Random Thoughts – Randocity!

In 1998 (almost 20 years ago), a new DVD rental format arrived named DIVX (aka Digital Video Express). It purported to be a DVD rental format that had no late fees and the media didn’t need to be returned… at least those were the benefits purported to the consumer. What they didn’t tell you was that you would need to buy a brand new expensive DVD player to play them. Let’s explore.

DIVX versus DivX

To get this confusion cleared up quickly, DIVX was a brand name assigned to a new DVD rental standard introduced by Circuit City and the entertainment law firm Ziffren, Brittenham, Branca and Fischer in 1998. However, it’s not entirely clear what problem Circuit City was trying to solve by introducing the DIVX rental format when DVD was already useful enough for rentals.

The DIVX brand name, introduced by Circuit City, bears no relationship to the DivX or Xvid video encoding standards. Even though there is no relationship by Circuit City to the DivX encoder, there is a slight reverse relationship from the DivX encoder to the DIVX brand. In fact, the original name of the DivX encoder was actually DivX ;-)

Yes, this encoder name included the winking smiley. This smiley was actually a nod (and sarcasm) towards Circuit City’s then soon-to-be-defunct DIVX rental standard. Here’s what the DivX Wikipedia article says of the early days of the video encoder named DivX ;-).

DivX ;-) (not DivX) 3.11 Alpha and later 3.xx versions refers to a hacked version of the Microsoft MPEG-4 Version 3 video codec (not to be confused with MPEG-4 Part 3) from Windows Media Tools 4 codecs. The video codec, which was actually not MPEG-4 compliant, was extracted around 1998 by French hacker Jerome Rota (also known as Gej) at Montpellier.

So then, what does DivX ;-) have to do with the DIVX DVD format? Not much other than DivX ;-) making a tongue-in-cheek poke at Circuit City’s DIVX rental format. Hopefully, this clears up any confusion around this convoluted naming.

DIVX as a rental standard

The primary impetus to build the new DIVX rental standard by Circuit City was probably brand recognition. At the time, Circuit City was considered the second largest electronics retailer behind Best Buy. The Circuit City management was obviously willing to do anything to become the number one electronics retailer, including dreaming up technology ideas that didn’t need to be built. Meaning that by 1998, Blockbuster had the rental market sewn up. However, Circuit City sought to disrupt that by trying to create a new standard that not only simultaneously upset Blockbuster’s cart, but introduced a new format that would bring more recognition to the Circuit City brand (and, of course, generate more hardware and rental sales). As a side note, Circuit City was also the second largest appliance retailer behind Sears at that time.

Here’s the Circuit City DIVX promo video (skip to 0:17 to begin an unrealistic family scenario, press 1 to skip the intro entirely or jump to 4:19 to begin use case demonstration). Don’t feel obligated to watch the whole thing.

Now, let’s watch this training video to better understand how then CEO Richard L. Sharp saw DIVX’s future within Circuit City. Pay close attention to his statements during the opening segments of this video. Again, don’t feel obligated to watch the whole thing.

Unfortunately, Circuit City’s management goals were way too ambitious and overconfident. They also dropped into a rabbit hole with this DIVX venture that took them away from their core retail business and caused them to spend millions to create and support a format that didn’t live up to the hype. In fact, it might even be considered that failure of the DIVX format ushered in the downward slide of Circuit City into oblivion. While Circuit City was a reasonable electronics retailer, they didn’t have any presence in the video rental market. When they introduced DIVX, the assumed strategy was to add $4-5 rentals and boost DVD player sales in the Circuit City and Good Guys stores. The management team thought that this rental business would somehow take them to the next level. If only they had adopted standard DVD rentals instead.

As shown in the demo, DIVX boasted a 48 hour rental period with no need to return the disc when the rental period ended. However, to use DIVX, you had to invest in a brand new type of DVD player that also supported the DIVX format. Tada! Here’s the catch. This is also where Circuit City comes into the picture. You’d have to run on over to your local Circuit City (or one of several other retailers owned by CC, like Good Guys) to buy one of these newfangled DIVX DVD player doodads. A doodad that might cost you $100-150 more than a DVD player without DIVX. At least, this is what the management at Circuit City hoped you would do.

