DIVX ON TEST MARKET STAGE IN FIGHT FOR DVD STARRING ROLE

DALE BUSS / Additional reporting: DAN ALAIMO

With the test market introduction last month of Divx, the battle of DVD technologies began evolving from a war of words into marketplace competition.

The Divx limited-play variation of the DVD format began tests in the San Francisco and Richmond, Va., areas June 13. Forty-five stores of two electronics retailers are involved in the tests -- Circuit City, Richmond, and The Good Guys!, Hayward, Calif. One Divx player is now available along with some 45 movies, according to press reports.

Warner Home Video, Burbank, Calif., is running a rental program for standard DVD in the same markets, as well as others.

Divx, based in Richmond, is short for Digital Video Express, a company owned by Circuit City and Los Angeles law firm Ziffren, Brittenham, Branca & Fischer. Consumers buy movies on Divx discs for $4.49 and have 48 hours to view them after they have been put in a special player that costs about $100 more than a standard DVD machine, but which also will play standard DVDs. Additional viewing time may be purchased for about $3, or more for decoding that will allow permanent ownership of the software.

Studios like the Divx format, according to industry reports, because of the copy-protection features it offers and because of large upfront payments made to them to put out movies in the Divx format. Some video-rental retailers, including supermarkets, see Divx as a threat to their business, while they view standard DVD as a high-tech enhancement that will help them meet future in-home delivery competition.

However, according to SN's Annual State of the Industry Report on video in supermarkets, a minority of responding retailers, 6.5%, also saw potential for selling the low-priced Divx discs in the grocery environment if the format becomes accepted at mass-market levels. While the scope of the current Divx test pales next to the national availability of standard DVD -- an estimated 1,400 titles are available -- this is likely to change in the fall when Divx supports its national rollout with $100 million in advertising over 12 months, said an official. Divx expects 400 titles to be available by the end of the year.

Divx advertising slogans seem aware of consumer difficulties in understanding the system. "Sometimes the biggest ideas are the hardest to grasp," goes one. A tag line is, "Divx, the best way to watch movies at home."

Industry executives are careful choosing their words, but most believe consumers will prefer standard DVD over Divx.

"Divx will just be an additional option that will be available to consumers and retailers, but DVD will be the much stronger format," said Bill Bryant, vice president of sales, grocery and drug at Ingram Entertainment, La Vergne, Tenn.

"We're participating in DVD and Divx," said an official at Buena Vista Home Entertainment, Burbank, Calif. "But we don't have a crystal ball. We feel it's really for the consumer to decide which way they want to go."

On the hardware side of the business, Rusty Osterstock, assistant general manager of the DVD division of Panasonic Consumer Electronics Co., Secaucus, N.J., noted that his company will manufacture and market a Divx player this year.

"Our position on Divx is it will broaden acceptance of DVD as a whole. It's a delivery method for the software that is more convenient for the consumer," he said.

"There are certain feature advantages of Divx that consumers ultimately will have to decide if they want, and want to pay for, because they will pay premiums for those features. But Divx-featured players also will play non-Divx discs, so they should be looked at as universal DVD players," said Osterstock.

The lineup of major studios for the two versions of DVD finds Warner Home Video and Columbia TriStar Home Video, Culver City, Calif., both strongly in the standard or "open" DVD camp. Warner and Columbia have a financial interest in DVD. Twentieth Century Fox Home Entertainment, Beverly Hills, Calif., is the one major studio that has aligned itself with Divx and not standard DVD, while others, including Buena Vista; MGM Home Entertainment, Santa Monica, Calif.; Universal Studios Home Video, Universal City, Calif.; and Paramount Home Video, Hollywood, support both formats.

If released on DVD and Divx this fall, Paramount's "Titanic" is seen as a title that will help the new technologies break through to the mass market. But Paramount has so far made no announcement about its digital plans for the mega hit.

"It's very evident that the studios have committed to driving hardware sales by releasing software and proving to consumers that they have a very long-term commitment to the format," said Ingram's Bill Bryant.

Supermarket retailers generally have been quick to embrace standard DVD, and in some markets faster than video specialty stores. Big national video chains, like Blockbuster and Hollywood, are only now starting to carry DVD. According to SN's survey, 10.3% of respondents said they now offer DVD for rent, while 5.1% said they offer DVD for sale. About a quarter, 26.9%, said they plan to test or carry DVD in 1998 and the same number said they won't handle it until hardware penetration reaches mass-market levels.

For example, Schnuck Markets, St. Louis, took an early lead when DVD was introduced last spring, and now offers the new format in 24 of its 63 video departments and in five of its seven freestanding stores.

Wegmans Food Markets, Rochester, N.Y., and Giant Eagle, Pittsburgh, also have strong DVD programs. Among the many others in DVD to one extent or another are: Nash Finch Co., Minneapolis; Coborn's, St. Cloud, Minn.; K-VA-T Food Stores, Grundy, Va.; Carr Gottstein Foods, Anchorage, Alaska; B&R Stores, Lincoln, Neb.; Reasors, Tahlequah, Okla.; and Star Time Video, Columbus, Ohio, which operates leased-space departments in four Big Bear stores.

