Sears Drops Out, RCA Joins Divx, Launch Costs Rise

In a move that reportedly caught Circuit City CEO Richard Sharp by surprise, retail chain Sears, Roebuck & Co. has decided not to carry Divx. Apparently, the format's overwhelmingly negative pre-release publicity was taken seriously by the retailer.

Divx's launch costs are skyrocketing. A group of 15-second "teaser" commercials are now running in advance of a $100 million national advertising campaign being prepared for later this year. Stockholders are rumored to be grumbling about the cost of payouts to movie studios. Circuit City, which has already contributed $86.8 million to Digital Video Express, has promised a minimum of $112 million in royalties to the studios. This represents an average of almost $19 million for each of the six film companies that originally agreed to release titles in the controversial format. Most have since announced their intentions to release films in the open format as well.

An $11 million payout is due from Circuit City to the studios in fiscal 1999, increasing to $26 million in 2000 and $32 million in 2001. Assuming Divx finds its sea legs, software licensing costs will decline after that, to $20.5 million in 2002 and $14.5 million in 2003.

Circuit City is also in the midst of a massive expansion. The 558-store retail chain opened 57 new stores last year and expects to open an additional 48 outlets this year.

Digital Video Express is scrambling to unload the Zenith logo due to "poor brand image" (the official reason) in addition to Zenith's unreliable prototypes and recent bankruptcy. At the same time, Thomson (makers of RCA and ProScan products) has signed on to manufacture Divx machines. "Divx is going to happen," declared Thomson COO Jim Meyer as he announced that RCA's Divx machines will hit the market this summer. Matsushita (parent company of the Panasonic brand) is still committed to Divx as well, but other interested manufacturers have quietly backed away. RCA hopes to sell as many as 1 million DVD players, including Divx machines, in the coming year.