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Divx on the defensive
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December 11, 1998: 3:47 p.m. ET
Circuit City's new video rental technology faces an onslaught of criticism
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NEW YORK (CNNfn) - Even before its new video entertainment system hit the market, Circuit City Stores, Inc. was prepared for criticism.
Most new product launches in the unforgiving electronics arena, it reasoned, face a certain degree of scrutiny from the competition, not to mention a period of adjustment before the merits of the technology sink in with the buying public.
But since the launch of Divx in October, Circuit City has faced an onslaught of negative publicity, backing the Richmond, Va.-based electronics retailer to the defensive corner of the marketing ring.
From the half dozen anti-Divx Web sites that have sprung up to the flurry of unflattering reports in trade publications, the company admits it's never seen anything like it.
"Who has?" said company spokesman Josh Dare. "This is kind of a new phenomenon, really."
Dare is quick to point out, however, that as Divx technology becomes more readily available to consumers, Circuit City is beginning to see signs that the technology could one-day become the alternative to video rental outlets it was designed to be.
The technology
Divx, or Digital Video Express, is a new feature incorporated into DVD players, enabling viewers to rent digitally encrypted movie disks without returning them.
The discs, which can be played only on Divx-compatible DVD players, become part of the consumer's home video library after the pre-paid 48-hour viewing period is up. For an additional fee, customers can reactivate the disc for another viewing period, or convert it to unlimited viewing -- ideal for children's movies and old favorites.
Proscan DVD player with Divx
Source: Circuit City Stores Inc.
By contrast, regular DVD movie discs cost movie buffs a flat, and slightly higher, fee for outright ownership, like buying a movie video for your VCR.
Circuit City said it's important to note that Divx-enhanced DVD players will play all standard DVD discs, but the Divx rental discs can't be played on standard DVD players.
Winning back the consumers
Using Divx as a springboard, the company hopes to tap into the lucrative home entertainment business and take on video king Blockbuster Entertainment.
Over the next five years, Circuit City hopes to claim an ambitious 15 percent to 20 percent piece of the rental market pie.
Industry data show Americans rented 3.65 billion videos last year alone, translating into 10 million rentals a day.
But Dare said those numbers were down 6 percent from 1997, due largely to the distaste consumers have acquired for rental returns, late fees, and the absence of new releases on the shelves.
"People tell us they don't mind going to get the movie," Dare said. "It's something exciting to do. It's the returning aspect [that is driving video renters away]. We think we can bring back that lapsed renter."
Hurdles
The technology, however, has had a less-than-welcoming reception.
Mark Mandel, an analyst who follows the company for ABN Amro in New York, said "just about every article written about Divx has been generally negative."
The anti-Divx faction, fearing the movie studios will stop releasing hits and classics in standard DVD format, has maintained its momentum as the months wear on. Groups like the National Organization to Ban Divx and Strider's Anti-Divx Page bash the technology online and urge would-be customers to boycott the product.
"There are a lot of people who don't believe in Divx," said Argus Research analyst Alan Mak. "They don't believe it'll ever take off."
The obstacles the product faces are many:
-- Among them are concerns that video renters will view Divx as an interim technology, a common obstacle for new products that can dissuade potential buyers from breaking out their wallets.
-- Some analysts also express concern that only 250 movie titles are available at present for Divx-compatible DVD players. Although Circuit City said the number will grow, the delay in building a movie title library could snuff out the spark of enthusiasm that new technology feeds on.
-- Moreover, they say, renting a movie from the video store -- if it's returned on time -- is still cheaper than buying a Divx disc.
On top of that, Mak said movie buffs who venture into a Blockbuster typically don't know what they are going to check out until they browse. Renting a Divx movie off the Internet -- one option available -- requires consumers know what they want going in, and forces them to wait several days for it to arrive in the mail.
"Most people going to Blockbuster and other video stores don't have any idea what they want to rent. They are just browsing," Mak said.
-- DVD devotees also complain that Divx discs have none of the extra features that come standard on the DVD movie discs, including trailers, wide screen options, directors' extra commentaries, interviews, or subtitles.
-- But perhaps the greatest obstacle to the product's long-term success, analysts say, is that DVD players, on which the Divx technology runs, don't allow users to tape shows or movies from their television.
"That's a serious handicap," said Mandel of ABN Amro. "If you want to tape a movie, your VCR is still necessary. There are definite handicaps here."
Circuit City's side
Dare of Circuit City said he's not surprised by the unfavorable reaction to the product, saying many of the most vocal opponents to the technology are competitors.
"It doesn't surprise us that people who consider us a competitor say bad things about us," he said.
He also said the advantages of Divx are just as many.
"A lot of videophiles have really taken a fancy to DVD, but we think to broaden the market you are going to have to offer mom and dad and the kids more," he said. "The general public is really not all that dissatisfied with the quality of their VCR picture, so if you want to get them to push aside that VCR, we think you have to give them more."
Divx, he said, offers convenience and a more economical way to get DVD digitally enhanced picture quality.
"American's have shown an overwhelming preference for rental over purchase," he said.
He also said consumers who choose to order their Divx discs over the Internet aren't subject to delays in viewing their selection, as the anti-Divx groups claim. Instead, he said, Divx titles are available to the public the same day they are released to the video stores.
Customers who pre-order their selections over the Internet can have them sitting in their mailboxes on the day of release, he said.
By contrast, standard DVD movies sometimes take two months to hit the stores after their video release.
The billing system also is easier, he said,
Divx-enhanced DVD players are connected to the viewers' phone lines. Charges are downloaded once a month into a central billing center and the fees automatically appear on their credit card account.
The technology, which is encrypted to prevent piracy, is the brainchild of Los Angeles-law firm Ziffren, Brittenham, Branca & Fischer, but Circuit City helped develop it and remains the majority owner.
At present, Divx-loaded DVD's and the Divx discs can be purchased in 800 stores nationwide. But Dare said Circuit City ultimately hopes to sell its Divx movie titles at convenience stores, drug stores, grocery stores and, if the industry allows, in video rental stores.
"They are in a CD size case and that will make them very handy to put on a rack in the check out line," he said. "We would love to get them in the video stores."
As a direct competitor to the video store community, however, Dare acknowledges that the "video rental community really hasn't run to us with open arms."
The cost of convenience
Divx movies cost $4.49 to rent for a 48-hour viewing period that starts when you hit "play." After that time, the viewing is blocked. Paying $3.25 more will renew it for 48-hours and for a fee of $15 to $20, viewers can convert their disc to unlimited viewing.
By comparison, standard DVD movies cost between $20 and $30 to keep.
The Divx rental fees, however, don't include the $400 to $500 consumers have to pay for a Divx compatible DVD system. That's about $100 more than the lowest-priced standard DVD player.
As for the DVD fans, Circuit City says it has no plans to replace the technology in favor of the upgraded, and more expensive, Divx-enhanced DVD's.
Dare said both products will be available, and the movie studios likely will continue offering DVD titles, as long as consumers want them.
The company will release the first sales data on Divx in early January. Until then, analysts say, they'll keep a close eye on how the product is selling at local stores.
"The thing to watch is if momentum starts to build, this could feed on itself," said Mandel, of ABN Amro. "They may get a new financing partner. Other companies may jump on board. It could get pretty interesting. I am certainly not willing to write this thing off yet." 
-- by staff writer Shelly K. Schwartz
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