DIVX Press Conference at the Consumer Electronics Show on January 7, 1999

DIVX Press Conference at CES on January 7, 1999

The following is a transcript of the Divx press conference at the Winter CES on January 7, 1999. The event took place at 10:45 AM, at the Las Vegas Conference Suites & Services facility. Some 50 reporters and industry members were in attendance. The main speaker was Richard Sharp, CEO of Circuit City and DVE.

Josh Dare: Good morning everyone, thank you so much for coming. I'm Josh Dare with Divx's office of communications. In fact, I am the Divx office of communications. I appreciate you all making the very short, what they told us was going to be a very short block and a half from the convention center to here. Let me just tell you about some of the materials you have, you have some background materials in the press kits you have. The actual numbers that Rick is going to be sharing with you this morning, and some of the quotes, are in a press release that we'll share with you on the way out. You also have a Q pack in there. You may have noticed there are no movies in that Q pack. We will give you five free movies however if you purchase a Divx player... (gets a laugh). You also have a videotape there, and that's a videotape that we send to consumers when they call our line and ask for more information about Divx. Without further ado, I'd like to introduce you to Richard L. Sharp. He's the chairman and chief executive officer of Circuit City Stores, Inc., and of Digital Video Express, LP. We'll run until about 11:30 - probably just short of that we'll cut questions off, and if you have any additional questions after that, I would encourage you to contact Mr. Gluckman here, who can funnel those questions to our panelists for the noon-time panel.

Richard Sharp: Thanks Josh, and again thanks to all of you for coming over. Although our product, our feature, is being shown at a significant number of booths at the show, we're not officially an exhibitor, so we had to find some space outside the convention center. Hopefully, this wasn't to inconvenient for you.

What we're going to do this morning is review a number of announcements that were made earlier, both by Circuit City, and by Divx. We'll talk a little bit about some additional hardware announcements, an update on our manufacturing status overall, a little bit of information about some of the technology we're working on, and finally some support programs for retailers, which includes this kiosk to my left. And we expect to have some time for Q & A, and to the extent that you don't get everything answered, you'll have another shot at us, at least to some extent, over at the panel at noon over at the convention center.

OK, let me start by saying that we're certainly pleased to announce, what we consider a very successful launch of the Divx feature. I'll paraphrase Mark Twain here - the reports of our death were greatly exaggerated. Players with the Divx feature first took to market nationally in late September. Divx actually launched in the last week of September with 2,150 titles available for our customers - Divx owners. That's 2,000 titles on DVD, and 150 titles on Divx, all of which can be played on any Divx player. Divx owners now have a library of about 2,600 titles - 2,300 on DVD and 300 on Divx.

In a short period of time, consumers have quickly grasped the fundamental concept of Divx, its benefits and the value of those benefits to them, and the fact that it really is a feature for DVD players, and not a competing format. Divx has demonstrated that we can create incremental volume for retailers, by broadening the market for DVD. And both Circuit City and Divx are encouraged by the results, and we look forward to a very successful 1999.

Moving to the category of player sales, I assume - we released these numbers early this morning - most of you probably have seen them, so I won't get the dramatic effect I'd wanted to have. But nonetheless, let me talk first about December. It was not until early December that we had the full assortment of 4 players in the stores, and what we would consider to be our 250 titles that we really needed to hit critical mass with the product. So with four brands, and a reasonable software assortment, we were really able to demonstrate the power of the product, and accelerate the momentum that actually started for us at the end of November. The seven major retailers that carried the Divx product - that's Circuit City, Good Guys, Ultimate, Future Shop, Dow Stereo / Video, Nationwide, and Sixth Avenue - and together we sold more than 62,000 DVD players with the Divx feature in the month of December. We're talking about the calender month, not bleeding over into a couple of days in January.

For the fourth quarter, that would be October 1 through December 31 - and as you can tell from the December number, the momentum really did accelerate as our player assortment, our in-stock position and our titles grew - we went from about 7,000 players sold in October, to 18,000 in November, to 62,000 in December. So a total of 87,000 Divx-enhanced DVD players were sold in the fourth quarter.

