Circuit City How the Once Mighty Have Fallen... and Returned

You could be forgiven for believing you somehow slipped back in time to the 1990s lately. You might have even been heading out to Ticket Master to secure seats for the upcoming Pearl Jam tour when you heard the news on your FM radio that Circuit City is getting the band back together.  Yes, that Circuit City. Once the largest consumer electronics retailer in America turned cautionary tale for executive mismanagement, has announced that it will begin opening new retail outlets and an online store in June 2016. Are they playing at nostalgia for millennials?

A lot of us have memories of Circuit City back in the 90s and 2000s, some fond, some maybe not so fond.  Circuit City and Best Buy were the two biggest retailers of things with power supplies. In those days, CompUSA didn’t hold a candle to Circuit City. But lo, how the mighty have fallen. In 2009, Circuit City closed its door across America for the last time. So, why did Circuit City fall so spectacularly? And why the heck does it want to come back from the dead? 

A Tale of Hubris

On November 4, 2008 when Circuit City filed for bankruptcy, it was widely seen as a poster-child for exec mismanagement. But its descent wasn’t so much a spectacular blowout as it was a slow and painful death emanating from bad decisions and miscalculations that date as far back as 1998. 

Remember DIVX?

The first time Circuit City found itself on the wrong side of history was DIVX. Before the HD DVD - Blu-Ray format war, Circuit City wanted to singlehandedly go to war with the fledgling digital disc format, DVD. In the 90s it was only starting to eclipse VHS. DVD had clear advantages but it was just outside the price range of most consumers so… there was room for a clever alternative to find its way into contention if they could somehow find a way to reduce the cost to entry into the digital movie disc utopia. 

But Circuit City was selling a solution that to a different problem in DIVX.

First introduced in June of 1998, DIVX was a variation of DVD that had a built-in Content Scramble System (CSS) based on Triple DES encryption. This made content distributed through DVIX that boasted even more security than DVD. The consumer problem DIVX intended to solve was the eternal headache of returning movie rentals.

Looking back, it’s easy to see how short-sighted they were but you know what they say about hindsight.

It was a novel idea. You could go into Circuit City and buy a movie on a DIVX disc for about $4, much cheaper than buying a DVD. Encryption would kick-in, completely scrambling any effort to re-watch the movie just two days after initial viewing. So, in 48 hours your movie transformed into yet another plastic coaster. 

You have to give ‘em credit for trying something new, but there were several downsides to DIVX.

The most apparent problem with DIVX was the front-loaded barrier to entry for the consumer. A DIVX-enabled DVD player cost upwards of $500 in 1998. This is about $100 more than the cost of a regular DVD player at the time. 

It’s difficult for us today to grasp the idea of such a steep cost-barrier to entry into new technology. These days, companies are more than happy to subsidize or eat some profit to sell the initial hardware that will ensure your addiction to a recurring cost model (such as software or media) only they can provide. Examples of this modern ethic in sales and marketing includes cell phones, game console, most of which are sold at a loss, at least initially to get you in the door of their “club”.

Let’s face it. In the days before mp3 was popularized, the idea of only temporarily owning something you bought didn’t sit well with the public. Years of all-out warfare would be fought between consumers and music fans over Digital Rights Management, a form of encryption, like DIVX but on digital music, strikes at the heart of the constitutional definition of private property. You buy it, but you don’t really own it. Beware haters of the software intellectual property grey areas, the next frontier on this controversy is going to be (gasp) automobiles — and the software that makes them run.

But, back to DIVX.  Cost and funny feelings around throwaway discs was only a mild opposition compared to the downright hatred for DIVX coming from home theater circles. 

DIVX was an affront to the very art of film and hobby of home theater. These discs were almost all pan-and-scan, garbage to any serious movie buff. And they had almost none of the special features that appearing on DVD at the time.

By 1999 after only about a year after it was introduced DIVX players were discontinued. Circuit City announced that it had lost some $114 million in the failed venture to change the way we watch movies. 

Ultimately, it wasn’t the movie studios or opinions of angry home theater aficionados that killed DIVX — it was Blockbuster. The video rental giant simply refused to sell the discs. Why would they want to endanger the revenue they earned from late-return charges?

More failures soon followed. By 1999, Circuit City was still humming along as the second largest consumer electronics retailer behind only Best Buy. So, it started going into bad decision overdrive in time for the new millennium. 

PlayStation exclusive!

In 1999, Circuit City cut an exclusive deal with Sony to only sell PlayStation games instead of games from a variety of popular formats of the era. It sounds like it might have been a good deal for Sony, but not such a great deal for Circuit City who were, for a short time, restricted from selling games in other formats. 

Move Out the Appliances!

In 2000 Circuit City decided there was no future in large household appliances. The execs must have looked into their economic crystal ball and decided that a mid-2000s housing boom, putting appliances into unprecedented demand, was unlikely.

So, Circuit City bailed on the large appliances reasoning that it would save money on storage space and shipping. Even though at the time Circuit City was the second largest appliances retailer behind only Sears. In 1999 appliances brought in $1.6 billion (with a B) in revenue. But hey, think of the space they’ll save.  The 2000s proved to be a kind-of kaleidoscopic montage of shifting top execs, new business plans and yes, more bad decisions.

For instance in ’04 they decided to do an exclusive deal with Verizon killing its foray into what was then a just ready-to-explode North American smartphone market. 

By ’05 the store closings had already started across America. Circuit City stores in many locations remained vacant for years as empty real estate. It’s estimated Circuit City owned 1.2 million acres of unused real estate across the US.

So, in ’07 Circuit City drafted a plan to stem the tide of company red ink. The answer was an ambitious plan to open 200-300 stores per-year. It’s not clear exactly how many stores they were about to open in ’08, but just as they were hiring new employees with new stores ready to go…  all new Circuit City outlets including most of the operating stores across America suddenly closed down. 

The brand was sold at auction to Systemax, owner of CompUSA and TigerDirect, for a mere $14-million. 

The NEW Circuit City

Recently the Circuit City brand was purchased again, this time by New York-based “retail veterans”. This time around, the new Circuit City franchises will more closely resemble RadioShack with small 2,000 - 4,000 square-foot stores that will begin opening in Dallas TX this June 2016. Circuit City expects to open 50-100 of these new stores in 2016, with an eye on opening 10,000 stores in the next five years. 

“Nevermind that it sounds like RadioShack, it isn’t!” Snaps new Circuit City CEO Ronny Shmoel in a phone interview. Apparently he didn’t appreciate my comparison to RadioShack at all. About 40 people are working on the start-up retailer including some former RadioShack employees. Shmoel has not disclosed purchase price or any other conditions of the sale. The stores are intended to target millennials with a mix of payment options for popular consumer electronics. 

The in-store kiosk approach sounds novel. It’s a bit like what you can do with any cell phone or computer at your home, except that you get to into a store for the same “online shopping” experience.

One interesting detail is the new Circuit City will carry a line of private-label products. This could be Circuit City’s value-add if they can provide easier payment options and private-label products at a discount. 

If anyone is interested in helping Circuit City with its aggressive 10,000-store plan, Shmoel is offering franchise opportunities for the entrepreneurs among you.  Do you think they will succeed this time?  Read on and please share your thoughts in our forum discussion.