Rival Formats Offer 2 Views of Videodisc Future

Given the disposable character of this city’s buildings and atmosphere, it’s entirely appropriate that the Consumer Electronics Show last week hosted the first public battle of the year between supporters of the digital videodisc (DVD) and its disposable cousin, Divx.

Backers of the DVD format, which allows viewers to watch movies on a 5-inch CD with better sound and picture quality than VHS video or even laserdisc, touted promising year-end sales figures and made enthusiastic projections for the coming year.

Meanwhile, promoters of the Divx format said it offers consumers the chance to rent DVD-quality movies the way they rent videos today, with greater convenience.

But a key question was left unanswered: Will consumers see the similar formats as rivals and hold off on committing to one until a clear winner emerges?

Warner Home Video President Warren Lieberfarb complained during the show that film studios planning on licensing their films to Divx are “engaged in the classic ‘take the money and run’ strategy, often resulting in a short-term benefit but a long-term detriment.”

Lieberfarb said the Consumer Electronics Manufacturers Assn. estimates that 200,000 DVD players have been sold to consumers since the format was launched last spring. That surpasses initial sales of both the compact disc (35,000 players in one year) and the VCR (200,000 players in two years), he noted, adding that “everything suggests the early vital signs of DVD are very good.”

Lieberfarb also said that more than 5 million pieces of DVD software have been shipped, with consumers snapping up nearly 2 million discs at about $20 each.

Brad Anderson, chairman of the big retailing chain Best Buy, said DVD player sales in December were 15% ahead of expectations at his 285 stores. The average buyer of a player also ended up buying an average of 22 movies, he said.

“That is a testament to consumers buying a product that they absolutely love,” Anderson said.

Columbia TriStar Home Video President Benjamin Feingold said the DVD business “exploded in December,” with four titles--including “My Best Friend’s Wedding” and “Jumanji”--selling more than 60,000 copies apiece. The James Bond movie “GoldenEye,” from MGM, and Warner’s “Batman and Robin” were among the other big sellers.

“DVD has established itself as a consumer product that is here,” Lieberfarb said. “This is clearly the next generation of watching movies at home.”

Unless, that is, supporters of Divx--short for “digital video express”--have their way. Although its presence at CES was limited to a single out-of-the-way sign and a dummy player at the RCA booth, Divx backer Circuit City invited key retailers to a private suite off the showroom floor for a demonstration of the pay-per-play format, which is scheduled to begin trials in April in two unidentified cities, followed by a national roll-out sometime this summer.

Like standard DVD, Divx’s medium is a 5-inch disc. The key difference lies in sales and marketing. Instead of unlimited viewings, Divx consumers buy the disc for a suggested retail price of $4.99 and can watch the disc only on a specially outfitted DVD player--for $100 more than a regular player--linked by modem on a separate phone line to a Divx central computer.

They can watch the movie as often as they choose during the initial 48 hours. Each subsequent viewing costs an additional $3.50 or so. Consumers who have had their fill of a particular movie can simply throw the disc away.

Richard Sharp, chairman and chief executive of Circuit City, Divx’s chief financial backer, said during a DVD panel discussion that he hopes Divx will “expand the DVD market” by offering consumers a “flexibility and convenience” in watching movies that mimics the video rental experience, with much less hassle. They can, in effect, “rent” a DVD movie at a fraction of the sales cost, without having to return it or visit a video store for subsequent viewings.

Warner Home Video Executive Vice President Jim Cardwell, however, pointed out that digital cable, with its new set-top boxes and beefed-up servers and infrastructure, will offer the same features as Divx, with greater convenience and at lower cost. He drew applause when he accused Sharp of unnecessarily confusing consumers during DVD’s critical first year.

“We have to send a simple message to consumers,” he said. “In the long term, I doubt whether the Divx financial model will even work. But in the short term, it could be damaging, because it could make consumers hesitant to invest in the DVD format.”

Since it was first announced last September, Divx has also come under fire from other large retail chains concerned about Circuit City’s $100-million backing of the format. Some say they are unlikely to carry a product that would benefit one of their largest competitors.

Other opposition has come from video retailers, who see the computerized rental process as cutting them out of the business. Because Divx discs never have to be returned to the rental outlet, retailers fear losing the late fees that account for a good chunk of the revenue at many sites. Jeffrey Eves, president of the Video Software Dealers Assn., which represents 20,000 video stores, goes so far as to call Divx a “poison pill.”

Eves prefers DVD because retailers are free to rent the discs as well as sell them.

The DVD-versus-Divx rivalry has also sparked a battle in Hollywood. Of the six major players, two--Warner Home Video and Columbia TriStar Home Video--support DVD only. Buena Vista Home Entertainment (Walt Disney Co.’s video distribution arm) and Universal Studios Home Video support both. Paramount Home Video has so far thrown its support only behind Divx, while 20th Century Fox Home Entertainment has so far refused to commit to either format.

But Lieberfarb notes that Disney and Universal are now also aggressive players in the DVD-for-sale game. And with five studios now committed to releasing titles on DVD, in most cases simultaneously with their VHS videotape versions, Lieberfarb said he’s confident that “consumers are no longer sitting on the fence, waiting for Divx to come. They’re buying now.”

As for the DVD holdouts, Paramount and Fox, Lieberfarb said he expects them to come around sometime this year. Paramount executives would not comment, saying they are still evaluating the issue, while a Fox spokesman recently denied trade reports that Fox was about to jump in.

Retailer Russ Solomon, chairman and founder of Tower Records & Video, a 95-store audio-video combo chain based in West Sacramento, has harsh words for the holdouts. “They’re crazy; they’re totally nuts,” he said. “They absolutely baffle me. They could be making money right now.”

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Thomas K. Arnold is editor in chief of Video Store magazine, a weekly trade publication serving the home video industry.