The Bill Zone Editorial - Divx - Not Worth the Worry?

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Site created 12/15/97.

page updated: 2/19/98

Divx - Not Worth the Worry?

After considering all of the information released thus far by Divx, and the responses I've heard from those at the movies studios supporting it, I am more and more convinced that we are all worrying about nothing. Yes, even with Fox having just announced its support of the format. I simply don't think it will matter.

Why? Well, all the information recently released by Divx indicates that they really are positioning themselves to go after the rental market, not the collector's market, which is currently dominated by VHS. This makes a great deal of sense, because repeat rentals are where they and the studios would run to the bank in the unlikely event that Divx succeeds. The studios will get a piece of every rental transaction, something they don't get with VHS now. The potential benefit of Divx is simply too good for them to pass up on.

Hey, it's no skin of their nose to try it. If it works, they reap the benefits. If not, they'll still reap with open DVD (if a year or so later). How will Divx and DVD figure into their plans? Well, I suspect we'll have to wait until the test marketing period is over, but here's how it's likely to go: the studios release their top hits on Divx, day and date with VHS. This protects the all-critical rental period against video pirates. Then a few months later, the studios satisfy the collectors' market by releasing the film to sell-through VHS and open DVD.

All of this is supported by Divx's own press materials. Divx discs will provide only simple pan & scan versions of their licensed films. They will include no widescreen versions, no 16x9 enhancement, no cast bios, no extra languages, no subtitles, no theatrical trailer, no behind-the-scenes documentaries. In short, nothing to attract the home theater crowd and movie collectors to the format. You want special edition, widescreen versions of Aliens or Clear and Present Danger? According to their own reps, Divx will reportedly encourage the studios to do that on open DVD.

Now, the studios could easily diffuse all of the anger and confusion they've created by backing Divx right now, by admitting that they will eventually release films to open DVD as well. Keep in mind that Disney and Universal have announced support for both formats, and done just fine profit-wise with their DVD releases. Universal has said it's unlikely that they will release anything to Divx that isn't already on DVD. And the president of Buena Vista Home Video has gone on record has saying that Divx will be examined on a case by case basis only. So why don't Paramount and Fox do the same? Well, I suspect Paramount's motivation is simple greed (especially now that they are holding onto a mega-hit title like Titanic). They would prefer to see Divx succeed to increase their profits. And they know that if they announce open DVD releases, Divx's chance of being taken seriously by consumers goes from slim to none. It may even be that their contract with Divx specifies no open DVD announcements until the fall, after the test market run and after Divx has had a chance to catch on nationally. This gives Divx the illusion of exclusivity to certain titles, hopefully increasing sales. And while it's hard to explain Fox Home Video's motivations, given their recent change in leadership, profit may certainly play a role. It may also have something to do with their relationship to Image Entertainment.

As many of you know, Image has long dominated laserdisc distribution. But laserdisc has never been more than a niche market, and is it now drying up, largely because of DVD. As a result, Image has long been on the financial rocks. And they would have been again this year, if not for hasty distribution deals they made for DVD with Universal, Criterion, and DTS among others. What's my evidence on this? Image's own financial statement, released on 2/18. Here's an exert:

"Exclusive and nonexclusive DVD sales accounted for approximately 18% of the Company's net sales for the December 1997 quarter. Although the Company intends to aggressively pursue DVD opportunities while at the same time supporting its laserdisc business, management believes that the DVD format, launched in March 1997, competes directly with the laserdisc format and continues to adversely impact the laserdisc marketplace."

This may give you an idea as to why their support of DVD has been something less than enthusiastic (check these links for more detailed financial information on Image and its position on laserdisc and DVD). Because their laserdisc business is dying, Image is having to depend on DVD to take up the slack. They need DVD to succeed as a format, but not so quickly that it knocks the bottom out of their laserdisc business, before they've signed enough DVD deals to replace it. They're counting on laser being viable for a few more years at least. So their public stance is that DVD is a niche of a niche, and laserdisc still has a lot of life yet.

So what does all this have to do with Fox and Divx? Image distributes Fox laser product. And certain of Image's LD license agreements also extend to other optical disc format rights, including DVD. This is just speculation, but Image needed a boost last year and they got one: the Star Wars Trilogy: Special Edition was their biggest ever laserdisc seller. Garret Lee of Image admitted (in their Jan 98 issue of Preview) that it's true, that had the trilogy been released on DVD, the laserdisc sales would have been a lot different. I would be surprised if Image didn't ask Fox to delay any announcement of DVD support, until well after the holiday season, to insure high laserdisc sales of the trilogy. So what does Fox do in the meantime to address the consumer demand for Fox films on digital disc? Jump on the Divx bandwagon. It will be at least six months before we know if Divx succeeds or not. If it does, Fox banks. If not, Image has had plenty of time to sell lots of Fox laserdiscs and prepare to produce and distribute Fox DVD in the second half of 1998.

