DIVX: ANALYSIS OF A BUNGLED PRODUCT LAUNCH by Richard Ewing

It has been curious to see a lot more talk about Divx on many popular e-forums than in the previous weeks leading up to the Divx launch. While some additional Divx chatter is to be expected, the sheer volume of it has not gone without notice. In that chatter, the amount of pro-Divx posting has certainly increased.

While I'm sure that some of the pro-Divx postings are genuine, I can't help but to think back at a comment made at the RCA/Divx press conference regarding the impact of web sites like this one on Circuit City's marketing campaign for Divx. All of the anti-Divx talk over the Internet is having a clear effect on people's purchasing decisions. Circuit City clearly underestimated the impact of the web on the issue of Divx but I'm not quite sure how they could have ever fumbled so badly. A company that knows that early adopters are the key to the adoption of a new product technology should have been better about its own marketing efforts.

Divx began on the disastrously first step of insulting those very same early adopters last year with comments from Circuit City's CEO Richard Sharp. Now that they are trying to focus the debate on a more "soft sell," they do acknowledge that the same high technology minded folk who surf the web are their very same first Divx customers. Amazing, but any first year business school student should have been able to figure this out.

At this point, all that Circuit City can do is a kind of PR damage control. Some of that effort appears to be what we are seeing across the Internet. Divx has acknowledged that the anti-Divx web sites are having a clear effect on their marketing efforts. Now we are seeing a campaign, organized or otherwise, to blanket e-boards like this with debate on the merits of Divx. While some of us deride these people as trolls, I welcome the debate since it gets a chance to air all the issues of the format. Ironically enough, one of Divx's biggest challenges to web-savvy people may not be the anti-Divx message boards but the fact that a search of "Divx" on Yahoo brings up 7 anti-Divx web sites under the topic "Divx: Consumer opinion" before the real www.divx.com site even shows up.

Home Theatre magazine has a great article about the process of the purchase of a Divx player. If Circuit City and Good Guys are smart, they should take to heart the article's points if they ever really want this format to succeed. While Home Theatre magzaines official stance is very anti-Divx, the article and the subsequent review of the Zenith/Inteq player was one of the most balanced I've seen yet.

Now to the cold facts. Divx is facing an increasing uphill struggle and the battle may already be lost. Anyone at Divx who says that the purpose of Divx originally was not to "take over" the DVD market clearly has lost touch with reality. Divx didn't have to say this in order for consumers and other companies to come to this conclusions. The ire of Sony and the outright declaration of war by Time/Warner over this issue cannot be ignored. Neither Sony nor Time Warner are small concerns that will roll over quickly to demands of the world's largest consumer electronics retailer. Circuit City grossly underestimated the resolve of these companies.

Home Theatre magzaine did stipulate that there are some noted advantages to the Divx model. I will admit that there have been plenty of times I did not want to throw on clothes and return my movie rentals before the store closed at 11 PM. Home Theatre did say that the operation of the player was fairly straightforward in most cases and that the player didn't cut off a running movie at the end of the 48 hour period. Also, the phone interface seemed to work as advertised and didn't interfere with normal household usage.

But at the same time, Divx is up against forces, most of which are its own doing, that from a business sense makes it look less likely that it will succeed. These problems are as follows...

1. The reluctance of other retailers to sell Divx players. I'm not sure what Circuit City said to Good Guys to cause them to commit to Divx, but most of the other large retailers like Best Buy, Wal-Mart, Sears and Dayton-Hudson (Target) have no interest in selling players that put profit on every sale into Circuit City's hands. A better solution for Circuit City would have been opening up the group of investors in Digital Video Express to other retailers. An agreement could have been reached that licensing profits to the players could have been evenly distributed among the investors or even kept for the investor that sold the player. That would have given Circuit City's competitors some incentive to sell Divx units. Sure, there are other retailers selling Divx players but right now they are too small or financially weakened to make a real difference right now. Circuit City would have enjoyed lesser profits from this model but they would have succeeded in spreading the risk out more. Circuit City is now trying to secure addtional funding from other sources to defray the cost of Divx marketing, but it's very late in the game for that and there isn't enough reward for the risk of an investor to cough up 40-50 million dollars now.
      