This idea for introducing this new format was a huge misfire for Circuit City. In addition to the picture quality problems described just below, the DIVX player contained a modem that required the player to dial-up and register itself before you could play any DIVX discs. It also apparently dialed-up twice a day to register any new purchases and download advertisements. This modem required a physical telephone line plugged into the unit to dial home. This then authorized not only your player, but supplied the player with the necessary information to authorize playback of a rental disc you recently picked up. This concept all worked reasonably well, except for the fact that several privacy groups felt that this dial home feature meant that Circuit City (or whomever) could keep tabs on your viewing habits. Little did we know then exactly how much spying would become commonplace with sites like Google and Facebook. Anyway, that privacy concern didn’t help boost efforts to sell DIVX into main stream. Of course, it wasn’t the only problem.

Poor Movie Quality

The actual DIVX DVDs themselves failed to contain the more advanced features found on a standard DVD, such as 16:9 anamorphic widescreen needed to fill a large flat panel. DIVX movie discs also failed to contain alternate audio commentary and extra features commonly found on standard DVDs. Instead, these DIVX DVDs simply contained 4:3 cropped pan and scan versions of the film… a subpar version. This was a huge misfire for the format. When you can get a better looking film on standard DVD, why would you rent the crappier DIVX format for $5? Yet more consumer dilemma.

Consumer Misunderstanding

Because a DIVX DVD appears to be a standard DVD (it looks the same), some consumers didn’t understand that they needed to buy a new player to play the DIVX media. Instead, they bought the DIVX disc, took it home and inserted it into their regular DVD players only to find that it failed to work. They would then find that they couldn’t return the disc because it was open. The misunderstanding of this new format caused grief among would-be consumers and left a sour taste for this format. This problem only served to fracture the DVD market. Worse, who’s willing to buy a brand new and expensive DIVX player just to recover a $5 loss? Not many. This problem didn’t serve Circuit City well.

It seems that Circuit City’s commercials likely didn’t much help clear this misunderstanding. Let’s watch a Circuit City commercial from this era with that same guy from the Demo reel:

There were also a number of commercials released during 1998 and 1999 that failed to mention DIVX at all… like the following commercial from 1998. You’d think a company like Circuit City spending millions to try and force adoption of their new brainchild would advertise the DIVX format on every commercial, if even only a mention at the very end. Nope. You can’t sell something if you don’t market it.

Landfill Problems

One of the touted benefits to consumers would be throw-away discs. You’d spend $4-5 for each disc, but you didn’t need to return any discs after the 48 hour watching period was over. This also meant no late fees. You simply tossed the disc into the garbage can. This idea was to hit Blockbuster where it hurt. Blockbuster was the king of late fees at the time. A few months after introduction of this idea, Circuit City stores set up recycle containers to entice users to recycle used DIVX discs at Circuit City stores instead of throwing them into the trash. Not sure how well that worked. I don’t think this wasteful idea went over well with consumers, particularly after AOL’s constant barrage of wasted CDs ended up everywhere at the time.

Licensing Issues and Retailers

As a result of Circuit City’s involvement with DIVX (along with a legal team), for other retailers to sell DIVX compatible players required paying a licensing fee to Circuit City. As a result of the licensing fees, Best Buy and other retailers shunned the players choosing to avoid paying those fees. It’s no wonder, either. Why would you ever agree to pay another retailer money for the privilege of selling that retailer’s product in your store? You wouldn’t. This was a completely foreseeable miscalculation by the Circuit City management team.

This meant that Circuit City and other stores owned by Circuit City ended up the sole sellers of these players (and the DIVX format). Without wider support via other retailers, this format really had no hope of surviving. Circuit City should have dropped the idea for licensing fees quickly just to get better entrenchment for the format. It’s not like it wasn’t already costing Circuit City a mint to keep this format alive. Stupid is as stupid does.

Movie Studio Support

On the plus side for the format, because of what studios considered weak protection technologies associated with standard DVD (CSS), many studios jumped on board with the DIVX’s CSS + Triple DES protection standard. This boosted the initial ~20 titles when it arrived in summer of 1998 to well over 400 titles by early 1999. Some early studio adopters were 20th Century Fox, Disney and Dreamworks. Wikipedia says:

The initial trial of the DIVX format was run in the San Francisco and Richmond, California, areas starting on June 8, 1998. Initially only a single Zenith player was available, along with 19 titles. A nationwide rollout began three months later, on September 25, with players and 150 titles available in 190 stores. In total 87,000 players were sold during 1998, with 535,000 discs across 300 titles being sold.

