Digital Videodisks: Betamax Wars All Over Again?

New DVDs are on the way--in rival formats

If you're shopping for a high-end PC or home-theater setup this fall, expect to get an earful about digital videodisks, or DVDs. Launched with deafening fanfare last March, these shimmering disks that hold billions of bits of information will display the entire Yellow Pages on your home computer, or play movies with the sharpest picture you've ever seen on a TV screen.

There's just one little hitch. Thanks to some last-minute jockeying by movie studios and electronics giants, not all DVD machines are created alike. And the system that you buy today may not play the movies or multimedia games you see on the shelf next summer. Which may be why you haven't seen many DVD players outside the electronics shops. American consumers have bought only 180,000 players and just 500,000 movies.

SWORN ENEMIES. Incredible as it may seem, the DVD drama is already looking like a replay of Betamax vs. VHS, the epic battle of rival VCR formats from Sony Corp. and Matsushita Electric Industrial Co. in the late 1970s, in which millions of "early adopters" got burned. The irony is, of all the new products launched in the 20 years since Betamax, DVD was the one designed not to fall into this kind of trap.

Why? Because the new videodisks were carefully crafted by Toshiba Corp., Time Warner Inc., and their partners as a true product of "digital convergence"--the 1990s megatrend in which computing and digital entertainment supposedly meld into one. Japanese industrial magnates courted Hollywood moguls. Microsoft Corp. and Intel Corp. were brought on board. Sworn enemies struck compromises.

As a result, DVD promoters dreamed, by 2000 the new format would revitalize the consumer-electronics business, which hasn't had a major hit since camcorders in the late 1980s. Hollywood would bathe in new revenue streams, as consumers around the world rushed to build home libraries of film classics on disk. Silicon Valley would get the ultimate multimedia disk drive, with seven times the capacity of a CD-ROM.

Those dreams aren't washed up--yet. But despite intense efforts to keep the alliance together, it's unravelling. Digital convergence, it seems, has vastly complicated the process of negotiating--and implementing--new standards.

The first signs of trouble appeared last year, when music interests clashed over how the new players should handle movie soundtracks, delaying DVD's launch in Europe. Then in August, core alliance members Sony and Philips Electronics suddenly broke ranks with the pack over the design of next-generation recordable DVDs, which will play movies, but will also be used in computers. "They appear to have their own agenda," complains Matsushita President Yoichi Morishita. "It's extremely regrettable."

Just a few weeks later, Matsushita dropped its own bombshell. In league with Zenith and Thomson Multimedia, owner of the RCA brand, it announced plans to create a variant of DVD called "Divx" devised by Digital Video Express LP, a partnership between retailer Circuit City Stores and a powerful Hollywood law firm. Their systems, to be launched next summer, will play movie disks that don't run on conventional DVD players. "Divx will muck up the works more than ever," predicts Mary Bourdon, a Dataquest Inc. senior analyst.

From day one, there was tension between Hollywood and the electronics companies--and within the electronics camps. Film studios wanted maximum encryption on the disks to fight against piracy. Paramount Pictures and Universal Studios, in particular, resisted endorsing the format. Computer companies griped about limited storage capacity and problems rewriting data. And within the Japanese contingent, conflicts erupted over how to divvy up patent royalties--causing Sony and Philips to bolt.

Then came Divx. Circuit City Chairman and CEO Richard L. Sharp says he was approached three years ago by Hollywood entertainment lawyers at Ziffren, Brittenham, Branca & Fischer, who had dreamed up their own exotic videodisk rental scheme. Together, they created Digital Video Express, which is two-thirds owned by Circuit City. They added an extra layer of encryption code to standard DVD gear, along with a modem and circuitry to handle customer billing.

Customers will register with Divx and then purchase movie disks at Circuit City or other licensed retailers for $5--compared with $25 or more for new movies on regular DVDs. Upon inserting a disk in the player, they'll have 48 hours to watch the flick, after which they can throw it away, recycle it, or just store it on a shelf for future use. On all subsequent viewings, the hardware will keep a log and communicate automatically with Divx's computers to arrange for billing.

"HYBRID MODE." Promoters of the original DVD format don't believe Divx will work as hyped but fret that consumers will postpone purchases. Some, like Warner Home Video President Warren Lieberfarb, also question the Divx business model. "If you are in this hybrid mode, the existing rental model will do it more cheaply than Divx," he says.

But Divx backers defend their maneuver. "Will Divx cause some consumers to wait? Absolutely," admits Thomson vice-president Michael O'Hara. "But in the digital world, there will always be an expansion of functionality," even if that causes some shoppers to wait. And, insists Circuit City's Sharp, "Divx provides meaningful new features."

Ultimately, Hollywood will determine which DVD variant wins, as it decides which format to release its latest movies in. Disney, Paramount, Universal, and DreamWorks SKG have committed to cranking out Divx titles. But Hollywood is also hedging its bets. Kingmaker Disney, for example, plans to release software in both Divx and DVD formats.

So by all means, listen to those DVD sales pitches this fall. But before reaching for your wallet, make sure there is something good to play at the end of the day.

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