We're also pleased that these numbers were achieved in what we'd call a highly competitive environment. Again, we had about 740 retail stores carrying the Divx model, versus about 10,000 retailers carrying basic DVD. Again, we have 4 models - there are about 40 DVD models on the marketplace today. Consumers looking for the lowest price, not an insignificant issue in our industry as you know. Our product was in the market at $399 for the hardware, with 5 free discs, a $22.45 value in the software, making the net price to the consumer after the software at about $375. The lowest priced DVD players were advertised, promoted and sold at $299 and less, and for most of the November - December period, it included 5 free movies and 13 free rentals, which they valued at about $130, bringing the net price of the promotional basic DVD player to about $170. We said for sometime, since we first announced the product in September, a year ago, that we though the right price spread for Divx - the feature warranted about a $100 premium to the consumer. We're obviously faced with the situation today, where the consumers found over a $200 premium, when you include the software. So we're particularly gratified that the strong sales were achieved despite this competitive environment.

Would anybody out there care to hazard a guess as to how many total DVD players were sold in the month of December? You're all the experts...

Audience member: 188,000.

Sharp: 188,000. I have 188,000 (imitates auctioneer - gets laugh).

Audience member: You want more?

Sharp: No (gets another laugh). You know I think most of the numbers we've heard from you experts have been somewhere in the range of 175,000 to 200,000. If 188,000 is the right number for December, and that obviously includes the DVD players that have the Divx feature, despite the pricing disadvantage, and the despite the distribution disadvantage, we sold about 1 in 3 of all DVD players sold during December.

Now shifting to the makeup among those, Circuit City not surprisingly represented about 80% of the total storefronts carrying the Divx featured DVD players. Our total players, including both those with Divx and without, was 75,000 in the month of December - that Circuit City sold. I think we can safely say that was the best performance of any retailer for DVD sales during the month. And in the total fourth quarter, our DVD sales were 106,000.

Now, I'm not going to breakdown the mix - we'd like to keep a little bit of competitive information. But I will do a brief commercial for Circuit City here. We did well with Divx, obviously we were motivated to do well, but also because this is what Circuit City does best. We have a lot of experience in selling new technology, explaining new technology to consumers - that's why we have been the leading seller of Direct TV systems since it's introduction, the leading retailer of digital cams, high-end televisions, etc.... So this is really our forte here. Our store personnel clearly understood this product. They were well trained, and were able to explain it as a feature of DVD, not an alternative. We also presented this product to three broad types of consumers who came into our stores. First, those who came into our stores and asked about Divx - not surprisingly, we told them about Divx. Second, those who came in and asked about DVD - we showed them DVD players without Divx, and with Divx, and let them make an informed decision. And finally, those that came in looking for VCRs or televisions - we asked them if they might be interested in hearing about an exciting new way to watch movies at home. So by presenting this set of compelling values to consumers, we were able to grow the category significantly. And in short, Circuit City just did what we've done for years when we've launched other technologies in this industry.

OK, the other retailers are also pleased with their performance. Broadly they saw momentum through the quarter as well. Bob Gunst, president and CEO of Good Guys, who was our first non-Circuit City retailer for Divx, said, "The Divx share of our DVD mix accelerated throughout the holiday selling season. We have been especially pleased by the sales performance of the ProScan model, which has a feature set that is particularly appealing to The Good Guys customers." Dave Workman, from Ultimate, said, "Our primary motivation for carrying Divx was our belief that the feature would grow the entire DVD business, and that is exactly what our experience has been." Kevin Layden, executive VP of Future Shop, "We believe that the affordability offered by Divx software is helping to bring more customers into the DVD market. We are very pleased with our growth in the entire DVD hardware category, including those units with the Divx feature." And finally, Tom Campbell, corporate director at Dow Stereo / Video, "We are extremely pleased with the sell-through of Divx. We not only sold out of our initial order of players, but we are convinced that Divx is contributing to greater interest in the DVD category as a whole. Divx sales went well beyond our expectations." Again, we're excited that our retail partners here are doing well with this category, and are pleased with its performance, and we're confident that other retailers can do well too.