Fox and Paramount aside, I'm convinced that Divx will never be the big home run hit that topples rental VHS. But let's say Divx does succeed on a limited basis. Do you think that the studios will simply ignore the collector's market? Hardly. The recent proliferation of widescreen VHS titles for sale should tell you that. There is an increasing demand for special edition releases of popular and classic films, especially now that DVD has arrived. The DVD supporting studios are simply making too much money to pass up on. Sales of open DVD titles like Air Force One and Crimson Tide have been tremendous, given that the format has only been around for less than a year. Regardless of who's numbers you use, DVD player sales have far outpaced first-year sales of compact disc players and VCRs, both big hits with consumers. As prices drop, home theater is slowly moving into the mainstream of the consumer marketplace. This is further evidenced by the fact that a significant percentage of DVD players have been purchased by people who have never owned a laserdisc player.

The reality is that Divx stands about zero chance of surviving. In order for Divx to be an even moderate success, it will have to attract the support of a significant percentage of VHS renters, most of whom are completely unaware of either DVD or Divx, and who are typically ambivalent to new technology in general. The bottom line is this: most people who are big VHS renters are quite happy with VHS. These people are unlikely to pay an extra $100-200 for a Divx player, when they are equally unlikely to buy a DVD player. And with Digital TV coming later this year, the growing necessity to own a home computer and Hi-Def on the horizon, there will be plenty of other gadgets competing for the hard-earner dollars of Joe and Jane Average in the near future.

You might say that DSS has been a big hit, so why not Divx? The answer is simple. Most people buy DSS or similar satellite services for the sports packages, because they hate the quality of their cable service or because they can't get cable where they are. DSS provides something that they can't get elsewhere - more choices and a better value. But Divx provides far fewer choices than open DVD does. Ok, so you only pay $4 for a movie and you don't have to return it. But the player costs more, you have to connect it to a phone line, you only get pan and scan, and you have to keep paying to replay the disc. Dollar for dollar, DVD is definitely the better value for those who are into new technology, superior home video and sound quality, and for those who want the richer movie experience of special edition releases. And if people really hated that trip back to the rental store, the home video industry wouldn't be nearly the success that has been.

Let's face it: aside from the few idiots that will run out and buy a Divx player just for the ability to own a pan and scan copy of Star Trek: First Contact, and the industry folk who will no doubt be interested in checking Divx out for themselves, few Divx players will ever be sold. Look, the players are generally only going to be available at Circuit City stores. Anyone who has ever patronized a Circuit City store knows that the average sales person there can't explain the workings of a toaster, much less a Divx player. Other leading consumer electronics chains (like Best Buy) have already said no to Divx. Few traditional music and video stores will carry the movies. Tower Records and Video and the Musicland Group (Suncoast, Sam Goody, Media Play and Musicland) have all pledged exclusive support to open DVD. I'm told that Wall Mart and Sam's Club are in the process of rolling out DVD in their stores nationwide, and that they will not sell Divx. And few rental stores are likely to support Divx, given the low profit margins and threat to their livelihood that Divx represents. In fact, you are likely to see increasing support of open DVD by video rental outlets, specifically to counter Divx. So I guess you'll have to buy Divx movies at Circuit City and your local 7-11.

The only thing that really bothers me about Divx, is the way the studios are knowingly allowing the confusion caused by Divx to dominate the marketplace. To my mind, this clearly shows a general disregard for the very people who support them most. The studios depend upon you as consumers to buy their product. I'm disappointed that they show so little concern for the anxiety they are causing you.

To all those of you who love and support DVD, I say relax. Use your DVD player often and without guilt. You have made a sound investment. Revel in the ever-increasing number of excellent DVD titles already out and coming soon. Don't sweat Divx. And just be patient. I am confident that by this time next year, we will see full support of open DVD by all of the studios, weather they have announced such or not. Keep in mind that we're really only talking about Paramount and Fox here. And although both have said they are supporting Divx, neither has said they will never do DVD. Fox simply won't comment, or issues 'non-denial' denials. And Paramount only says they are considering the marketplace, but Divx better addresses their piracy concerns at this time. Piracy shmiracy. They just want to make more money.

Enjoy your DVD players. And rest easy in the knowledge that by Christmas, the most common use of a Divx disc will likely be as a coaster for your Coke, while you watch an awesome DVD special edition release of Titanic. Enough said!

Bill Hunt, Editor
The Digital Bits

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