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Start-Up Firm Develops Model for DVD Industry

Technology: Circuit City-backed company says system will protect digital videodiscs from piracy.


Six months after the introduction of the digital videodisc format for home video, a start-up company backed by retailer Circuit City on Monday announced a new technical and business model for the industry.

The company, Digital Video Express, or Divx, says it will offer a rental/sales hybrid that solves the problem of piracy feared by Hollywood studios--but could create confusion among consumers experimenting with a new format. The announcement was greeted skeptically by video retailers and by some of the major studios.

Under the Divx plan, consumers will be offered a DVD for about $5 and can watch the movie for two days; they can then opt to pay additional two-day windows for $3 each. In other respects, the disc will be the same as DVD, offering a high-resolution film in a digital format on a CD-size disc.

Walt Disney's Buena Vista Home Video, Universal Studios, Paramount Pictures and DreamWorks have agreed to release new video titles on the Divx system along with their VHS releases.

The system requires new hardware, to be made by Goldstar's Zenith, Matsushita's Panasonic and Thomson's RCA brands. Hardware and software is planned to be available by summer 1998.

Divx is underwritten by Circuit City Stores and the Los Angeles-based entertainment law firm of Ziffren, Brittenham, Branca and Fischer. Divx headquarters is in Herndon, Va., and will

be headed by Richard Sharp, chairman and chief executive of Circuit City. Sharp will continue to work from Circuit City headquarters.

After making less than $1 on the initial sale, retailers would receive no additional money--a fact that has beleaguered video retailers up in arms.

"A home video combination of pay per view and revenue-sharing disguised as a disposable DVD" is what Jeff Eves, president of the Video Software Dealers Assn., called Divx in an interview in July.

John Thrasher, vice president of video sales for Sacramento-based Tower Video, said, "I don't see any incentive for retail, and not much for the consumer."

Thrasher recalled a short-lived attempt in the 1980s to create a pay-per-transaction VHS model. "It was in stores in test for about six months before everybody said, 'Our customers are revolting,' " he says.

Sharp contended, however, that "the consumer benefits are quite strong." Divx's main selling points are ease of use (no more late return fees on videos) and flexibility. The viewer can start the two-day viewing period at any point after purchase, instead of having to have it back to the video store on a specific date.

The downsides include cost: Divx players, which include a modem and special encoding technology, will cost $100 more than a regular DVD player. Currently, those start at about $500. And $5 is nearly twice the average national cost of a traditional video rental.

Those resistant to Divx also fear another downside: customer confusion. "I really hope this isn't a replay of Beta versus VHS," says Tom Wolzien, an analyst with Sanford C. Bernstein.

Wolzien notes that while Circuit City commands a dominant 15% of the consumer electronics market, its video sales are dwarfed by giant retailers such as Wal-Mart. It is at those stores where the mass market potential for any technology must ultimately be proven.

On the studio side, Sony's Columbia TriStar and Warner Bros.--along with MGM/UA and New Line, which Warner distributes--said they oppose Divx. "Our market research surveys show a 2-1 preference for current DVD technology versus the Divx model," says Warren Lieberfarb, president of Warner Home Video. Adds Lieberfarb, "I think [Divx] is obsolete from its introduction."

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