 million machines.

A potential equity investment from Blockbuster Video March was the last ditch attempt to save Divx. The format had long been looking to partner with a major video store rental chain to push the technology, and over the past several months has hinted that a deal with Blockbuster was likely. It wasn't.

And that put the final nail in Divx's coffin.

Circuit City 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. "Divx was a good product; no question about that," says 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."

Even as Divx fades away, DVD appears set to gear up.

Although the studios declined to comment, sources say the majors are readying to increase their marketing budgets behind DVD--many had unofficially already made DVD the standard, increasing the number of releases per month.

Disney, for example, was slow to jump on the DVD bandwagon, but will release 42 titles this summer alone. Its animated classics aren't part of the package.

Paramount Home Video said this month it will release "Titanic" on DVD Aug. 31. The title is expected to be the jewel of the DVD biz, fueling sales of the discs just as the VHS video broke sales records last summer. Fox Home Video will release its own DVD for the pic overseas Sept. 1.

The biggest push for DVD, however, is expected to come from retailers, with the discs and players taking up more shelf space than ever before.

Last month, Los Angeles-based DVD Video Group estimated that 3.5 million DVD players would make it into North American homes by the end of the year. Now, with Divx out of the picture, the outfit says numbers are likely to rise.

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

"Circuit City has consistently demonstrated an outstanding ability for promoting the benefits of new technologies to consumer's," says Warren Lieberfarb, prexy of Warner Bros. Home Video. "We look forward to working with them in furthering the development of the DVD market."
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Title Annotation:DIVX loses out to DVD
Article Type:Brief Article
Geographic Code:1USA
Date:Jun 21, 1999
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