TV Digest Breaks Divx Rumor

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page created: 3/25/99

TV Digest Breaks Divx Rumor

As I've mentioned recently, in my daily column here at the Bits, all of the recent rumors regarding Blockbuster's interesting in buying into Divx came from a very reliable source - Paul Gluckman's regular column in TV Digest. Paul is a respected journalist, and I'm confident that he wouldn't raise an issue like this unless he had good information to base it on. That in mind, I thought readers of the Bits might appreciate being able to read first-hand the text of his original articles, to gain a better perspective in the issue. Mr. Gluckman has very kindly secured permission for us to reprint them here. So enjoy, and let me send a quick word of thanks to Paul, and the staff of TV Digest. Enjoy:

TELEVISION DIGEST
copyright 1999, Warren Publishing Inc.
MARCH 15, 1999 VOL. 39, NO. 11

BLOCKBUSTER IN TALKS TO BECOME DIVX EQUITY PARTNER: Cablevision-owned N.Y.-based Wiz chain is within days of announcing commitment to carry RCA and ProScan Divx hardware models and hundreds of software titles, we have learned. We also have learned that Blockbuster is among parties negotiating actively with Circuit City for equity stake in Divx.

At our Fri. deadline, it couldn't be determined whether Wiz commitment to carry Divx would extend beyond Thomson hardware brands. Panasonic Asst. Gen. Mgr. for DVD Rusty Osterstock declined comment and Wiz officials didn't return phone calls. Thomson Vp-Worldwide DVD Product Management Larry McKinney wouldn't confirm or deny report: "If it relates to any of our retailers what they choose to do or not do, I think [it] should come from them." RCA and ProScan Divx introductions at Wiz are expected to be supported by heavy ad and promotion blitz starting in early April.

Ironically, Wiz was one of 5 national and regional chains to participate with Warner Home Video in $20-million 4th-quarter ad and promotional campaign in top 50 markets to boost open DVD as affordable and readily available for rental and sale. Campaign, which involved linking of DVD hardware outlets with software sellthrough and rental stores, ended Dec. 31.

As for reported talks with Circuit City to make Blockbuster equity Divx investor, Divx spokesman said he wouldn't "comment on rumors." Similar reply came from Blockbuster spokeswoman. Spokesman at Blockbuster parent Viacom said his company wouldn't have any comment "at this time." Circuit City executives told financial analysts March 4 that they were in talks with several potential equity and distribution partners and that announcements were expected in "not too distant future." Circuit City is expected to release year-end financial results in early April.

Blockbuster and Divx would make strange partnership in more ways than one, not least of which were derogatory public comments directed toward Divx by senior Blockbuster executives at 1998 VSDA Convention in Las Vegas. Blockbuster Chmn.-CEO John Antioco cited ads trumpeting Divx as alternative to purported inconveniences of video rentals in telling partisan audience of video retailers that Divx "has launched a frontal assault on video stores."

Viacom has told financial community that it's prepared to put some of Blockbuster up for sale in 1999's 2nd quarter in form of initial public offering (IPO). Senior Viacom executives have said IPO probably will be for 10-20% of Blockbuster and will serve as "tracking stock" to gauge Blockbuster value before Viacom aims for complete divestiture later in 1999.

Meanwhile, not all went Divx's way last week, as Future Shop chain, battered by national and regional CE competitors, said it will close its 23 stores in western U.S. and retreat to Canadian base nearly 7 years after sweeping into Pacific Northwest (see separate report, this issue).

Future Shop's plans to close regional office in Kent, Wash., and outlets in Id., Mont., Ore. and Wash. also came after top U.S. officials reportedly told vendors at Jan. CES that they were shifting strategy away from promotional products and toward step-up merchandise, sources said. Chain has 88 stores in Canada, including 7 that it has operated under Computer City banner since buying outlets from CompUSA last fall. Future Shop burst onto U.S. market in 1992 and had expanded to 16 stores by 1995 when it laid out plans for another 22, including major push into Salt Lake City (9). Future Shop was one of 7 "primary" Divx accounts cited by Circuit City as contributing to sales of 87,000 Divx players in 4th quarter 1998 and million Divx discs through Feb. 21.

TELEVISION DIGEST
copyright 1999, Warren Publishing Inc.
MARCH 22, 1999 VOL. 39, NO. 12

CIRCUIT CITY STOCK SOARS ON BLOCKBUSTER-DIVX REPORT: Circuit City shares soared to record high Thurs. on report by Merrill Lynch analyst that company is likely within 3-4 weeks to announce Blockbuster equity stake in Divx.

Report by Merrill Lynch Vp Peter Caruso, citing unnamed sources, said deal could have "significant impact" on Circuit City stock if "this rumor proves to be correct." He said some investors have opted to sidestep Circuit City shares because of uncertainty on Divx, which he said has been "hampered" by lack of independent retail support. However, he said potential Blockbuster-Divx deal would be "that type of turning point that could motivate a lot of investors that had been sitting on the sidelines."

We were first to report that Blockbuster was in active talks with Circuit City on Divx equity partnership (TVD March 15 p9). But unlike Caruso's report, ours didn't speculate on possible timetable for closing equity deal or whether it might be imminent, if deal finally emerges at all. Caruso didn't return our phone calls. Besides information in report we broke last week that Blockbuster was active Divx equity candidate, we weren't source for his conclusion that deal could be closed within 3-4 weeks.

However, our own sources at several Divx studios have confirmed that serious Blockbuster-Divx equity talks are taking place. They also indicated that any final agreement with Blockbuster or other potential Divx equity investor hinges on Circuit City's obtaining signoffs by studios that license content to Divx. We're told Divx contracts leave room for wide interpretation, including possibly option for any studio to void Divx license agreement if content owner doesn't approve of new equity partner. At least one or more of Divx's 6 studio partners -- Disney, DreamWorks, Fox, MGM, Paramount, Universal -- is believed to be using signoff privilege as leverage to negotiate better financial terms.

Blockbuster and Divx officials independently have declined to discuss reported equity partnership talks on ground that they don't comment on rumors. Blockbuster Customer Service Dept., responding to e-mail correspondents prompted by anti-Divx Internet sites to write in protest against possible equity stake, said: "Blockbuster has not made any announcements regarding our support of Divx." It said information released in media "is simply speculation. Therefore, as a matter of policy, Blockbuster does not comment on such a rumor."

Blockbuster executives also have sidestepped commenting on reports that chain is unhappy thus far with its DVD revenue results, although spokeswoman did deny recently that company would reduce its DVD storefronts. Dissatisfaction with DVD was cited by some in studio community as one motive why Blockbuster might be exploring Divx equity ownership role. Blockbuster spokeswoman recently reiterated statements by Sumner Redstone, chmn.-CEO of parent Viacom, that Blockbuster plans this year to broaden its DVD commitment beyond 600 stores that currently carry it.

As for Circuit City, analysts' speculation that Blockbuster-Divx deal could be completed in 3-4 weeks could be related to their belief that chain will spring major announcement when it releases year-end financial results April 6. Circuit City cautiously has said only that it's in active talks with potential financing and distribution partners and that announcements could be forthcoming in "not too distant future." Cablevision-owned N.Y.-based Wiz chain is expected to announce Divx commitment, possibly as soon as this week. But Circuit City has been burned before in raising expectations of finding potential equity partner, and shares tumbled last summer when financing agreement failed to materialize.