All right, let's shift over to disc sales for a moment. Total Divx disc sales for October through December, were 535,000 units. And again, all these sales numbers that I'm talking about, just to make sure there's no question here, are retail sales to consumers. They're not wholesale sales into the distribution channel, but sales to consumers. Total Divx disc sales in December were 375,000 units.

Now, we've had a lot of questions, and I'm sure that there will be a lot of questions here, about individual player patterns - what's going on, how are they doing, what are they watching, how many times are they watching - and I'm going to tell you that two-thirds of our players are less than a month old. They haven't even called in for their first bill yet. So it's a little difficult to know yet what the viewing patterns are going to be. But we did try to get a little bit of research for our own understanding, about what was going on. So we commissioned an independent research firm in Los Angeles to do research on our customers who had been Divx customers, roughly on the period in the first two weeks of November. We just completed this research, so they had roughly four to six weeks of experience with their Divx players. And here's what they told us. First of all, over 80% said the Divx feature was an important part of their decision to buy a DVD player. Secondly, there was an almost 90% satisfaction level with their Divx player. And we also asked them about their software purchasing habits, and again these are people who had their players for 4 to 6 weeks. They bought an average of about 11 Divx discs. They'd been back to their Divx software store about 3 1/2 times, on average. And here's another statistic, that will reinforce a point that we've been making all along, which is that they had also purchased an average of between 4 and 5 basic DVD discs. This is absolutely consistent with what we've been saying about this product - this is a feature for DVD. Consumers will figure this out very quickly. There are certain movies, their collectors if you will, that they think an investment of $20 to $25 to own that content, in an unlimited way, is an appropriate decision and investment for them. And there are movies that they will decide - I may watch this only one or twice, I'd like to have it in digital quality, I'd like to have the convenience of buying it when I want, watching it when I want - and the Divx fills that need. And the consumers will continue to use both - will continue to buy both formats - another piece of evidence that Divx grows the DVD market for everyone.

OK, so much for the numbers - let's look ahead a little bit. We obviously anticipate continued growth for Divx. We are gaining significant momentum here. On the press side, the coverage is getting more positive - I'm sure that trend will even accelerate further after today's conference (some laughter from the audience). A couple of excerpts here - from Knight-Ridder, a columnist on December 28th: "Several months ago, I wrote an update on DVD, or Digital Versatile Disc. In that column, I wrote negatively about Divx, a derivative of DVD that was being pushed by several Hollywood movie studios and retailers. I recently had the opportunity to use Divx in my home, and I admit that my trashing of the concept was wrong." From the October issue of Playboy: "When Divx, a video disc alternative to DVD, was announced last year, it took a beating from the press, Playboy included. But now that we've actually seen the format work, we're more optimistic about its future. Here's our update: Divx is not a replacement for DVD. It is a way to enjoy exceptional picture quality of video disc, without having to buy a bunch of movies you'll watch only once." And finally, from the Dow Jones news service: "Circuit City Stores, Inc. has completed the national rollout of its Divx brand digital video disc products. If I'm a typical consumer, the Richmond consumer electronics retailer could have a hit on its hands."

Early on, the press, and these particular reporters, may well have been influenced by a bunch of negative comments, by a bunch of people who potentially have business interests that are in conflict with Divx. Obviously, when they have the product in their hands, and they see how it works, they recognize that it is a great feature, and it offers a lot of flexibility, and affordable software, for them and other consumers.

On the hardware manufacturing side, we had four major brands of players for 1998. As you know, Zenith was our first, RCA, ProScan and Panasonic. Four more brands will hit the market for 1999. Virtually all eight of these have some presence for Divx in their booths. Previously announced players for 1999 are Pioneer, JVC and Harmon Kardon, and Kenwood announced yesterday that they would be adding the Divx feature to their DVD line this year as well, bringing us to 8 major manufacturers here.

