This was a LONG time ago. People in this thread are pointing out recent events - geek squad vs firedog, commissioned sales, laying off higher paid workers (which also happened when they stopped commissioned sales), etc....but the question the OP is posing was long before that. I worked at Circuit City my junior/senior years of high school, along with my freshman year of college. This was circa 2001-2003, so before ANY of those things took place, and already Best Buy was firmly #1, even back then, Circuit City was teetering on falling to #3 behind WalMart.
Reasons why CC failed:
1) They didn't crush Best Buy when they had the chance. Way back when, before I worked there, is the event the OP was talking about (I don't remember the exact year. mid to late 90's sometime). They had them on the ropes, and they basically just let them go. They figured they weren't a big competitor and continued on their merry way, rather than being competitive and driving BB out of business.
2) Since then, they've been reactionary. Rather than trying to innovate, they copy things that Best Buy did 5 years early. For example - getting rid of commission, upgrading their stores to be bigger and brighter (the more best buy-like "warehouse" look), in-store third party vendors like Verizon, Firedog. Its always too little, too late. They never do something fresh and new to draw in costumers, they're just fighting to retain what few they have left
3) Consumer perception. Consumers consider Circuit City to be old, slow, dark, pushy, etc. Even if they've become "best buy-like", even if they've launched dozens of ad campaigns to try to change that image, they haven't been successful in doing so. For example - there are people in this thread posting about commissioned sales. Circuit City has been 100% commission free since 2003.
4) They continually cut their best employees. When they got rid of commission, they gave you your hourly average as your salary. If that average was above a certain amount, they fired you. Basically, they fired all their best sales people! Terrible. Someone posted that they recently did that again. That doesn't work.
5) DIVX. DIVX was a monumental bomb that CC had backed big time.
Its a shame, really. Circuit City carries MUCH better brands than Best Buy for audio equipment, both home and car. I guess I'll have to turn to the internet for that stuff.