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Is Divx a Threat to PPV, Home Video?

12/06/1998 7:00 PM Eastern

It's new, it's confusing, and it's certainly gotten the
attention of the home-video industry.

It's Digital Video Express' limited-play DVD variation,
better known as "Divx," and it has video stores in a sweat. As the pay-per-view
version of home video, should PPV providers and cable operators be equally concerned?

As it stands now, Circuit City Stores Inc. is the largest
mass merchant selling the new Divx players, and it is the main financial backer of the new
technology.

Two companies are currently licensed to sell Divx hardware
-- Zenith Electronics Corp. and Thomson Consumer Electronics' RCA brand -- and both of
them are selling their respective players at around $399.

Each will roll out its wares into other mass merchants in
the coming weeks, along with Panasonic Consumer Electronics and RCA's ProScan brand.

How do Divx players work? A consumer purchases a Divx disc
from a participating retailer, and the disc allows unlimited plays of its content for 48
hours. After that, each time the disc is viewed, that information is stored in the Divx
player, which is hooked up via telephone lines to Digital Video Express, and the customer
is then charged $3.25 for another 48-hour period.

The initial purchase of the disc costs about $4.49.
Comparatively, DVD titles retail for about $15 to $20 for unlimited plays on a permanent
basis, but the difference is that DVD titles can only be played on DVD players, while Divx
players can play both Divx and DVD titles.

Circuit City is currently stocking about 150 Divx titles on
its shelves, with another 50 set to arrive this month. Are PPV providers worried?

CABLE: NO THREAT

Most cable operators agree that while it's important to
take any competitor seriously, they just see too many problems with the format for it to
ever be a serious threat. And even if it did become one, home video would feel the heat
much more than PPV, as the purchasing procedure so closely resembles that of a video
rental.

Consumers must leave their homes to get the discs, and PPV
providers believe that will always give PPV the edge. When cable goes completely digital,
of course, they believe that their edge will only increase.

"When laser discs first came out, everyone said,
'There goes home video and PPV,'" said Deborah Charlton, director of customer
support, telesales and PPV at Media General Cable in Fairfax, Va. "We still have a
way to go before Divx could make that big of a difference."

Rick Lang, marketing director of Cable One in Phoenix, sees
Divx's pricing as one of its main drawbacks. "When you start paying $4 or $5 for
something, and video sell-through is going for about $10, you begin to wonder about the
tradeoff in consumers' minds. Do I want a limited number of plays, or do I want to own
something?" he said.

Ted Hodgins, manager of PPV at Media General Cable, also
didn't see the sense of Divx pricing.

"By the time you watch your Divx disc for the third or
fourth time, you're up to about $20, in which case you could have bought the DVD," he
said. "You have to remember, too, that some people are just going to discard the Divx
after that one viewing, which creates an environmental nightmare. I just don't see the
staying power of a technology that is so throwaway."

It's this "throwaway" perception that has cable
operators like Falcon Cable TV Corp. concerned not so much about the threat of Divx, but
about how its pricing could affect overall perceptions about the costs of technology.

"A DVD costs pennies to manufacture," said Art
Maulsby, director of public relations at Falcon. "If you charge under $5 for a Divx
disc, you're proving just how little it costs to make it, and that will put pressure on
other manufacturers who make CDs [compact discs] and DVDs to lower their costs.
Personally, I'd rather have the DVD for $20 and be able to watch it forever."

CONSUMER CONFUSION?

Another major sticking point is just how confusing Divx
technology is to the consumer. It's this confusion that PPV executives believe will
ultimately slow its penetration into the marketplace. Because Divx and DVD are such
similar technologies, it will be hard for retailers to differentiate between the two in
consumers' minds. As a result, the public is likely to take a wait-and-see attitude before
purchasing, these skeptics believe.

"There's no installed base of Divx players yet,"
said Phil Laxar, senior vice president of programming at Jones Intercable Inc., "and
consumer confusion over Divx and DVD is going to slow that down even more. When Divx does
get an installed base, they perhaps will have an interesting story to tell, as it will be
like a high-quality videocassette rental. But until then, there's not a near-term
threat."

Others saw compatibility problems between Divx and DVD
players, as DVD homes can't use Divx discs.

OPS: VOD WILL BE OVERPOWERING

Aside from what they feel are obvious drawbacks to the
technology, MSOs also believe that the strength of PPV itself will ultimately defeat the
format, particularly when PPV goes digital and becomes more user-friendly.

They referred to video-on-demand companies like Diva
Systems Corp., which provides multiple offerings, time-shifting, pausing and
fast-forwarding, and which Hodgins refers to as "Divx to the 10th power."

They argued that if consumers can order affordable digital
movies whenever they want from their own homes, without the expense of additional
machines, why would they opt for Divx over PPV?

"People are running out of room, for one thing,"
Charlton said. "A Divx player is just one more machine that you have to buy and put
near your TV set."

While VOD is still a few years away, operators are starting
to roll out 35-channel near-VOD platforms that are almost as extensive as the ones that
have worked for direct-broadcast satellite service DirecTv Inc.

.

DEFENDING DIVX

Not everyone is ringing the death knell for Divx, however -- particularly Divx itself. In
fact, Josh Dare, a spokesman for the company, pointed to PPV as one reason why Divx will
succeed.

"A lot of people who have switched from renting videos
to watching pay-per-view were tired of the hassles, like returning tapes and paying late
fees," he said. "But we're better than pay-per-view in that you can fall asleep
tonight, then watch the rest of the movie tomorrow. We also have the rent-to-own option,
which means that you can have unlimited plays for $15 or $20."

Divx titles are currently hitting the streets day and date
with the video release, and Dare admitted that the company is targeting the video-rental
industry as its main competitor. He didn't see VOD as a threat because the issue, he said,
is "years away."

Even then, Dare argued, Divx's research has found that
people don't mind leaving home to rent movies, and that they enjoy the shopping experience
and reading the video boxes.

After all, he said, online bookseller Amazon.com is doing
great, but people are still going to Barnes and Noble retail stores.

"Consumers like to touch the product before they buy
it," he added.

Even some cable operators said they could see Divx's appeal
for some people.

."I could see Divx being attractive to those who'd
like to own the software but not necessarily play it," Laxar said. "One of the
big problems, though, is that you have to go to the store to pick it up, and if you do
play the title frequently, then DVD is probably better."

As far as the issue of quality, Divx excels in that area.

"It has the allure of its picture and sound,"
Lang said. "With the boom in home theater, Divx become an attractive option for these
people."

While Lang agreed that digital PPV has a rosy future, he
noted that its rollout has been tedious, and that cable, in general, "hasn't done a
great job of driving the message into consumers' minds that PPV is an option."

PPV executives agreed with that assessment. Joseph Boyle, a
spokesman for PPV network Viewer's Choice, said, "We haven't been aggressive in
communicating certain things to our customers, such as no rewind fees, no returns and the
fact that our movies are never out of stock."

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