Last Rites for Divx, Clear Sailing for Open DVD

Divx is gone. Digital Video Express, the Circuit City subsidiary that launched the pay-per-view DVD format less than a year ago, announced on June 16 that it would cease operations. Blaming lack of support from film studios and retailers, Circuit City decided to bow out early rather than continue to fight a losing battle. "We regret that a lack of support from studios and other retailers will prohibit consumers from receiving the exceptional benefits of the Divx system," says W. Alan McCollough, president and chief operating officer of Circuit City Stores, Inc. A refund program for Divx buyers is underway, company officials stated.

Hatched by the Los Angeles entertainment-law firm of Ziffren, Brittenham, Branca, and Fischer (a major investor in the format), and almost universally vilified by the home-entertainment press, Divx was promoted to film studios as a "robust solution" to the problem of copyright protection. Studios were reportedly promised payments of up to $30 million each to sign on with the plan. Circuit City hyped Divx to consumers as an easy alternative to movie rentals. "Never pay another late fee!" the ad campaign proclaimed.

In reality, Divx was a complicated system involving encrypted discs, modem connections to a remote server, and billings to credit cards or telephone accounts. In addition, customers' viewing activity could be charted by corporate overseers, which made many people uncomfortable. The incompatibility of Divx discs with other DVD hardware prevented its acceptance by consumers, retailers, and film studios alike. Divx DVDs could not be played by portable equipment, computers, or non-Divx players, and they could not be traded or given as gifts without knowing beforehand if the recipient was a Divx subscriber.

Compatibility wasn't the only area in which Divx came up short. Most movies on DVD can be seen as either widescreen (full theatrical aspect ratio) or pan&scan (formatted to fit the 4:3 ratio of ordinary television sets). Divx discs offered only pan&scan, and they lacked many of the extras that movie fans are so fond of: outtakes, trailers, cast bios, and interviews with directors. Not having to return rentals was scant compensation for everything Divx lacked.

Since DVD's inception, retailers have sold more than 30 million individual discs. Divx discs reached the 1 million mark in February, five months after its official nationwide debut. However, the number of Divx discs actually sold is open to interpretation, because a substantial number were given out as promotional items. The launch of the format itself was delayed several months while Circuit City searched in vain for financial partners to keep its ship afloat. As DVD quickly gained popularity---more than 3000 titles released in less than two years---Divx lagged, issuing only 494. Without the support of Paramount, Sony, and Warner Bros., which together encompass approximately 75% of the video software market, Divx was doomed.

Another problem was the pricing of discs and players. Films to be seen only once or twice would be cheaper to rent; those to be seen many times would be cheaper to buy. The extra $100 (average) to purchase a Divx-compatible player negated any financial advantage the format might have otherwise offered consumers. So-called "open" (i.e., non-Divx) DVDs sell from about $15 each at the low end to about $40 at the upper end; the typical movie on DVD costs $20-$25. Divx discs sold for $5 each; after an initial "unlimited play" period of 48 hours, they could be played for an additional $3.25 per viewing as often as their owners wished. They could also be upgraded to permanent unlimited play for $20---meaning Divx customers could actually end up paying more for less.

Since late 1997, consumers have purchased more than 2 million DVD players, of which only 10% were Divx-compatible. The hardware was available nationally at Circuit City Stores, at the Good Guys on the West Coast, at Ultimate Electronics stores in the western US, and at a few other locations. Despite rosy quotes from marketing executives, news reports about the few dealers who signed on with the Divx program were often tinged with a hint of doubt about its long-term viability. The efforts of Digital Video Express to recruit dealers increasingly became exercises in futility. Doubt proved to be the right instinct.

The Divx debacle was costly for Circuit City, which will take an immediate write-off of $114 million---and an ultimate loss of $337 million, according to Variety. Still, the company has done the wise thing in bailing out of this unwise venture. Investors welcomed the move; Circuit City's stock gained 10% on the news of Divx's demise. The company is also doing the right thing in extending a generous rebate/refund/exchange program to customers who bought into Divx. The discs themselves are being blown out at $1.99 each, and they will be viewable (at the normal pay-per-view rate) until June 30, 2001, after which they will be turned off forever.

Fortunately, Divx machines work fine as players of standard, open DVDs. With the value-added feature of Divx now rendered worthless, the players have been reduced in price by $100. As of Saturday, June 19, Circuit City was selling RCA's basic machine for $249.

In his concession speech, Circuit City CEO Richard Sharp sincerely thanked all his employees who had worked so hard to make Divx happen. Regretting "that this decision was necessary," he said, "I cannot thank them enough for the talent, commitment, and dedication they have given to this project. We hope to work closely with all Divx retailers and customers to ensure that the closure process is as simple as possible."

Sharp's nemesis---Warren Lieberfarb of Warner Bros. Home Video, Divx's most outspoken and unrelenting foe---was equally gracious in his victory remarks: "Circuit City has consistently demonstrated an outstanding ability for promoting the benefits of new technologies to consumers. We look forward to working with them in furthering the development of the DVD market." A single video-disc format, which is the unifying ideal of film studios, production houses, distributors, retailers, and home-entertainment fans, is now a reality---at least until high-definition DVD appears.