DIGITAL VIDEO EXPRESS, PARTLY OWNED BY CIRCUIT CITY STORES INC., IS OFFERING A $100 REBATE TO CONSUMERS WHO BOUGHT DIVX VIDEO DISK PLAYERS BEFORE WEDNESDAY. A GRAPHIC IN YESTERDAY'S BUSINESS SECTION MISSTATED THE TIME PERIOD. (PUBLISHED 06/18/99)

The museum of failed consumer products is filled with exhibits such as the Betamax videocassette player, the eight-track tape and New Coke. And now there's Divx video-rental technology.

Circuit City Stores Inc. and its partner conceded yesterday that their plan to replace videocassette rentals with video disks that don't have to be returned was a resounding failure.

From the start, Divx has been mired in problems. In a battle much like the one in the 1970s and early 1980s between the Betamax and VHS formats for VCRs, Divx competed with the standard DVD format for consumers looking to play digital video disks. Although Divx, unlike Betamax, was able to play videos encoded in its rival's format, it met the same fate.

The Divx format was designed to be a solution to the hassle of returning videos to the store. A Divx disk, which looks like a CD and whose quality of picture and sound is superior to that of a videocassette, costs $4.50 for unlimited viewings during a 48-hour period. After that, the disk won't play unless it is "recharged" for another two days at the cost of $3.25. Billing is done through the phone line that connects to the Divx player.

And that, as it turned out, was a major consumer complaint.

"That was the main thing: I did not want someone keeping track of what I watched and when," said Christopher Blount, an Air Force electronics technician who lives in San Antonio.

The Divx technology ran into resistence from movie studios, even though Richmond-based Circuit City's partner -- the Los Angeles law firm Ziffren Brittenham Branca & Fischer -- specialized in the entertainment industry. Retailers also balked.

"Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas," said Richard Sharp, chief executive of Circuit City.

But attempts to woo retailers were doomed even before they started, said analyst Kenneth M. Gassman Jr. of Davenport & Co. in Richmond.

"Why didn't more retailers carry it, especially Best Buy?" Gassman said. "The answer is: Would you put profits in the pockets of your arch competitor?"

In the spring, rumors that Divx had inked a deal with Viacom Inc.'s Blockbuster video unit in which the movie-rental firm would rent its disks sent shares of Circuit City stock soaring. A company official familiar with the discussions said the agreement was quashed at the last minute.

Blockbuster, he said, wanted to purchase the entire Divx business. But two movie studios, whose approval was required to seal any deal, nixed the idea. They "said no because they thought Blockbuster was already too powerful," he said.

Industry observers expressed skepticism about a possible deal between the two retailers. "It's like mixing oil and water," said Mark Mandel, a retail analyst with the brokerage ABN Amro in New York. "The Divx technology was really an affront to the rental model."

Wall Street cheered the decision to kill Divx, sending Circuit City's stock soaring $8.37 1/2 on the New York Stock Exchange to close at $90.37 1/2. Analysts said Divx's death will allow Circuit City to focus on its core electronics operation as well as its CarMax automobile dealerships.

Also yesterday, Circuit City announced a two-for-one stock split and said it will take a $114 million charge to eliminate the Digital Video Express division in the first quarter ended May 31. About 300 employees will lose their jobs. As a result, the retailer will post a loss of $88.2 million in the quarter, compared with a $12.5 million profit in the year-earlier period. Revenue rose 19 percent, to $2.7 billion from $2.3 billion.

The intense emotional response to Divx has surprised many industry observers. Over the past two years, the video format has inspired jeers, intense hostility and a host of Divx-bashing Web sites. Consumers who bought the first DVD players were upset because the standard players do not play Divx disks.

"The reaction has been consistent from the start, and it was consistently negative and visceral," said Mark Fleischmann, senior writer with Etown.com, an Internet site that follows consumer electronics issues. "I have never seen such a negative to any new consumer electronics product since I began writing about this in 1980."

Consumers just didn't like Divx as much as the competition. Often, DVD offers extra goodies such as director commentary, mini-documentaries about the film's creation and wide-screen format, customers said.

"If you're going to market this new concept, at least make it competitive," said Tom Longo, a retired Foreign Service officer who lives in Ocean City.

Longo and other consumers who purchased Divx players won't entirely lose out, because the machines were built to also accommodate DVD disks, Divx officials said. Additionally, Circuit City is offering $100 rebates to consumers who have recently purchased Divx players.

Rebates, Refunds and Exchanges

Own a Divx player?

Divx players also accommodate DVD disks, but Circuit City is relaxing its rules to appease consumers who may not want outdated technology. The retailer will allow customers who have purchased Divx players in the past 60 days to choose one of the following: a $100 rebate, an exchange or refund, or the current reduced prices. Prices of Divx players and disks will drop as Circuit City seeks to get rid of the products.

Rebate forms will be available at www.divx.com, www.circuitcity.com or Circuit City stores, or by calling 1-888-639-DIVX.

CAPTION: Richard Sharp, Circuit City's chief executive, extols the virtues of the chain's Divx concept compared with the regular DVD format at a Richmond store in October 1997. Yesterday, he said that, lacking retailer and movie studio support, the business isn't viable.

CAPTION: Divx machines still play DVDs, but the pay-per-play concept joins such failed formats as eight-track and Betamax.