Divx Gains Another Retail Ally

The format war is heating up. Circuit City has enlisted a third ally as it prepares to go nationwide with the launch of Divx. On August 11, Denver's 30-store Ultimate Electronics chain threw its weight behind the pay-per-view format. California-based retailer The Good Guys has been a Divx partner since early in the game.

Ultimate Electronics operates stores under its own name in Utah, Colorado, Oklahoma, New Mexico, Nevada, Idaho, and Iowa. It also runs Audio King outlets in the upper midwest, and nine SoundTrack stores in Colorado.

Extolling the benefits of the Divx model, company President David Workman says, "We believe that Divx will generate return traffic for software purchases as well as expose the consumer to new related products such as digital television and home theater."

The fact that Divx discs are not returned to a rental outlet has been criticized by some observers as a potential loss of revenue for these businesses; customers who return videos often rent something else on the way out. However, Workman says that Divx "uniquely addresses the rental market and will only help the overall demand for the DVD platform."

Circuit City has been test-marketing Divx in Richmond, VA and the San Francisco Bay Area for most of the summer. Paving the way for the format's nationwide introduction, a rash of recent television ads emphasizes the ease of use and peace of mind that will come to consumers when they know the discs don't have to be returned.

At present, major video retailers like Blockbuster and Tower Records have no plans to stock Divx discs. They will be available only at Divx hardware retailers, a fact that could limit the format's market penetration.

Retailers make approximately one dollar for each Divx disc they sell. After that, the film studios and Digital Video Express share the revenue for repeat viewings. "The retailers are shut out," according to Tower's VP of Video Sales John Thrasher. "The amount of money we make on it is negligible."

Divx has been excoriated in the press for the fact that Digital Video Express can compile a profile of its users based on their viewing habits---something local independent dealers can also do---and because its business model borrows from both the buy-to-own and pay-per-use models. In effect, a customer buying a Divx disc is buying a key to turn on the movie at a later date, which is activated by paying a viewing fee. Many analysts believe that a large portion of private entertainment---from single-song downloads to deeply engrossing interactive games---will adhere to some variety of pay-per-use.

Defying traditional concepts of ownership and usage rights is a crusade Divx must carry out in order to reach profitability. Tom Adams of Adams Media Research in Carmel Valley, CA, told the San Francisco Chronicle: "Like anything that attempts to completely change the business model of the industry, it's a hugely risky undertaking." However, Adams admits that one video-industry survey showed that 38% of video customers hate returning rentals.

Divx hardware---DVD players modified with modems, phone jacks, and computer-control circuitry---is being supplied by JVC, Panasonic, Zenith, Pioneer, and Thomson Consumer Electronics.