Divx Expensive Loser for Circuit City in 1998
By Mark Harrington
Richmond, Va.
Circuit City acknowledged Wednesday that its Divx video system will be a money-loser throughout 1998, and will require as much as $300 million in public or private financing for its launch.
Richard Sharp, chairman and chief executive officer of Circuit City, told analysts in a conference call yesterday that the company expects to hold the first demonstration of Divx, a rival to the currently available DVD, in private suites next month during the Consumer Electronics Show in Las Vegas. While Sharp said a new ad agency and hands-on exposure of the product will build momentum, the controversial Divx system faces several challenges, including financial woes.
"We fully expect we'll have to do some sort of financing transaction in the first half of next year," he said, to launch Divx. Sharp told analysts the development and launch could cost between $100 million and $300 million.
Asked about Divx's possible contributions to Circuit City's bottom line, Sharp said, "We fully expect it to continue in the loss mode for the entire [1999 fiscal] year." Circuit City cited costs tied to its Divx investment in reporting that profits declined 39.9 percent, to $11.9 million, for its recently ended third quarter. Sales increased 15 percent to $2.14 billion.
Circuit City announced its backing of Divx earlier this year. The format would allow consumers to purchase discs for around $5 and receive unlimited playback for a 48-hour period on dedicated Divx players. Customers could reactivate a disc by dialing into a central Divx database via a player's built-in modem and paying additional rental fees. Divx machines will cost around $100 more than DVD players, which retail for around $500.
Sharp said Circuit City recently hired an ad agency to assist in the national launch of Divx, and said, "There have been nothing but positive developments from our perspective."
But in an apparent acknowledgment of the uphill battle Divx faces, given an expanding installed base of rival DVD players and because of its ties to Circuit City, a fierce rival to most retailers, Sharp said: "It's hard to get people excited about this product when they can't see it." Approximately 100,000 DVD players have already been shipped.
Responding to an analyst who asked how Circuit City expected to get financing for Divx in light of the fact that the stock market apparently does not see Divx as a Circuit City asset, Sharp said, "Am I to interpret this question to mean that you don't want to buy any?"
But Sharp went on to explain that by the time of launch, Circuit City expects to have the support of several hardware and software companies. And he added wryly, "The good news is that we haven't peaked too early."
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