There was also a little stir last night at the Thomson conference, when they announced and demonstrated their new high-definition DVD system. This basically uses sort of an extension of existing DVD technology, to produce 1080i high-definition content. Divx is extremely pleased to have been selected, chosen by Thomson, to provide the content protection system for this. And it provides a very high level of content protection that we use on our fundamental Divx system, and again, it's essentially our existing technology applied to this new technology that Thomson developed. And we're excited about it - Thomson's excited about it. Those of you who got to see the picture quality, it's pretty impressive. And we're also optimistic that the studios will find the entire system of delivery to be one that both meets their quality standards, and also meets their standards for protecting their high-definition digital content.

I would point out that we literally - the covers are still going on the players that we're using to demo this. We've not had the chance to get it to Hollywood, and demo it for the studios, and have conversations with them. Player pricing and disc pricing have yet to be determined. But, we've clearly demonstrated - Thomson has demonstrated a technology here, that we've worked with them on, that we think is very exciting. I'd also point out, from the Divx technical development program, that this system uses - will use - the third generation of the Divx module. And the Divx module is a little piece that goes in DVD players to make it a Divx featured DVD player. We had a first generation of that that we used when we launched. Players that come out this year would use our second generation, which is basically just a cost reduction effort. And hopefully by the end of this year, but certainly by next year's models, we'll be using the third generation Divx module, which is an NRSS standard, Part A product, which will be user renewable, and will be easily incorporated into display devices, which is consistent with the Thomson architecture for content protection.

Sharp Demonstrates a New Divx Retail Kiosk

On the retailer news side, we've developed this kiosk, which we think will be of value to retailers who may not have quite the sales force, that we and other consumer electronics specialty retailers have (he starts a demo tape on the kiosk, which plays for a moment). This is a continuous loop, that runs, and this is designed to run in unattended mode, just presenting some of the benefits of Divx. It's designed to sort of catch people's attention, and maybe get them to stop by and take a moment at the Divx kiosk. Obviously, there's a little subscript here, that says, "To learn more about Divx, just press the start button." And there's a big red start button here - when the consumer presses that, you immediately go into a brief explanation of what Divx is, and how it works. At the end of this little introduction, we'll bring up a menu, with a variety of issues about Divx and features, and if the consumer wants information about a specific feature, there are numbers here from 1 to 6, where they can press that, and get a little bit of explanation and demonstration about how this particular product works. Again, this is designed to answer virtually any questions, or all the questions that the consumer would have about the Divx feature, and DVD in general. This one is configured with a complete surround sound system, to demonstrate full capability (he plays with the menu system a bit). Again, the consumer can absolutely, under their own control, go through this and get a pretty complete explanation of how Divx works. This could be helpful for a variety of retailers. Obviously, Circuit City has the human equivalent of this, but we'll probably try this in a few stores and see how it does in terms of generating some interest.

So that's one piece. The second is that we've put together an internet-based, software distribution system, and this we think is the first of its kind that we know of, which is a low cost, very efficient way for smaller retailers to order, at wholesale, Divx discs. And they will be able to set up a wholesale Divx account, and then be able to get into the system and order discs, and have them shipped directly to their stores at the lowest possible handling cost, avoiding some of the costs that sometimes occur for these smaller retailers to get their software.

So in summary, let me just say that we had what we think is a very impressive launch quarter. I think the evidence is pretty clear that Divx appeals to a significant number of consumers. Divx is broadening the demand for DVD. Divx owners are buying Divx and DVD software. Momentum is clearly with us. We had a great quarter - sales accelerated into December, beyond the seasonal growth you would expect. We've got at least 4 new brands of players coming into the market in 1999. We've got the new technology for the industry - we're part of this HD development with Thomson. We're continuing to reduce product cost - again one of the big benefits of the third generation Divx module, is significantly reduced cost, which brings feature premium down. New programs for retailers as we've talked about here, with the kiosk and web distribution. And so, in summary, I guess if it's not obvious by now, this is a business that we're very excited about. We're very committed to it, and we look forward to a successful 1999. And we'll open it up to questions.

