300px-Circuit_City_logo.svg As Circuit City commences liquidating its remaining 567 stores this weekend, it might be worth TeleReaders’ while to check out the sales and see if there are any good bargains to be found on e-book readers or PDAs or netbooks that can be used as such.

But it is also worth considering the lessons to be learned from Circuit City’s failure.

Divisive DIVX

Some would say that Circuit City’s road to bankruptcy began ten years ago, when it bankrolled DIVX (Digital Video Express), a digital video disc format that semi-competed with the fledgling DVD. An expensive failure, DIVX in some ways predicted such digital rights management (DRM) controversies as those that dogged Spore.

Unlike DVD, DIVX offered a minimum of special features, pan-and-scanned video, and a singularly obnoxious DRM system that insisted on phoning into centralized servers every time a movie was to be played to make sure viewers had permission to watch their time-limited movie disc.

The idea was that it was meant to replace video rentals rather than video sales—you could “re-rent” a disc in your possession without having to bestir yourself from your sofa—but then, as now, consumers had the funny idea that once you buy the medium, the content should be and stay “yours.”

In the end, DIVX folded and the DIVX authentication servers went dark (presaging the similar fates of Microsoft, Google, and Yahoo music or video DRM servers more recently), and every DIVX disc that had ever been sold became unplayable. This cost Circuit City a great deal, both in investment losses and in good will from those who had bought into its boondoggle.

Lesson: Consumers aren’t inclined to give up their ownership rights just because media and corporate interests think it might be a pretty neat idea.

Ill-advised layoffs

More recently, Circuit City changed the pay scale for its sales—eliminating commissions and laying off 3,900 salespeople in 2003, and then in 2007 laying off its 3,400 highest-paid salespeople because management bean-counters thought they were costing the company too much.

The latter layoff was especially crippling, because the highest-paid salespeople were naturally the best and most-experienced salespeople. Without its top sales staff, the quality of Circuit City’s customer service tanked and sales naturally slowed.

Losing experienced sales staff would be bad for any business, but especially one that makes its money by selling such expensive items as home theater systems and large-screen TV sets. Wrote the Washington Post:

"I think even though sales were soft in March, this is clearly why April sales were worse. They were replaced with less knowledgeable associates," said Tim Allen, an analyst with Jefferies & Co.

In particular, the televisions showing disappointing results are "intensive sales" requiring more informed employees, Allen said. "It’s a big-ticket purchase for somebody. And if they feel like they’re not getting the right advice or are being misled by someone who doesn’t know, it would be definitely frustrating. They will take their business elsewhere."

From then on, it was only a matter of time. Once a retailer’s slide into bankruptcy begins, it is extremely hard for it to pull itself out—suppliers have no reason to sell to a business if they know that business can get court-ordered amnesty from having to repay them.

Lesson: Customer service matters.

How these lessons might apply to the current e-book market, I leave as an exercise for the reader.


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