DIVX: THE DAY THE CLOWN CRIED by Peter M. Bracke

With the announcement by Circuit City that it was pulling the plug on the controversial "pay per play" DIVX format, the DVD community breathed a collective sigh of relief that the pesky thorn in the format's side had finally been clipped. However, as the dust settles, will the seemingly clear path to success for DVD have any new roadblocks strewn in its path?

By most estimates, the DVD format has had a tough time in the last two years. After years in development, the fledging Digital Video Disc weathered prolonged technical and copyright issues, a narrowly-avoided format war, continued pre-launch postponements and a near-vicious press indifference that many thought would kill the format before it even got out of the gate. When DVD did finally launch in March of 1997, it did so with limited studio support and the naysaying of both the mainstream tech press and staunch laserdisc advocates, of whom many thought would be supportive, not combative. And though DVD didn't hit a home run its first time at bat, it drive a solid line double, and by September of 1997, player and software sales showed real promise. The press began to look more positively on the format, and aside from early supporters Warner and Columbia, heavy hitters Universal and Walt Disney soon announced DVD support. DVD was on its way.

The DIVX Bomb Lands

	So, who's crying now, Winky? Exclusive! The only known photo of Winky, an early rejected DIVX marketing concept.

But like a shock wave, the arrival just hours after the big Disney announcement of something called DIVX rocked the DVD world. If you have never heard of this "enhancement" to DVD, you may be one of the few. Designed by leading consumer electronics chain Circuit City and a high-powered Hollywood law firm, DIVX added a modem to a DVD player, and played special DIVX encrypted discs. After activating your DIVX account via phone, a DIVX movie was activated from the moment Start was pressed on your player, and allowed for a limited "viewing period" of 48 hours. Once your time was up, additional viewing periods could then be ordered for an additional fee, or a disc could be converted to "Silver Status" for unlimited play, for a higher fee.

Hence, DIVX was simply pay-per-view DVD. The studios loved it, of course, with Disney, Universal, DreamWorks and major holdout Paramount all jumping in from the start, with others such as Fox and MGM soon to follow. The early adopters and many in the consumer electronics industry, all of whom had made a major leap of faith with DVD, were not so happy. After six tenuous months on the market, this was a battle DVD didn't need.

Divx was mired in controversy from the start. The encryption technology required specially encoded discs and players which didn't work on existing DVD players, threatening (and largely succeeding) to confuse consumers over what to buy. The subsequent reaction was swift and furious, but perhaps no place as impassioned as on the web. Seemingly within minutes, anti-DIVX web sites popped up, and no doubt the leading pro-DVD enthusiast sites such as The Digital Bits, DVD Resource and The National Organization To Ban DIVX were instrumental in pitting DVD vs. DIVX. A full-scale war between the digital dueling discs was underway.

But, an amazing thing began to happen. Despite naysaying and early dire predictions by the press, the laserdisc community and the pro-DIVX factions, DVD players and discs began to sell...a lot. The remaining studios previously withholding DVD support all announced belated releases on the format, yet staunch DVD backers Warner and Columbia refused to budge and support DIVX. Eventually Circuit City, who perhaps made a major miscalculation by so boldly predicting early in the DIVX launch that it would achieve great, swift success and supersede "open" DVD, soon found itself stuck with millions still owed in promised payments to the studios, nearly zero support on the retail level, and a launch plagued by defective players and a serious lack of available titles.

Now, less than two years after the announcement of DIVX, the format is no more. "Sales at participating Divx retailers reflect strong consumer interest in the Divx feature," said Richard L. Sharp, CEO of Digital Video Express (DIVX's parent company) and Circuit City, in a press release announcing the end of DIVX. "The majority of customers purchasing DVD players in Circuit City stores have selected players that include the Divx option. Unfortunately, we have been unable to obtain adequate support from studios and other retailers. Despite the significant consumer enthusiasm, we cannot create a viable business without support in these essential areas."

Now What?

In the hours since the DIVX announcement, the atmosphere on the web and within much of the industry was one of relief, satisfaction and perhaps even glee. It almost reminds me of one of the films that never made it to DIVX, The Wizard Of Oz. "Yes, Dorothy, the Wicked Witch really is dead." But, with this newfound sense of optimism (and suspended disbelief for some) that comes in the wake of DIVX's demise, the question remains, where can DVD go from here?

