The Disaster of DIVX

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By: Eric Flapjack Ashley (@flapjackashley)

A few months ago, I wrote about format wars in the technology world. Two notable ones were the VHS vs. Betamax videocassettes in the 80s, and the battle between Blu-ray and HD DVD to be the High Definition physical medium standard. One footnote that is often overlooked – perhaps because it wasn’t around long enough to be an actual long term format to be in a war – is Divx. This horrible idea took on DVD as that format was just taking off itself in 1998. And what is Divx, you ask? Well, let’s dig into it, and find out why it lasted less than a year and played a big role in tanking an electronics retailer chain that had been around six decades.

What Is DIVX?

In 1998, DVD was just taking off – players started to become more affordable, discs were more commonly found in retail outlets, and people started to see the real jump in quality as DVD became to supplant VHS as the home entertainment medium of choice.

But some film companies were not initially warm to the DVD format. The VHS rental business was still a major moneymaker – studios could charge rental chains such as Blockbuster upwards to $100 a copy for new release movies to rent in their stores, while DVD was retailing for $20-30 that people could buy and own forever. While it seems commonplace now, major studios like Disney, Fox, and Paramount did not support DVD until late in 1999 or even later.

Before Divx became known as the video codec it is today, the name Divx meant something completely different. It was introduced and exclusively marketed and sold by Circuit City, then the no. 2 electronics chain and a major force in the retail business. Divx used the same technology as DVD, but with a few major differences. Divx discs contained full movies, but its pricing scheme mirrored a Pay-Per-View format: the discs were sold for $4.50 (on average) and came with a viewing window of 48 hours. The players would connect to the internet via phone line and the movie could be watched an unlimited amount of time for two days. After that, if you wanted to watch it again, it would charge another amount – usually $2.50 or so – to watch for another 48 hours. You could also upgrade select movies (based on the studio’s limitations) to Divx Silver that would allow for unlimited plays for a fee and essentially made the cost equal to that of a DVD.

The “Benefits” and the Drawbacks

Divx was sold as “The Best Way to Watch Movies at Home.” There was a big backlash against late fees by stores like Blockbuster Video. Divx would eliminate that, giving the consumer a full movie at not much more than a price of a rental, with no late fees or returning the movie. Those initial prices were a fraction of the cost of a new DVD to buy, and Divx players could still play DVD movies as well.

But the drawbacks began mounting even before the format launched in June 1998. The assault Divx launched on DVD, calling it “basic DVD,” instantly rubbed movie fans the wrong way. The players were roughly $100 more than a standard DVD player. The movies came on encrypted DVD but most were in Full Screen (pan and scan) format and came without special features DVD offered. Divx was sold by Circuit City exclusively in the United States, and that company put a lot of money behind it.

Divx had the support of the aforementioned studios, and some major titles – such as A Bug’s Life, The X-Files movie, and Halloween: H2O – appeared exclusively on Divx before DVD.

According to the training videos that are available to watch on YouTube, employees were told to talk about how expensive DVD was, and how late fees of rental stores were outrageous – both technically true at the time. In theory, it would be cheaper for a few years to enjoy a movie in DVD quality 480p if, as many people do, buy a movie and only watch it once a year or so and sit on the shelf the rest of the time. You could recycle movies that you didn’t want to keep for future viewing, and it would end up being cheaper than buying a movie outright that was a stinker. Among the possible questions employees could get in scripted scenarios was “What happens if Divx goes out of business?”

That Was Quick

And going out of business is exactly what Divx did, not even a year after it launched. A horrendous business model couldn’t withstand the barrage of negative press and advertising attacks by Hollywood Video, among others. The supporters of “Open DVD” (i.e. no pay-per-view fee) launched many fan sites dedicated to taking down Divx, and even parent company Circuit City. A holiday season of hardware sales that totalled under 100,000 units, the refusal of Blockbuster Video to carry Divx discs, and the fact that it was available from only one retailer was too much to bear.

The wind down of Divx was shockingly fast. An announcement was made in mid-June 1999, and no further accounts would be opened past that date. Players would still be sold at a discounted price, but without Divx functionality. The website also offered a $100 mail-in rebate to existing customers to help bring down the price they paid for their Divx machines to match current DVD player prices.

But unlike other formats that can still be used after it’s collapse, Divx was different. Since it relied on servers and billing systems, once they shut down, it was really the end – of everything. Servers would remain up until June 30, 2001, so people who had previously bought and registered their players could still watch their movies on subsequent rentals or play their upconverted unlimited play “Silver” discs. However, past that date, nothing would work – the player would have no database to dial into and the machine wouldn’t be able to read that the disc was paid for or not. The discs were completely useless.

Divx was not only dead in the eyes of consumers, but literally dead in every possible meaning of the word.

Aftermath

The curse of Divx was over and supporters of the standard DVD format had won. Holdout studios would eventually embrace the format late in 1999 or shortly thereafter. But parent company Circuit City didn’t come out without a lot of battle wounds. The collapse of Divx cost the company around $114 million upon closure, and an estimated $317 million or more loss over the year Divx was active. This may not seem like a lot to a company that had been around for 60 years, but the marketplace for electronic stores began to tighten, and losses like this were monumental.

Circuit City’s brand name also took a hit from loyal movie fans, offended by the assault Divx launched on DVD, and how dismissive the stores were to DVD – often high pressuring customers to buy Divx instead. Stocks dropped, and Circuit City began operating in the red on a regular basis. The company later would begin to lower starting wages of new employees, swap CEOs, lay off higher-paid associates, and close select stores.

After a bid of $1 billion by Blockbuster Video was withdrawn, Circuit City continued to flounder, filing bankruptcy, and closed all of its stores in March of 2009. It is uncertain just how much the failure of Divx played into the downfall of Circuit City, but it certainly kickstarted a rolling ball of bad press, bad customer relations, and garnered a reputation among the core customers it always banked on it never recovered from. And, in a bit of irony, Circuit City folded up less than a year of the most recent “Format War” of Blu-ray and HD DVD ended, both of which the company stocked.

Legacy

The legacy of Divx is a minor one. In fact, when I posted about it in social media circles, most didn’t even know what I was talking about, and these were movie fans as well. Divx as a name is not dead, however, as it is now associated with a popular video codec.

But the original Divx is important for a major reason: it shows just how an aggressively marketed bad idea can not only suffer failure itself, but also cause irreparable damage to a beloved brand name that had been around for six decades. Divx discs can still be bought as a collector’s item on eBay on occasion, and it is a fascinating piece of history in technology in both its questionable business model and its shockingly short lifespan. It’s an example of a company not understanding the basic concepts of Business 101, and paying for it well after the bad decision faded away from the public eye.


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