Commentary: Dvd And Conquer: Why One Technology Prevailed

It seemed a marketer's nightmare. Replace the hottest consumer-electronics product in a generation--the VCR--with one that had few hot new features and cost more. Then watch as a competing product is launched with the help of the top consumer-electronics retailer. That's what confronted the marketers of the digital video disk, or DVD.

But DVD is fast becoming the most important consumer-electronics product since the VCR. Just as DVD began to sell in 1997, a rival system, Divx was announced. That slowed DVD sales--but now they're on a tear: DVD sales could double this year, to just over 2 million units, and reach 5.6 million by 2002, says forecaster Info Tech Inc. And on June 16, sponsor Circuit City Stores Inc. unplugged its Divx venture, incurring losses of about $375 million.

DVD owes its victory not to tech superiority but to shrewd strategic planning. Key to its success was knitting a tight alliance with Hollywood, which wanted long playing time, high image and audio quality, and a parental "lockout" feature. But it wasn't until recently that studios began to make thousands of films available on DVD. Manufacturers, such as Toshiba and Sony, also slashed prices and poured tens of millions into advertising and promotion.

SHORT-CIRCUITED. Divx, meanwhile, save for Circuit City, had little support. The idea behind Divx was to let consumers buy a disk for the price of a regular video rental. It could then be viewed during a 48-hour period. After that, viewers could throw the disk away or pay an extra $15 to get permanent, unlimited viewing. There would be no more worries about late fees at the video-rental stores. Viewers, however, would have to give Divx a credit-card number, and then agree to be billed automatically and allow viewing to be monitored through the phones lines they used for the system.

In the end, Divx flopped: It sold only 87,000 units in 1998 and an estimated 150,000 in 1999. Why? Because hardware makers, Hollywood studios, and retailers redoubled promotional efforts for DVD. Only three manufacturers agreed to produce Divx decks, and analysts say they did so to avoid annoying Circuit City. Meanwhile, all but about 750 of some 10,000 stores nationwide refused to carry Divx lest they line the pockets of rival Circuit City. Video-rental chains had even more at stake. They saw Divx as cutting their store traffic in half, so they started introducing DVD rentals.

Perhaps worst, given DVD's higher profile, Divx ads often backfired. Customers would go to stores that offered only DVD players. That's a salutary lesson in the law of unintended consequences. And a Divx marketer's nightmare.