Quite simply, DVD has been one of the bigger, if not the biggest, new product introductions in the history of the consumer electronics industry. Many comparisons of early DVD sales to VHS and CD historical models has been made. However, DVD occupies a significantly different place and time than its predecessors, and perhaps much larger expectations. And, as history has shown, when a new heir apparent to the established king (in this case the trusty VCR) shows true signs of promise, not everyone will necessarily want to see it succeed. Fear, paranoia and even extreme caution may be looming ahead.

Traditionally, the major Hollywood studios have been largely against new technologies, and actively fought tooth and nail to have the VCR banned from the kingdom. After predicting it would spell the end of their theatrical business and send millions back home to sit in front of their TVs, the VCR as death knell never happened, and though today the studios derive more revenue from home video than theatrical release, the box office continues to thrive. The filmgoing experience will probably never die, so on the surface, one would think the studios would welcome a new format through which to resell their back catalogs. Especially since the replication costs for DVD can, with adequate volume, be cheaper than VHS tape.

Changing the Paradigm

But, there is more here than simply switching to a shiny silver disc. Perhaps strangely to some, one of the bigger obstacles DVD may face is the fear on many studios' parts that it will begin to cannibalize the established VHS market. In fact, this is already beginning to happen. Every week more and more reports come in from leading retailers such as Best Buy, Tower, Musicland and Kmart emerge about increasing profits derived from DVD, and (gasp!) shelf space previously devoted to VHS being cleared for shiny 5" discs. Sales of Widescreen VHS tapes have plummeted, and laserdisc sales are all but dead.

DVD has quickly become the format of choice for early adopters, film buffs, and an increasing number of tech-saavy 18 to 34 year olds. Even families and women, two categories that are a signpost of a format going more mainstream, are beginning to become interested in the format, with recent VideoScan numbers illustrating that about 25% of 1999 disc sales went to family, comedy or drama/romance titles, instead of the usual action/adventure fare early adopters (i.e., white males) generally favor.

But, why should this be scary to the studios? Lest one forgets, it is important to remember that DVD was developed and launched without support nor serious involvement from many of the top studios. The three major players in the launch, Warner, Columbia and Universal, all have corporate parents (namely Sony, Toshiba, Matsushita) with vested interests in hardware to sell. DVD holdouts as Fox, Paramount and Buena Vista don't have such a need to push hardware, and all have serious (counter?) interests in the established rental/sell-through windows currently enjoyed by VHS. And with revenue sharing and and copy-depth protection becoming the norm at video retailers across the country, the studios can be secure and comfortable that with VHS they carve out a chunk of the rental revenues that for years eluded them.

Perhaps that may have been why DIVX was initially attractive. However, with the demise of DIVX, and DVD poised solely as a sell-through model (it is worth noting that it was largely Warner who set the tone for this approach, and had to pull back a bit when it became clear DVD would not succeed without strong rental support at the retail level), the loss of rental revenue is a major concern for studios. But as DVD grows, cannibalization of VHS is inevitable. It just can not be avoidable, and any supplier who thinks consumer will not choose one over the other has clearly lost a few marbles.

So, can DVD continue to be offered strictly at sell-through prices as VHS evaporates? Don't think for a minute that perhaps as soon as 2000 (maybe even Christmas 1999?) we may not start to see changes and experiments in how day & date DVD titles are priced, or perhaps titles may even be held back from release more regularly until after the rental window has closed. But don't expect at least some studios to give up on rental revenue without a fight.

Holding Out

Probably one of the more debated aspects of DIVX and its impact on DVD has been in regards to some of the high profile holdouts of DVD. Though the DIVX almost certainly played a part in such early no-shows such as Paramount and Fox, the continued absence of top Spielberg titles and "classic" Disney animation continue to perplex many. Though in my travails in writing some Spielberg updates my general hunch is that that particular case seems more sales and installed-player base motivated than directly involving DIVX, the Disney animation question is a bit more clouded.