Question #1: Do the results from the fourth quarter change at all your expectations for interest in finding an equity partner?

Sharp: The answer to that is absolutely not. Circuit City, which is the majority owner in this, and our partners, continue to be interested in finding additional partners, hopefully strategic partners. But certainly we've been talking to some financial partners as well, about their involvement in Divx, and making an equity contribution to the business. One of the issues that we've talked about for some time, was that we had a vision of the value of this business, which was not always consistent with the vision that potential investors had. We were confident that we would preform, maybe not to the level that we did, but that we would have a very strong performance when we got this product to market. We think the value of the business has gone up, on that basis. And we will continue to talk to potential investors. I'm not setting any deadlines about who or when we're going to announce, but in terms of our interest and desire, we certainly are continuing to talk with those, and if we can make an attractive deal, we'll do it.

Question #2: How many replicators are there for the Divx discs?

Sharp: Ah, there is Nimbus, which is now part of Technicolor. Of course, Panasonic Disc Replication Services. And Pioneer, which is just getting started in this.

Question #3: Are you going to continue giving the 5 free discs offer? And do the sales numbers for discs include the 5 free discs?

Sharp: We've announced to our retail partners that we will be continuing that through February. We've not made a decision beyond that. But I can tell you that we expect to continue to try to provide incentives and activities to continue to get consumers interested in the product, and to help our retail partners be successful on the sales floor. But there are no announcements beyond February. Absolutely the sales numbers include the 5 free discs. The 5 free discs, for those of you who didn't purchase one, and aren't familiar with it, is a mail-in coupon - the consumer actually buys the discs in the store, and then mails the coupon in, combined with their sales receipt, for the $22.45 rebate.

Question #4: The Divx sales pitch, at least as I've experienced it in Circuit City stores, tends to be along the lines of, "If you're in the market for a DVD player, why not get one with the Divx feature, so you have that option." So the question is, and I know it may be a bit early, how many of those 87,000 consumers have actually established accounts, and are renting?

Sharp: Ah, again, we're not gonna talk about specific numbers. We have experienced from the beginning, way back from the early days in June, when we first launched, we've experienced a lag between sales and registrations. We believe that they all get there. Certainly, there's some drop-off that don't make it, but certainly the vast majority get there. Given the Christmas season, we anticipated a very heavy volume, obviously on Christmas Day, and on the days subsequent to that, and we achieved that. There is still a float out there of players that have not registered yet, not inconsistent with what we've been seeing. They paid $100 for this, and they've most likely taken a few discs home, so we think they'll do it. Obviously, as a number of people have pointed out, it does require connection to a phone line - some people may be installing a phone jack, rather than using a wireless phone jack, but we're pretty confident, based on our research, and the trends we've seen, that we'll get the vast majority of them registered in a reasonable slope over time.

Question #4, reiterated: Do you have an approximate figure on the number of accounts created so far?

Sharp: No.

Question #5: How many rental validations have you had occur? I guess the player dials a lot to get your mail, and upload the billing data, and to communicate test market data. I don't imagine you've done a lot of promotions to the players by e-mail yet...

Sharp: Actually, the player doesn't dial out a lot. It's designed to dial out once a month - actually twice a month - to send the billing information out, and then, shortly thereafter, it calls back again so we can download the billing information to the player. Ah, and you're right - we certainly haven't done a lot of promotional activity yet. We've been focused on getting the product to market and getting it going. And clearly, while we're very excited about the number of players we've sold, this is a very small base of players out there. You know, two-thirds of our players have been out there less than a month. It's really to early to comment. There were a lot of people who wanted us to tell how many we sold the first day in June, when we launched in two markets, and even more who insisted we tell them in September. If we had given them numbers in October, they might have felt they weren't too strong. The reality is we need to get a critical mass - a statistically valid sample of what's going on out there - and we will share some information. We're a publicly held company. We have an obligation to share meaningful information with our shareholders, which we will so. I will tell you that we don't have anything that is statistically valid today.

Question #6: Any planned price moves coming up, and any word on new retailers picking Divx up?

