DixX Shook Off The Detractors And Became A Success

Despite a rocky start and widespread derision on the Internet, backers of Divx are remaining steadfast in their commitment to the digital, pay-per-view DVD system. Divx debuted nationwide in October 1998–two months late because of delays in obtaining a sufficient number of Hollywood films–amidst reports of sluggish sales during summer test-marketing in Richmond and San Francisco.

dsodDigital Video Express, the partnership between Circuit City and a Los Angeles law firm that’s pitching Divx, denies that the test-marketing was a disappointment. Josh Dare, Digital Video Express director of communications, says sales went as expected under the circumstances. The launch in Circuit City and good guys! stores in the two cities featured fewer than 100 movie titles and one $499 player manufactured by Zenith Electronics Corporation, which declared bankruptcy this year.

“We had one model player and got off to an admittedly slow start in the number of movies,” Dare says. “But we were encouraged by consumer response.”

Dare says consumers are attracted by the convenience of Divx, which allows them to purchase 48 hours of viewing time for $4.99. Instead of returning a Divx disc to the store when time runs out, the disc can be kept and reactivated for 48 hours for another fee, or activated permanently for up to $19.99.

Critics say the Divx feature is unnecessary now that open DVDs are being stocked in rental stores and are available for rent on the Internet, and they blast Digital Video Express for crowding the market with discs that are useless on open DVD players.

Referring to the onslaught of criticism as a “jihad,” Dare says he has been taken aback by the ferocity of Divx’s opponents, who he says have been spreading negative and often false information via the Internet. “I can’t understand the passion behind it,” he says. “I was naive. I expected this negative campaign to die down.”

Instead, it has been going strong. Internet reports claimed that Zenith had pulled out of the enterprise because of its financial problems, when, in fact, the company will include Divx players in its 1999 product line, says John Taylor, Zenith’s vice president of public relations.

“We are fully committed to DVD players with the Divx feature,” Taylor says. “There’s a vocal minority out there that doesn’t like the concept and has been spreading rumors.”

In time for this holiday season, Zenith and RCA are both offering $499 Divx players to holiday shoppers, while Proscan and Panasonic are selling higher-end Divx models.

The players and 250 Divx titles are available nationwide at 700 locations, including Ultimate Electronics and Future Shops in addition to Circuit City and good guys! stores. During 1999, JVC, Pioneer, and Harman Kardon will enter the Divx market, says Dare.

Industry analysts estimate that by the end of 1998, 5.3 million DVD players will have been sold and 8 million DVD-ROM drives–which read open DVDs but not Divx discs–will have been installed in personal computers. In contrast, they predict that sales of Divx players won’t reach the I million mark. And while all major Hollywood film studios have committed to DVD, Time Warner and Sony Pictures have refused to release their movies on Divx. The six studios that are backing Divx have been guaranteed $112 million in royalties over the next five years.

Divx supporters don’t like comparing their format to DVD, because they don’t view the systems as competitors. They point out that Divx machines play both DVD and Divx discs, along with Video CDs, and that their product actually benefits open DVD. “This is going to grow the digital market,” Dare says of Divx. “It’s one more DVD player that’s going to be in someone’s home.”

Dare says Digital Video Express is out to capture 15 to 20 percent of the videorental market, which averages 10 million movie rentals a day in the United States, within the next five years. Critics and many analysts say Divx has its work cut out for it, especially since the omnipresent Blockbuster chain and many other outlets have started renting open DVD-Video titles and players.

Circuit City chief executive Richard Sharp reportedly has acknowledged that Divx could reduce his company’s earnings substantially in the second half of the fiscal year. The electronics chain tried to avoid taking a hit for its support of Digital Video Express by seeking another financial backer for the enterprise, but failed to form any partnerships.

Dare says there were interested investors, but no one could agree on how much Divx is worth, so they couldn’t settle on what percentage of Digital Video Express the investors would own. The company expects that by February 1999, when the holiday sales are over, there will be evidence of what Divx is worth, and they will be able to strike a deal with investors.

In the meantime, Circuit City, owner of two-thirds of Digital Video Express, has had to cover the majority of the marketing costs itself, so the company scaled back its $100 million nationwide marketing campaign to $60 million. “We are quite comfortable with $60 million,” Dare says of Circuit City’s commitment.

Even with the marketing cut, Circuit City and its L.A. partner have invested $200 million in the venture, which means they will have to sell about two million machines and 50 million discs, and collect 50 million rental fees, to break even. Sharp has acknowledged that his earlier goal of selling 250,000 Divx machines in the first year may not be possible.

Dare says most analysts are being shortsighted. He is following a strategy of building toward the year 2000. In two years, he believes mainstream consumers will begin snatching up Divx players, because the average price will have dropped into the $300 range by then. And Dare expects more retailers to jump on board once Divx establishes itself as a force in the digital video market.

“It’s going to be a migration that happens slowly,” he says. “Perhaps a few retailers at a time.”

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