2. The problem of Divx Silver. Let's face it, a Divx silver upgrade has no price advantage over just buying the Open-DVD version in the first place and maybe Circuit City should have tried to make a better cost advantage proposition to its consumers. But the cold fact of the matter is that Divx-participating movie studios were promised a particular level of profit on a Divx rental or Silver upgrade and Circuit City can't change those numbers without significantly affecting their own cut. With Circuit City already feeling the pressure of Divx's development and marketing costs, they don't have a lot of flexibility to move on this issue.
      
   And then there's Divx Gold. That's a non-starter and proof that Divx wanted the entire DVD market. At least it's been shelved for now under the current marketing plan. Also, cornering the market in a consumer technology generally raises the interest of the justice department these days. Circuit City may indeed be glad that Divx Gold may never see the light of day.
      
3. The involvement of the Hollywood law firm that came up with Divx in the first place. As many lawyer jokes as we make, the fact of the matter is that Divx was created to change the rental model back to the favor of the studios, not the video rental dealers. 10 years ago, Hollywood took the issue of control over the video rental market to the U.S. Supreme Court and lost. Since then, Hollywood has made billions off the rental model they tried to kill, but they would still love to have control if possible. Divx gives them that control, which is why Blockbuster and other video rental places *hate* Divx since it effectively kills them. Even David Ingram, the president of the largest distributor of movies to video stores called Divx for what it was a threat to all his customers. Divx has a huge problem trying to joust against the established marketplace. Finally, the lack of all Divx titles having a "silver conversion price" demonstrates that Divx does not call the shots when it comes to the distribution of its titles, the studios do.
      
4. Lousy initial marketing that is difficult to make up for now. Remember when Divx proudly claimed that its new protection scheme was a great thing for consumers? What it ended up doing was telling its potential customers that they were all a bunch of thieves who couldn't be trusted. How anyone let this line of reasoning get into real Divx literature is beyond me, but its only a symptom if the problem Divx has had telling their story. Often, they have been their own worst enemy.
      
5. The effect of the Internet. The Web has produced a large group of technologically savvy shoppers over the last five years. Not coincidentally, many of them are the same "early adopter" types that typically invest their money in a new kind of consumer technology. They pride themselves on keeping in touch with trends and keeping their friends on family on the right track by buying the right things. Virtually all new technologies introduced in the last 30 years has required these people to "buy-in" to the technology first to guarentee success. The Internet has also given early-adopters a powerful tool to communicate with each other their interests in consumer electronics.
      
   The problem is that Circuit City thought that just because its business model appealed mostly to the wide rental community that it could ignore or bypass the early adopters. Bad mistake. Again, any first year business student knows that your chances of success without this critical group are slim-to-none. But Richard Sharp blew his chance to appeal to this market at Divx's initial launch, causing the early adopters to launch their anger at web-based forums everywhere. Before they knew it, every early-adopter and a lot of people outside this buying group knew of the overall anger that the first early-adopters had when they found out about Divx. Divx was and is now faced with a public not only disinterested in their product, but downright hostile to the idea of it succeeding at all. 6.
      
6. The format issue. Despite rhetoric that Divx preaches that Divx is an "enhancement" rather than a format, the reality says otherwise. A better analogy for a DVD enhancement would be DTS sound. If a consumer bought a DVD with a DTS soundtrack and they owned an older player, he/she could still enjoy it because of the Dolby Digital 2.0 soundtrack included for compatibility purposes. Divx discs cannot be played on conventional DVD players because Circuit City chose to "end-run" the DVD standards committee and bring out a product that flew in the face of the original DVD specification that took three years to finalize. Circuit City cannot escape this fact due to marketing doublespeak. And the DVD community cannot afford another VHS vs. Betamax debate. If Divx had been a participatory technology early on instead of an exclusionary idea from the rest of the DVD world, this wouldn't have been a problem. But again, Circuit City fumbled another critical ball.

How could Circuit City get the launch of Divx so wrong? There are many factors but the underlying issue is return on investment (ROI). If Divx were to succeed, Circuit City would reap *billions* of dollars on an investment of about $150 million. The problem with ROI in this business model is that they incurred a great deal of risk. Going through normal channels in the DVD standards committee and letting other companies get a piece of the Divx action would have given them a better chance, but lesser profits over tthe next ten years. Given how Circuit City has bungled Divx, lesser profits seems better that no profits at all.

»» Back To SPECIAL REPORT ARCHIVE