Maybe an advertising campaign is what the digital video industry needs to get things moving
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Computers & Technology Circuit City May Upset Delicate DVD Balance
Investor's Business Daily
Tue, Feb 03 1998
Circuit City Stores Inc.1 TEXT is loading up to fire a $100 million salvo at the emerging digital-video-disc market. But whether consumers hear the gunfire is anyone's guess.
In April, the electronics retailer's Digital Video Express LP unit plans to launch its alternative DVD format, Divx, in two cities. A national rollout is set for July or August. Behind it all is a sizable war chest.
"We expect to spend about $100 million in the first year making consumers aware of this product and its benefits," said Richard Sharp, chairman and chief executive of Richmond, Va.-based Circuit City.
Analysts, however, are skeptical about Divx, which has split the young DVD industry.
"Circuit City can spend all the money it wants," said Jim Hamilton, an analyst at Freeman Associates in Santa Barbara, Calif. "They have some major hurdles."
Divx is a pay-perview version of the digital video disc, a compact disc designed to replace the videocassette for home movie viewing. Divx was created by Circuit City and the Los Angeles entertainment law firm Ziffren, Brittenham, Branca & Fischer. Users will pay roughly $5 for a Divx movie and have unlimited viewing for two days. DVD movies go for $20.
Extra viewings of a Divx disc are likely to go for about $3.25. They are ordered online like pay-per-view cable movies, except they use phone lines and the Divx player's modem. Both Divx and DVD look like compact discs, but are coded differently.
Divx players are expected to go for $100 more than DVD players, which start at $400.
Divx's introduction upsets a delicate agreement on DVD formats forged between two alliances. The two camps are led by four media and electronics giants - Time Warner Inc.1 TEXT in New York and Japan's Toshiba Corp. on one side, and Sony Corp.1 TEXT of Japan and the Netherlands' Philips Electronics NV1 TEXT on the other.
In the past four years, several DVD-related disputes have erupted. At first, Sony and Toshiba went to battle over standards on the amount of space the discs should contain. That was settled in '95.
But then Hollywood studios objected, saying there weren't enough measures taken by DVD makers to ensure copyright protection. That was ironed out in late '96.
DVD player sales started briskly in April but have slowed recently. Analysts say consumers appear to be bracing for another format battle between Divx and DVD, similar to that of VHS vs. Betamax for the videocassette market in the '80s.
Four companies have signed on to make Divx players, including Victor Company of Japan Ltd., France's Thomson Consumer Electronics Inc.1 TEXT , Japan's Matsushita Electric Industrial Co. and South Korea's L.G. Electronics Inc.
Despite the objections of Time Warner and Sony, two Hollywood studio owners, some 70 Divx movies will hit stores starting in April, Sharp says. Studios say the features of Divx help ensure copyright protection.
Walt Disney Co.1 TEXT , Viacom Corp.'s1 TEXT Paramount Pictures unit, Seagram Co.'s1 TEXT Universal Studios unit and Dreamworks SKG are licensing titles for Divx releases. Sharp says he expects to land another studio before Divx launches.
"We have a critical mass to go to market," Sharp said.
There are several caveats, however. While Divx players will run DVD movies, DVD machine makers did not reciprocate. That means some 350,000 DVD players sold since April won't run Divx titles.
Circuit City also has yet to find retailers willing to carry the Divx titles and players.
Competitors such as Eden Prairie, Minn.-based Best Buy Co. Inc.1 TEXT and Brisbane, Calif.-based Good Guys Inc.1 TEXT would pay royalties to Circuit City for selling Divx products. For now, both Best Buy and Good Guys aren't commenting on Divx.
But Sharp, who is talking with other retailers, says he expects to land a national chain in coming months.
"I don't believe any retailer has made a decision that they are not interested," he said.
And video stores like Viacom's Blockbuster Entertainment Inc. also are hesitant. A Blockbuster spokeswoman said her company doesn't plan to offer Divx in the near term.
"We are monitoring the acceptance of the product," she said.
Sharp says he's still talking with Blockbuster as well as other rental chains and distributors serving smaller video stores.
"(Blockbuster) would be a strong retail outlet for Divx," he said. "At the end of the day, the consumer will decide how broad the participation is. If consumers find this attractive, you'll see more people get into it."
Sharp says Divx's selling point is flexibility. Users can buy and watch Divx movies when they want. There won't be a shortage of hot new titles, he says, as is common with videocassettes. Nor do users have to return Divx movies to video stores. And there's no late fees or rewinding.
"Because of that flexibility, we think there will be a lot more of these watched," Sharp said.
James Penhune, an analyst with Boston market researcher Yankee Group, isn't so sure. He thinks consumers will balk at connecting their Divx player to a phone line and providing personal information online.
"For the mass market, it is complicated," Penhune said. "It doesn't solve any more problems for the consumer than DVD."
Circuit City has invested $130 million in Divx and owns two-thirds of Digital Video Express. The move is part of the company's move into new areas with better profits than those of the razor-thin retail business. Circuit City also operates CarMax, a series of auto-buying superstores in the Southeast.
(Copyright Investor's Business Daily, Inc. 1998. |
