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Circuit City Kills Divx

Digital Video Express (Divx), the controversial pay-per-play DVD format backed by Circuit City, is dead.

Circuit City Stores, the umbrella company housing the separate consumer electronics and automobile sales operations, made the announcement Wednesday as part of its fiscal first-quarter financial statement, which included a post-tax charge of $114 million for terminating the Divx venture.

That more than offset record earnings of its retail business, the Circuit City Group, and the first-ever quarterly profit from CarMax, and left the company with a net loss for the period of $88.8 million. (See complete financial report here.)

The Divx charge, which excludes a $16 million Divx operating loss, reflects "commitments under licensing agreements with movie distributors, the write-down of assets to net realizable value, lease termination cost, employee severance and benefit cost, and other contractual commitments," Circuit City said.

A Divx spokesman said the total after-tax loss to Circuit City was $337 million, reflecting some $207 million in investments and costs through the February 28 close of fiscal 1999, plus the latest quarter's loss and the one-time charge, which mainly includes guarantees owed to studios. It also includes $3 million to cover future operating losses, the spokesman said.

"We have received positive feedback from customers who have purchased Divx-featured DVD players," said Alan McCollough, Circuit City president. "We regret that a lack of support from studios and other retailers will prohibit consumers from receiving the exceptional benefits of the Divx system. At this point, however, we want to make sure that all Circuit City customers receive a refund for the added cost of the feature and that the refund process works smoothly and conveniently."

Digital Video Express will provide a $100 cash rebate to all consumers who purchased Divx players prior to June 16, 1999, the company said. The rebate will cover the difference in price between a standard DVD player and a model enhanced with the Divx feature.

All Divx players are fully functional DVD and CD players and will continue to work with standard DVD movies. Rebates will be made via mail. Customers can obtain forms at www.divx.com, www.circuitcity.com or by calling 1-888-639-DIVX.

Circuit City said it is immediately dropping prices on all Divx-enabled DVD players. The amount will vary based on the brand of player and the DVD features. Circuit City will extend its normal 30-day low-price guarantee and its 30-day product return policy to 60 days, Circuit City said.

Circuit City announced that in its stores the current RCA Divx player that sold for $349 has been cut to $259; the ProScan and Panasonic models have been reduced to $329.

Divx is also lowering the price of all Divx discs from $4.49 to $1.99, which will give customers an initial 48-hour viewing period and the ability to purchase additional 48-hour viewing periods until June 30, 2001, when Divx-service operations will cease. The fee for additional playback periods will remain at the $3.25 rate, giving consumers an incentive to purchase additional Divx discs until inventory is depleted.

Divx will also provide refunds to consumers who have opted for the Divx Silver or Gold unlimited playback options, the company said.

Manufacturers of Divx players contacted this morning refused to comment on the announcement. One of them expressed unawareness of the decision, and a Divx spokesman confirmed that manufacturer partners were not informed in advance, "due to disclosure considerations."

Companies including Thomson and Zenith had made aggressive second-generation Divx product plans, after demand for the DVD category resulted in strong sales and out-of-stock conditions for all DVD models.

Additionally, both JVC and Pioneer planned to make their first Divx players available later this year.

Larry McKinney, Thomson DVD world product management VP, called Circuit City's decision "unfortunate." He added, "The impact of the Digital Video Express decision on Thomson DVD production is minimized since our manufacturing focus over the past month has been on open DVD players. Divx production will cease immediately, giving us an opportunity to focus on the production of open players."

Despite announcing strong Divx player sales, Divx executives refused to issue numbers for the player activations after purchase. Opponents of Divx had speculated that consumers purchased Divx units because open DVD players were unavailable.

Although Divx and its manufacturer partners had taken aggressive steps to have other retailers adopt the format, they were unable to get more than a handful to participate, and this year lost two.

Canadian-based Future Shop (an early Divx adopter) opted to close its U.S. stores (Divx isn't authorized for sale in Canada), and the San Diego-based Dow Stereo & Video is phasing out Divx in preparation for its July 1 acquisition by Tweeter Home Entertainment, a non-Divx supporter.

Despite Dow's withdrawal from the format, Tom Campbell, a director for the chain, said that Divx players were strong sellers, representing 22% of Dow's total DVD unit sales. He added that Divx was very cooperative when Dow recently returned its inventory of Divx software.

The only remaining outside Divx-backing retailers are Denver-based Ultimate Electronics, West Coast chain The Good Guys chain, and two New York- area retailers, 6th Ave. Electronics and Nationwide.

Richard Sharp, Divx and Circuit City chairman, acknowledged that the lack of widespread studio and retailing supporters was at the heart of the termination decision. Divx, he said, could not be turned into "a viable business without support in these essential areas."

Sharp told analysts that he didn't expect the Divx technology to generate much interest for an asset sell-off. However, Thomson has shown a high-definition DVD player that uses the Divx encryption system for copy protection. Additionally, the XCA copy-protection proposal for DTV television systems was designed to fit smoothly with the Divx system.