The studios felt that the DIVX format offered a more solid encryption technique to protect their movie content. I’m sure they did. Due to the arcane structure needed to authorize the movie rental, it meant jumping through hoops just to get your movie to play. The movie studios love making consumers jump through hoops to play their content.

This quick studio adoption rate was a bone of contention because some studios began exclusively releasing their films onto the DIVX format instead of DVD. This issue caused further problems for the format and more consumer backlash erupted and threatened to fracture the industry into a new format war.

On the other hand, Sony and Warner Home Video, which at the time apparently comprised up to 40% of the movie rental market, refused to release their movies on DIVX. The primary reason for this refusal was that both of these companies had a stake in the success of standard DVD format. Supporting the DIVX standard would be a conflict of interest.

By spring of 1999, the number of titles had increased to over 410. Little did Circuit City or the consumers realize the end was near for DIVX. Due to mounting pressures and costs, Circuit City didn’t realize how much of an albatross that DIVX would become. There was just no way Circuit City could go this new format alone without wider industry investment and consumer acceptance.

Overconfidence

Circuit City’s biggest mistake was its heavily miscalculated financial ability to support this newly created format. After all, Circuit City is a retailer, not a tech innovator. Driving a new tech format through a retail company already has many hurdles and reputational issues to overcome. Circuit City was also too confident in its ability to entice other retailers to make this format succeed. Those retailers didn’t bite. Even in 1998 when this format came about, Internet RFCs were still a thing. Circuit City entirely avoided the RFC and Whitepaper approach that had become commonplace to announce new technologies. Instead, they launched this format without much fanfare hoping that the party train would show up. It didn’t.

Because of all of the above and including backlash from consumers and lack of retailer support, Circuit City way overestimated its ability to get this format adopted… and why would anyone want to adopt this format? With licensing fees, there was no incentive for non-affiliated retailers to adopt some other retailer’s idea as practical or realistic… especially when the standard DVD already provided a better rental and sales format.

Without the necessary support by consumers and other retailers alike, the format was doomed from the go. By the summer of 1999 (just 1 year after it launched), the format officially died on June 16th, 1999 (almost exactly year since it had launched). However, due to format commitments to existing consumers, it would limp this format along until 2001. Wikipedia writes of the DIVX demise:

The format was discontinued on June 16, 1999, because of the costs of introducing the format, as well as its very limited acceptance by the general public. It was shot down by Blockbuster Video stores not wanting to carry it. Also Circuit City announced a $114 million after-tax loss, and Variety estimated the total loss on the scheme was around $337 million. Over the next two years the DIVX system was phased out. Customers could still view all their DIVX discs and were given a $100 refund for every player that was purchased before June 16, 1999. All discs that were unsold at the end of the summer of 1999 were destroyed. The program officially cut off access to accounts on July 7, 2001.

Retail, DRM and Tech Innovation Don’t Mix

Due to the conflict of interest between the Circuit City chain, other retailers, licensing and this new format, there was ultimately no way this idea could survive. Circuit City made so many missteps along the way to adoption, the format was doomed from the outset. Even the management should have been able to foresee this event. If Circuit City had spun off the DIVX idea into a separate holding company that Circuit City had founded and enticed other retailers in (to avoid licensing requirements), the standard might have had a chance of surviving. While DRM was a relatively new thing in 1999, consumers could already begin to see how it could become a problem in the way they viewed content with DIVX (and other formats).

The Future of the Movies at Home

Even if DIVX had managed to make the slightest dent in the rental market (hint: it didn’t), the future of Internet streaming movies would have still seen to its demise. Even in 1997, a year before DIVX came to exist, Reed Hastings was in the process of setting up Netflix. By 2002, Redbox led the downfall of Blockbuster through it’s DVD rental kiosks. Some people blame Netflix on the death of Blockbuster, but it is firmly the self-service and low cost nature of the Redbox kiosk that ushered Blockbuster out the door. Yes, Netflix started Blockbuster’s problems, Redbox nailed Blockbuster’s doors shut. Blockbuster simply couldn’t compete with $1 DVD rentals at a time when Blockbuster was still charging sometimes $5 per disc. Netflix chose a per month plan fee with limits and was (and still is) charging well more than $1 per disc that Redbox adopted. In fact, Redbox is still the best deal going for both DVD and Blu-ray rentals, even though their prices have somewhat increased.

