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Divx Launch Will Affect Bottom Line, Circuit City Admits

An otherwise good year for Circuit City could be marred by the debut of Divx. On August 31, the Richmond, VA-based company announced that earnings for the most recent quarter of their fiscal year would increase from 44 to 46 cents per share, up primarily on the sales strength of DSS, computers, wireless and mobile electronics, and major appliances. However, investments in Divx could reduce earnings substantially for the second half, during which the pay-per-view DVD alternative will get its official launch.

CEO Richard Sharp recently admitted that outside funding is needed to prevent the company's bottom line from taking a hit. Circuit City has been soliciting potential investors for its controversial subsidiary, Digital Video Express, but none have committed. "We remain in discussion with a number of entities," Sharp says. "If we do not obtain additional funding before the end of the fiscal year, we anticipate that Divx will reduce the Circuit City Group's net earnings by approximately 45 cents per share during the second half of the fiscal year."

Company profits were up 41% for the first quarter compared to the same period a year earlier, but Circuit City's stock has declined in recent weeks, losing approximately 45% of its value from a mid-July peak. The "core business" is "positive," according to Wheat First Union analyst H.B. Thompson III, but difficulties with Divx will hold it back.

On September 1, Virginia's Richmond Times-Dispatch business columnist Greg Gilligan reported that Circuit City had originally planned to spend as much as $100 million on marketing efforts for Divx, but it might have to cut that back to $60 million if new investors can't be found. Divx had been scheduled for a late-summer debut after test marketing in Richmond and the San Francisco Bay Area, but problems with obtaining a sufficient variety of titles from film studios has caused a postponement of its national launch until later this fall. Circuit City is Richmond's second-largest employer. "When Circuit City sneezes, the whole city of Richmond catches a cold," goes the standard joke.

A reduced marketing budget will almost certainly decrease the number of Divx machines sold to consumers. Sharp admits that reaching his goal of selling almost a quarter-million Divx players in the first year will be difficult under the present circumstances, but he remains unwavering in his devotion to the cause. "Our commitment to Divx reflects our belief that this revolutionary system can take home video to a new level of consumer convenience," he promises, "and thus generate exceptional returns for Circuit City shareholders."

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