Scott A. Partridge (Editor: Stacy Walter)

DVD is a consumer entertainment format developed through advances in digital data storage, digital video compression, and enhanced laser technology, which is creating a new market for content holders. Many proponents have touted DVD as the format of the future, and they have purported that DVD will all but eliminate the videocassette recorder in the home. However, the future of the DVD business is not without problems. While short-term growth prospects are good, it appears that the window of opportunity is small, and there are several factors which may negatively impact the long-term viability of this format.

TECHNOLOGY: DIGITAL COMPRESSION

DVD looks like a standard compact disc, but with much greater storage capacity, holding up to seven times the information of a compact disc. Storage capacity is increased due to the ability to digitally compress and house video and audio data into smaller and more densely positioned pits on the surface of a disc. Fine-tuned lasers read the pits and enable it to be viewed digitally through DVD players.

Discs are manufactured in a method similar to compact discs. Digitally-stored content is etched in glass by a laser encoder. Nickel is layered on top to create an exact replica image of the pits in the glass, creating a stamper. This is loaded on a press, and discs are created at a rate of one every three seconds.

There are three types of DVD discs: DVD-5 holding 4.7 gigabytes of data with content on one side of the disc; DVD-9 holding 8.5 gigabytes of information; DVD-10 storing 9.4 gigabytes with information on both sides of the disc. Dual layer DVD-9 permits for two layers of information on one side of the disc. When manufacturing DVD-9, it is critical to keep the transparent layer, which lies between the content, perfectly even in thickness or the disc will not play.

The DVD format presumably creates a new opportunity for content holders to enhance their libraries. Costs to digitally-prepare multiple video, audio, subtitled streams, closed captions and menus are extremely high ranging, between $10,000 to $80,000. It costs an additional $2.50 to manufacture a DVD disc, with 15 per cent of gross sales spent on sales and marketing. A sample profit and loss statement for a title would show net margins as low as 20-25 per cent, compared to 45-55 per cent for a VHS videocassette release.

Approximately 350,000 players were sold to retail establishments during 1997, and 60 per cent of these were purchased by consumers. With production expenses high and copyright protection still uncertain, the ability to turn a profit in this small market remains difficult, as evidenced by the 1997 figures. 1998 is predicted to show dramatic growth, with projections of one million machines sold to consumers this year.

The primary use of DVD-Video is for home entertainment. With a disc capable of holding two aspect ratios of a film, pan & scan and letterbox, multiple spoken and subtitled languages, as well as interactive menus with the ability to see a selected scene by branching, it is a colossal advance from VHS video. The initial consumer is the videophile, who has an elaborate home theater and significant disposable income. Other uses of DVD-Vidoe include reference materials, promotional pieces for businesses, and supplemental programming at art museums, to name a few.

Enhancement of the content is the single strongest factor in driving the acceptance of this format. For all of this content, the selling price is still quite low, under $25.00 suggested retail price (SRP). Furthermore, its small size promotes collectibility. Most of the major film studios, record companies, and small independent content holders are offering DVD-Video products to bolster the market.

Consumers are moved by the benefits of this format, though sales were not as brisk as anticipated over the 1997 Christmas season. With the growth of retail outlets now over 6,000 locations, many expect growth in demand of DVD. Success in non-traditional distribution channels, such as Internet and mail order, is also a sign of growing consumer acceptance.

Another factor driving the business of DVD is the development of DVD-ROM. There are projections stating that as many as eight million DVD-ROM drives will be in the marketplace by the end of 1998. This volume of machines would allow for critical mass as well as enable content holders to garner revenues, thus making it viable to enter the market.

The DVD formats are being developed by the DVD Consortium. Here, all the format standards are being debated for maximum effectiveness. It will be vital to set standards in order to allow for manufacturing of consistent products, thus creating playability across multiple platforms. Initially, some hardware companies sold products with flaws in processing abilities, which led to confusion amongst consumers. The format has gone through a large learning curve, and processing problems have since been diminishing.

The short-term growth of DVD is very promising. The format has been released in Japan, North America, much of Asia, and it is due in Europe during the second quarter 1998. Consumer acceptance is developing and should continue to do so as awareness is being raised by hardware advertising and tag lines of ‘available on DVD’ by most video companies. Most new titles are released on the same day and date as the VHS video.

A competing format called Digital Video Express (Divx), launching Summer 1998, will cause confusion and possibly limit the short term success of DVD. Divx is a pay-per-view form of DVD, with discs rented (for limited play) and purchased. All production and manufacturing are similar, yet there is the addition of extra encryption on the disc for trackability. Unfortunately, this is a closed-end system, enabling only Divx discs to play on Divx machines and not on standard DVD players. Standard DVD’s will play on Divx machines, and this could ultimately undermine Divx.

Opportunities also abound in the DVD-ROM arena. With the large number of drives reaching the marketplace in 1998, there will also be an increase in related products. Since these drives can play DVD video discs, content holders should be preparing low-cost simplistic versions of these discs for this market.

However, problems are abundant for long-term growth of the DVD format. A large percentage of the US population is satisfied with the quality VHS over a 20" screen with mono sound. Thus, content providers and hardware manufacturers must spend significant dollars to convince consumers to purchase new hardware and change their preferences.

The DVD format has a limited window of opportunity. Video on Demand (VOD) is an emerging product in this field. VOD will provide consumers with similar enhancements as DVD, including all transactions occurring in one’s home over the television, computer or set top box. With the delivery system still being developed, DVD is in the current position to create substantial penetration and acquisition of the marketplace.

Back to Home Page