Getting back to DIVX, Netflix’s movie streaming, along side Redbox, Amazon, Hulu, Vudu, Crackle, YouTube, YouTube Red and others would have killed the DIVX DVD format anyway. Ultimately, DIVX didn’t have a place in the market or a problem to solve. It was already behind the times when it was introduced by a company that didn’t have the capital to invest in the longevity of such a format.

In short, Circuit City bit off well more than they could chew with DIVX. Today, these DIVX players are essentially worthless for playing DIVX format discs. Because the players could play standard DVD format discs also, this is their only redeeming point. There’s no way to authorize the players or discs as the service has been dismantled. If you have any DIVX discs in your collection, they can no longer be played as there’s no way to authorize the players or discs.

Even today, DVD is so behind the times when compared with UltraHD 4K, even that would have killed DIVX in short order. Ultimately, even if DIVX had managed to survive longer than 1 year on the market, it would have eventually died because of movie streaming services. There was just no way for DIVX to compete with that. However, it died long before that happened simply because of Circuit City.

Final Death of DIVX

The DIVX format supported limited viewings as well as unlimited viewings (DIVX Silver). Limited viewings of a disc were based on your rental period. Unlimited viewings cost more and was known as DIVX Silver. Why this is important is that the players still needed to dial home to verify the viewing of each play of the movie. After June 30, 2001, the DIVX service was shuttered including the dial home feature. For those who had purchased into DIVX Silver for some of their films, they could request a refund before the service was shuttered. This meant that any further viewings of DIVX movies after June 30, 2001 were impossible, rendering the DIVX format and the DIVX portion of the players useless.

The LA Times wrote of DVIX’s failure on June 17, 1999:

But the venture never connected with consumers and represented a major miscalculation of both the market and the video industry by the nation’s second-largest consumer electronics retailer.

The failure of Divx is an embarrassment for Richard Sharp, chief executive of Circuit City Stores. Sharp fought an uphill battle to promote the venture, which became a significant drag on Circuit City’s bottom line.

Sharp declined to comment Wednesday, but the market cheered the decision to junk Divx. Circuit City’s stock closed at $90.38, up $8.38 on the New York Stock Exchange.

A Cautionary Tale

This whole DIVX situation serves as a cautionary tale for early adopters of technology when produced by a company that’s never been in that business. This is particularly a problem considering the DIVX players required so much constant hand-holding with home base. If that home base connection was unavailable (i.e., Circuit City closed the service), the movies would stop working, which is exactly what happened in the end. Why would you, as a consumer, want to buy into a media format that’s so heavily dependent on a third party’s continued success? The other problem is that the players chose to use a phone line instead of phoning home over the Internet. Of course, had the format lived, it would have been relatively trivial to introduce new players that supported Internet always-on capabilities.

The real cautionary tale here is that consumers should never early adopt into entertainment content that relies on phoning home to authorize each viewing. One could argue that Netflix is a form of this, but I’d argue it isn’t. When you use Netflix, the movie is either there or it isn’t. There’s no pulling-the-rug-out-from-under tactics. Meaning, you leave your media sitting for a few months only to find that it will no longer play. Standard DVD movies have never required authorization per play. However, Blu-ray technology has instituted a somewhat similar phone home approach, but so far this hasn’t been an issue. However, should Sony die or the servers cease to exist that enables a specific Blu-ray to function, we could find that Blu-rays become coasters at some point in the future like the DIVX media.

If you happen to own a DIVX player and any DIVX media, know that it’s dead and it’s not coming back. There is really no way to revive it. The decryption keys and the authorization service that allowed each movie to work have long been dismantled. As far as I know, there has never been anyone willing to reverse engineer this phone home service to allow old DIVX media to play. Though, why bother? The movies were mostly of inferior quality. Other than as a novelty of showing a functional DIVX movie off on a YouTube electronics history channel or possibly for nostalgia, there’s no other legitimate reasons to want to watch DIVX movies today.

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