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CHINESE FACTORIES HAVE BECOME the dominant supplier of DVD players, thanks largely to their ability to churn out products at a very low cost. Today, players that used to cost $300 or more can be had for less than the price of a boxed set of a season of "The Simpsons."
The bargain-basement prices have thinned profit margins to the bone. Making matters worse for Chinese manufacturers, all of the critical patents for DVD technology are held by others -- mainly by Japanese, U.S. and European companies. Four entities collect about $11 in licensing fees on each DVD player, and two others collect annual fees from manufacturers for the rights to install the anti-piracy software demanded by Hollywood. With the wholesale price of a no-frills DVD machine approaching $25, that's a lot of money for licenses.
Now, China's National Disc Engineering Center wants to make an end-run around licensing fees. According to the New China News Agency, the center confirmed plans this week to develop its own, high-definition format for movie discs by 2008.
The industry already faces an ugly format war over high-definition discs. Sony Pictures, 20th Century Fox and Disney, joined by numerous consumer-electronics and computer companies, back the Blu-ray format. Warner Bros. and Universal Studios, joined by Toshiba, Microsoft and Intel, support HD DVD. Only one major studio -- Paramount -- has said it will release discs in both formats.
The Chinese effort could muddy the waters further, discouraging consumers from making the leap to the next generation of disc. Chances are, however, that China will find a new format much harder to export than cheap players.
The New China News Agency reported that China's plan is to base its technology on HD DVD but with more detailed pictures, higher fidelity sound and better protection against piracy.
The latter component is critical to satisfying Hollywood, and it won't be easy. Nor are the studios eager to prolong the high-definition format war already underway.
China is also getting off to a late start. Blu-ray and HD DVD are expected to hit U.S. stores early next year, giving them at least a two-year lead over the new Chinese format.
China's main advantage is its enormous domestic market. That audience is large enough to sustain the new format even if it never reaches any other country's shelves. Even so, previous efforts by China to create alternative disc formats have seen mixed results. The new one may find a home in China, but manufacturers there are likely to be paying licensing fees for years to come on the machines they make for the rest of the world.