Certainly Disney felt confident and secure enough in DIVX to grant them a license to their animated titles in the DIVX format. Perhaps even more telling, both Disney and DIVX did reveal a few months back that said licensing was for the fabled DIVX Gold, which is a DIVX disc that is purchased for a set fee just like an "open" DVD title, but can only be played on DIVX players. Since DIVX offered a layer of copy protection a bit more robust than DVD (but certainly not a deterrent to piracy, in many's opinion), it was clear Disney had genuine concerns with copy protection, and by going with DIVX Gold, some of the charges against Disney wishing to milk consumers of their animated titles by limiting their classic animation to a pay-per-view model exclusively may have been rendered moot.

But, the question hangs in the air. With DIVX gone, will there be far less incentive for both Disney and Spielberg to continue to hold out, because as of now, it is either DVD or nothing. Buena Vista, at least, isn't commenting. Requests for a statement were declined, though with the demise of DIVX still fresh, expect more reaction in the weeks to come. However, with Disney assuring us and other press that Disney animation is coming, the question to be asked might be more of the volume and level of their commitment in a DIVX-less world, not if they will commit at all.

The Silence Of The Supplements

Another big question mark for DVD is just what the format could be, should to be, and what the consumer will pay for it to be. The format is still primarily a format catering to the early adopter, collector or widescreen aficionado, and the wants and desires by film buffs are often at odds with the desires of the average consumer who simply views a movie as a way to kill a few hours on a Friday night. DIVX seemingly tried to bridge this chasm, and failed. Can DVD succeed where its pay-per-view cousin didn't?

While nifty whiz-bang supplements such as commentaries, making-of features and interactive DVD-ROM components are expected and widescreen just about standard on DVD, it is anything but on VHS. As the format goes mainstream, will the average audience member care or want such bells and whistles? And, as Hollywood and the consumer electronics industry are certainly capitalist enterprises, the majority usually wins.

At worst, DVD sales will begin to taper and it will stick to being a replacement for the laserdisc. However, with the strong momentum DVD is enjoying as it goes into Christmas 1999, and a level of studio and manufacturer support that laserdisc never enjoyed, that seems unlikely. Make no mistake, the clash of these two differing sensibilities (the "early adopter" versus "Joe Six Pack") seems poised to be a major issue for DVD.

Recent studies, industry analyses and studio experiments already hint that the industry is aware of these looming issues. Studios such as Universal, Warner, Buena Vista and Columbia have all begun to experiment with different price points, features, aspect ratios, packaging and supplemental extras. Sales figures are being closely watched for such titles as Universal's movie-only and collector's edition releases of Patch Adams, Columbia's experiments with the snapper case on two titles, and Warner's controversial three-tiered pricing structure. Even Fox has played around with the rental pricing issue, inflating prices on their day & date with VHS titles to $34.95, regardless of features.

For the established DVD community that is already sold (and some might cynically say were presold) on the format, the key question is mainly one of "will they mess it up?." Though this writer is not psychic (though I am a big Kenny Kingston fan), trust me, if DVD starts achieving the numbers many are predicting, you will see every distributor, two-bit producer and pirate out there start developing DVD product. So then just what is DVD going to turn into? Already the Hollywood studios almost neatly divide right down the middle between those actively pushing the envelope of the technology and those who regard it more as another VHS upon which to repackage their films.

Casual conversations and some public comments in the past continue to illuminate the divide. "We're in the software business, we don't sell hardware" a Disney sales rep told me once, and just recently a Paramount staffer remarked "maybe DreamWorks and New Line can do the special edition content, but we can't," in reference to the complexities, budget requirements and committee-think red tape that seemingly plagues most major studios with vast catalogs. It seems some studios truly see DVD as simply a digital version of VHS. To many DVD enthusiasts, that means "they just don't get it."

However, it is worth speculating that as the DVD market grows and the customer ultimately decides how important supplements, quality, packaging and price is them, if past examples hold true again, the studios will follow the money. Make no mistake, if consumers demands extras and interactivity as pro formula for DVD, Paramount, Buena Vista, et al, will most likely follow. Conversely, if the consumer decides they want $9.95, movie-only pan and scan, the topflight DVD title that is almost de riguer now may go the way of the special edition laserdisc (remember, with decreased volume comes increased cost). And even potentially more troublesome is that as the potential long-term profits become more apparent, the urge to hold back on features in anticipation of the eventual re-release (and re-release and re-release) in the future may result in less topflight special editions right out of the gate (similar to VHS rental to sell through windows and "repriced to own" VHS releases with new features).