Another leased-space operator, Marbles Entertainment, Los Angeles, with 15 video shops in Vons and Lucky supermarkets in southern California, is preparing to offer a variety of DVD titles for sell-through beginning in the next few weeks. "A lot of people are starting to ask about it, both low-income and high-income shoppers," said Matthew Feinstein, vice president.

"What a lot of supermarket retailers are doing right now is identifying a handful of upscale stores where they do have a customer base with the interest and income level that would lend itself to an active DVD-rental base," said Des Walsh, vice president and general manager at SuperComm, Dallas.

Other chains, such as Marsh Supermarkets, Indianapolis, only are offering sell-through of DVD titles via the Internet. Customers can order them on-line and pick them up in the store's home-entertainment department on the title's release date.

"It's very convenient for DVD [player] owners, who frequently are time-pressed," said Bob Tollini, senior vice president of marketing for video distributor Major Video Concepts, Indianapolis. Its Web site hosts Marsh's DVD-ordering link, which offers 600 titles. Marsh executives weren't available for comment.

Many industry players believe that supermarkets won't become mainstream participants in DVD's growth until the rental market heats up. But some say that's already happening. Studios are beginning to promote it, and Ingram's Bryant said that retailers are increasingly attracted to rentals because they can purchase each DVD title for $20 to $25 and charge the same rental fee as for a VHS tape, which often cost retailers about $70.

B&R Stores is experimenting with 36 DVD titles for rent at one of its 11 stores, said Bob Gettner, video buyer and coordinator. The discs are moving, he said, but B&R's $400 DVD player is still collecting dust despite the store's package offer of two movies and a player for $20.

"Until we see a good saturation in our local market of people with players we won't be putting them in the other stores," Gettner said. "From what I've seen, the DVD format doesn't make much difference unless you've got a large enough TV."

Seattle-based New Century Multimedia Group is trying to help supermarkets with a deal under which, for a sign-up fee of $50, it will lend a supermarket a DVD player that will rent for $10 to consumers -- then New Century and the store will split revenues. A few chains, like Nash Finch, are experimenting with the arrangement in a few stores, and New Century is negotiating with several other majors including Kroger Co., Cincinnati, according to Josh Hanson, vice president of business development.

Industry executives acknowledge that it's true that few American consumers are equipped with a large-enough television set, or a capable-enough sound system, to truly optimize what DVD offers. But they also say that even DVD-player owners are much more enamored of the format's basic enhancement of video and audio quality than they are of the extras that studios include on many discs.

"Certainly all the features like directors' commentaries and uncut versions, languages and subtitles, are definite perks, and we're finding that many consumers like to see the stuff that ended up on the [cutting-room] floor," said Amy Jo Donner, director of the DVD Video Group, Los Angeles. "But ultimately, consumers like the fact that they're getting better pictures and sound. That's what's driving sales," she said.

"Digital formats are the way of the future, and in video terms, DVD is the platform of the future," said SuperComm's Walsh. SuperComm, a shared-revenue company that is a subsidiary of Walt Disney Co., Burbank, Calif., has been given the task of developing the DVD-rental business, particularly in supermarkets.

Taking Stock

More than 350,000 DVD players were sold to consumer-electronics dealers in 1997, the format's first year, at prices that gradually dropped from about $400 to an entry level of about $300 by the end of the year.

Sales to dealers -- not consumers -- were 10 times the level of first-year sales of CD players in 1983, industry executives point out, and nearly twice the first-year sales of VCRs, when 200,000 VHS and Beta machines were sold to dealers, according to the DVD Video Group, Los Angeles. So far this year, dealers have bought 200,000 more DVD players, according to Rusty Osterstock, assistant general manager of the DVD division of Panasonic Consumer Electronics Co., Secaucus, N.J. About 60% to 65% of players going to dealers are being "sold in" to consumers, he estimates.

"There's strong word-of-mouth, which we can measure by seeing how many hardware products are being bought upon the recommendation of friends," said Marc Finer, director of Communication Research, Pittsburgh, who is assisting DVD promoters and who also helped out with the launch of CDs and VCRs. "That's a very good sign for a new format."

Hollywood is supporting its end of the push by releasing new and old titles in the format, an estimated 500 to 600 by the end of last year and many more this year. Some industry executives believe that as many as 2,000 DVD titles of all varieties will be available by the end of this year, selling for a suggested retail price of $25, often discounted to $20. What's more, studios now are issuing new titles in DVD on the same date the title is available on VHS.

"Looking at the support that DVD has from hardware manufacturers and Hollywood and the studios, no one thought it would be this strong this fast," said Amy Jo Donner, director of the DVD Video Group.