June 16, 1999 8:30 AM PDT
Divx DVD backers call it quits
Digital Video Express announced today that it will cease marketing of the Divx home video system and discontinue operations, the company said in a statement.
"[Though] sales at participating Divx retailers reflect strong consumer interest in the Divx feature...unfortunately, we have been unable to obtain adequate support from studios and other retailers. Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas," said Richard L. Sharp, chief executive officer of Digital Video Express and of Circuit City, the majority partner in the Digital Video Express venture in a statement.
"Existing, registered customers will be able to view discs during a two-year phase-out period," the company said. "We want to thank all our existing Divx customers and regret that this decision was necessary," Sharp said. "We hope to work closely with all Divx retailers and customers to ensure that the closure process is as simple as possible."
Divx is a limited-use version of DVD that allows viewers access to movies for 48 hours after the initial viewing period. After that, a customer has to buy the disc for viewing again. The technology, developed and marketed by Circuit City, has been criticized for muddying an already complicated DVD field, which was marked by an early, contentious standards battle.
Nevertheless, earlier this year, Circuit City claimed that almost 90,000 Divx-enhanced DVD players were sold in the first three months of national availability, with 60,000 sold during December of 1998.
This compares to approximately 1.2 million DVD players sold in 1998, according to data released from marketing research firm InfoTech Research at that time--or an average three-month rate of about 300,000 units.
Also, at the beginning of the year, Thomson Electronics announced that it was developing a high-end version of Divx, which it was demonstrating at the Consumer Electronics Show in Las Vegas. Circuit City also announced then that Kenwood had signed on as a manufacturing partner. In addition to Thomson, Panasonic and Zenith manufacture Divx-enhanced DVD players.
Moreover, in March, shares of Circuit City rose more than 12 percent due to positive speculation about the future of Divx and the expectation that more companies would invest in it.
But this will all come to an end. "Digital Video Express will provide a $100 cash rebate to all consumers who purchased Divx-enhanced players prior to June 16, 1999. Rebate forms will be available at www.divx.com, participating retailers, and by calling 1-888-639-DIVX," the company said.
Circuit City also announced financial results for the first quarter ended May 31, 1999. Sales for Circuit City Stores increased 19 percent to $2.69 billion from $2.27 billion in the same period last year. Earnings from continuing operations rose 104 percent to $42.0 million from $20.6 million in last year's first quarter, the company said in a statement.
But Circuit City noted that the operating results of Divx for the quarter ended May 31, 1999, and the loss on disposal of the Divx business "have been segregated from continuing operations and reported as separate line items on both the consolidated and the Circuit City Group statements of earnings," the company said. The company also has reclassified its prior year financial statements to present the operating results of Divx as a discontinued operation, according to a statement.
For the quarter ended May 31, 1999, the after-tax loss from the discontinued Divx operations totaled $16.2 million, or 16 cents per Circuit City Group share, compared with $8.1 million, or 8 cents per Circuit City Group share, in the prior year. The after-tax loss on the disposal of the Divx business totaled $114.0 million, or $1.12 per Circuit City Group share, in this year's first quarter, the company said.
"The loss on disposal includes a provision of $3 million, after tax, for operating losses to be incurred during the phase-out period. It also includes provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination cost, employee severance and benefit cost, and other contractual commitments."
"Including the impact from discontinued operations, the net loss for Circuit City Stores was $88.2 million in this year's first quarter compared with net earnings of $12.5 million in last year's first quarter."