Sharp: Ah, no. No announcements on new retailers or pricing.

Question #7: Are you still talking to the other major Hollywood studios about supplying product for the format? Are there any announcements in that area?

Sharp: Ah, well we haven't had any recent conversations, so no (some audience laughter). We have our partners now - we're hopeful that the results here will encourage the industry, both the studios, manufacturers and retailers. You know, we never introduced this as a format war, we introduced this product as a feature. We have consistently said that this can only be additive, and it's a little bit mystifying to us, why the arguments against this - obviously, we recognize that there are a number of consumers who may not find this product attractive. They shouldn't buy - if they find basic DVD more attractive, they should buy one without Divx. But the theory that this is somehow negative to the industry, has never made sense to us. And I think that the statistics and performance to date would seriously challenge those who are trying to claim that it is. So we're hopeful that the industry will be more positive about the product broadly, and that we'll make progress over the year.

Question #8: What's the status of widescreen and DTS releases, that you've announced previously?

Sharp: Well, we do have - we tested widescreen, as we said before. We talked to our consumers before we started this product, and asked them broadly, whether they wanted widescreen or whether they wanted 4x3. You know, for those of us who are fortunate to have a 60" or 80" or 100" television, as part of our option, giving up 30% of picture to black bars is not a big problem. For the vast majority of consumers, who are watching on 30" or 27" or even 35", they don't want to give up 30% to black. And the research is clear. On the other hand, we did want to understand what our customer base looked like, and what the market would be for widescreen. We released Deep Impact, Tomorrow Never Dies and Armageddon is coming out in a widescreen version. As for DTS, we haven't released anything yet. Obviously, it's something we intend to do.

Question #9: Has a disc recycling program been set up yet? And is there any kind of disc after-market?

Sharp: There is a disc recycling program. If you go to the disc retailers, there is a little box where you can deposit your used discs. I'm not sure that they'll ever make it to the dump - we believe that people will take them out and go play them since you can watch that movie for $3.25 instead of buying one for $4.49. But I think that anecdotal evidence around Richmond, where there is probably the greatest concentration of players, indicates that there is a little bit of passing discs going on. We've always felt that this is not a product that would head for the dump anyway. People will add to their video collections - they've basically paid for it in the first place - and they'll put it on their shelf, and they may not watch it again for 5 years. But we've conveniently packaged this, and it's compact, and we think that will encourage people to collect these. But yes, if you want to recycle this, the recycle boxes are there in the stores.

Question #10: Are you planning to make any basic changes to the discs, to add some of the more advanced features found on open DVD, such as multiple angles and stuff like that?

Sharp: That's - first of all, every Divx player is a fully compatible DVD player, and it will play any disc, any language, any camera angle that any DVD player without Divx would play. Now, we have chosen to author our discs - as we initially said, our intention is not to go after the, what is now called the videophile or video collector market - we're after the rental market. And the rental market is about 10 million rentals as day. It's much bigger than the videophile market. And those 10 million rentals a day, take place in 4x3 pan and scan, English language, close captions. And that's the market we're going after, and that's the way the vast majority of our discs are authored. As we get a bigger base of players, if we find that there's an additional demand for those things, we'll take a look at that. But again, we're going after the market that's out there today. We have time for one more question.

Question #11: How many of these kiosks exist?

Sharp: Two (lots of laughter from the room)! We have 50% of the market cornered right here (more laughter).

Question #12: This is not something that's designed for small retailers - it seems rather elaborate...?

Sharp: Ah, the answer to that, is that I think some value-added retailers might find it effective. Understand that this kiosk - and I think our team put this together in about three weeks - is a TV and a DVD player. That's all it is. These little buttons effectively simulate the commands that you give on your remote control. So we're using the menuing that goes into any basic DVD disc. This is a basic DVD disc - not a Divx disc - that's running this demonstration. So all you need is really the TV and the DVD player.

All right, I want to thank all of you for coming. I'd love to stay longer, but we have a commitment over at the panel discussion to get to, so hopefully we'll see you all over there. Thanks again.

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