Doubts Arise as Divx Readies for National Debut
A year and a half after the roll-out of the digital videodisc, or DVD, a long-anticipated hybrid known as Divx is set to launch nationally within the next few weeks. The question is whether Divx (digital video express) will be DOA (dead on arrival).
The backers of Divx say it has the potential to fundamentally change the way video is consumed: The discs look like regular DVDs or audio CDs. But Divx discs are a rental/sales combination. For an initial charge of about $4.50, consumers get a two-day viewing period, starting at their convenience. The discs are then kept or discarded--not returned to the store. Further viewings or outright purchases are billed via a phone line connected to the Divx player.
But Divx could end up being a financial drain and a major embarrassment for Richmond, Va.-based Circuit City Stores, which partnered with Los Angeles-based entertainment law firm Ziffren, Brittenham, Branca & Fischer in underwriting the venture. Former Ziffren Brittenham attorney Paul Brinze is now the L.A.-based president of Divx.
Circuit City/Divx Chairman Richard Sharp has said Divx will lower second-half earnings by 45 cents a share for the nation’s second-largest consumer electronics dealer, if outside financing can’t be secured for the Divx operation. Circuit City is expected to announce second-quarter earnings today, with an expected 12-cent-per-share charge related to Divx.
It doesn’t look to be an attractive investment so far. With Circuit City backing it, rival electronics retailers such as Best Buy are disinclined to jump on board. Good Guys is the only other major chain currently committed to selling Divx hardware.
“Certainly, we would prefer to have broader distribution,” said Sharp in an interview with The Times this week, “but this is a product in its introductory phase that needs explanation to consumers. We need stores . . . like Circuit City . . . that have professional salespeople to support it.”
With a price $100 more than comparable “open format” DVD machines, the hardware is not particularly compelling to the major discount chains. Apparently convinced that DVD is becoming a mainstream product, Target stores have recently introduced open-format DVD machines starting at $299.
As for software, the country’s top two video chains have no plans to carry Divx. Blockbuster and Hollywood Video--which together control the majority of the rental market--are both introducing DVD rental titles, in at least some stores, for the same price as a VHS rental.
Video retailers see Divx as a threat to their core business model. They say Divx will provide lower profit margins and that not having to return the discs would naturally mean fewer trips to the video store. According to the Video Software Dealers Assn., six out of 10 renting households visit a video store at least twice a month. What happens if you cut that number in half?
Blockbuster Chairman John Antioco bluntly told attendees of the VSDA convention in July: “Divx has launched a frontal assault on video stores.” He was preaching to the choir.
Sharp doesn’t deny that Divx could take business away from video retailers. He hopes Divx can capture a hefty 15% to 20% of the 90 million households with VCRs over the next few years. “We believe this is a vastly superior way of delivering movies . . . [that] consumers will choose this method over [traditional] rental,” said Sharp. “VHS isn’t going away. We’re not predicting the demise of the VCR or the rental store.”
Sharp wouldn’t elaborate on the results in Divx’s two test markets--San Francisco and Richmond, Va.--though he says indications are “encouraging.” He admits that Divx’s advertising budget has been scaled back 40%, from $100 million to $60 million, for its launch.
There are many Divx skeptics. “Although it’s premature to say that Divx is dead, it’s my opinion that it is fighting an uphill battle,” said Warren Lieberfarb, president of Warner Bros. Home Video.
Lieberfarb has been an outspoken opponent of the format. Both Warner Bros. and Sony have been involved with the development of open format DVD and have not licensed their movies to Divx. Most others, including Disney, Universal, Paramount, MGM, Fox and DreamWorks, have; collectively, they expect to receive more than $100 million over five years from Divx.
Lieberfarb continued, “we had an independent survey done . . . which showed that 86% of people were interested in buying [open format DVD] and didn’t consider [Divx’s] ‘no returns’ feature a significant benefit.”
Lieberfarb also points out that Divx discs can’t be played on computers. While the demand to watch movies on computer is tiny today--and Sharp says Divx plans to make their discs compatible down the road--it is still a consideration for some techno-savvy “early adopters.”
Meanwhile, some analysts say Circuit City should have never gotten involved with Divx. Said Scot Ciccarelli with Gerard Klauer Mattison: “It doesn’t make a lot of sense to me that a retailer like Circuit City is involved in technology. It’s taken resources and attention away from their core business.”