Then there is the final question of territoriality. Already as DVD grows more and more popular, an increasing backlash is beginning to be heard among the faithful: "Don't go mainstream." Though many complain about Buena Vista's featureless, non-anamorphically-enhanced titles, or Warner's no-frills budget line, Warner and Buena Vista are nevertheless the No. 1 and No. 2 DVD suppliers in terms of market share, respectively. Though some feature-packed titles, such as Lost In Space from New Line, performed strongly, often outselling their VHS counterpart, there is still no hard evidence on just how much a factor extensive extras played in sales. DVD may end up very much like VHS, in that it is a title-driven industry. I, for one, are generally optimistic and hope DVD grows in market share as well as progressively and creatively. But, though no one had much nice to say about the movie-only version of, say, Armageddon from Buena Vista, everyone bought it anyway.

The Interactive Factor and Other Technologies

Though there are many question marks for DVD, one thing that is for certain is that for now, it has a clear playing field with no competitors in sight. The industry continues to gamble on the format as the delivery method for the coming digital revolution, with no less than DVD-ROM, DVD-Audio and various DVD recordable formats still in their infancy, and plenty of work continuing on "HD DVD" technologies. And with recent announcements by Sony and Nintendo that their next-generation gaming consoles would utilize DVD and the natural complementation of High-Definition Television with the format, it seems DVD certainly has gotten its foot in the door, if not a lock on the next few years as the storage medium of choice.

Of course, none of this assures DVD of true mainstream success. But every week seems to bring the latest gadget, upgrade or next generation DVD player, and even Car Theaters, Jukeboxes, convergence home theater systems and Web-based applications are all using or utilizing the technology. And even without DIVX, the idea of pay-per-view or "unlocking" DVD content on a timed basis is not a thing of the past. Though I think anyone attempting to introduce any kind of pay-per-use anything will learn what not to do from the DIVX launch, let's face it, renting a VHS tape or DVD is essentially pay-per-view, as is Video-On-Demand (which, tellingly, Warner is aggressively developing). DVD is simply a platform, and the good news is that DVD is in the right place at the right time and at the right price. The bad news is I'm sure DIVX isn't the last bunch of idiots to attempt some half-cocked scheme that is doomed to failure.

Fragmentation

One of the more interesting development is one that has been a bit overlooked over the past few weeks, that of the introduction of Nuon. Not really a thing but a process of sorts, Nuon (developed by VM1 Labs) is a more sophisticated decoder chip in "Nuon enabled players" that allows for more interactive capabilities and gaming functions. Studios such as MGM and New Line have announced support for Nuon enabled players, with discs due sometime in 2000. But before one gets all bent out of shape, all Nuon-enhanced DVD discs will play in existing players. It is more akin to DVD-ROM features on DVD-Video discs, in that only Nuon players will play the Nuon portions on the disc. However, there is the issue of fragmentation, as more and more features will only be available to those with access to DVD-ROM, Nuon, or live web events, such as the extra features on the recent MGM Ronin disc that were only available via a live webcast event. A danger here may lie in overreaching ambition to offer so many features through so many platforms and media that it all comes crashing under the weight of consumers who tune out because they are too overwhelmed with the options.

Finally, the key factor in all of this is that for VHS to pass the torch to DVD, it needs the one thing it currently doesn't have: true recordability and ease of use. Let's face it, the average citizen can't even program their VCR, let alone navigate subtitles, multi-angles and audio tracks, and the thought of complex, non-real-time DVD recording of some sort will have to be so easy a Circuit City employee could use before it can succeed. With the quagmire that is DVD-R, DVD-RW, etc., as of now we can hope those developing true DVD-Recordable learn their lessons from past mistakes. And let's not even get started on the copy protection issues...

A Nod To The Future

Though, speaking as an early adopter myself, I enjoy the quick availability, great features and quality, affordable prices and wide variety that DVD current affords. However, it would be sticking my head in the sand to think that DIVX is the biggest challenge or the roughest waters DVD may see. If the little disc that could starts moving into the 5 to 10 million players sold range, the whole DIVX vs DVD battle may seem like child's play as the war heats up over everything from rental windows to progressive scan copy protection. Though this is an incredibly exciting time for DVD, and full of wide-eyed enthusiasm, the fun is only just beginning...and so is the danger.

In loving Memory Of DIVX and Winky The Clown: 1997 to 1999