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Divx dust-up looms

The high-density, pay-per-view recording medium looks more likely than ever to threaten the nascent DVD market.

With a new manufacturing agreement, upcoming field tests, and a massive marketing campaign about to get under way, Divx--a high-density, pay-per-view recording medium--looks more likely than ever to threaten the nascent DVD market.

This week, Digital Video Express (DVE) announced it has inked a five-year deal with Nimbus CD International to manufacture and replicate Divx discs. DVE also said it will launch customer tests this summer in San Francisco and Richmond, Virginia.

In addition, the company has invested $100 million in a marketing campaign designed to erase the negative publicity Divx has generated in its efforts to supplant DVD, analysts say. It will likely seek to clear up lingering confusion about the differences between Divx and DVD.

Particularly, the Nimbus deal is a clear sign that DVE, which developed Divx with backing from Circuit City, is making a serious run for the digital video market, according to analysts.

Roughly speaking, Divx is a limited-use, pay-per-view version of the 4.7MB DVD (digital versatile disc). Its pending arrival has already caused an uproar, since DVD players can't play Divx discs, although a Divx player will be able to view DVD movie discs. Consumers are fuming that their new DVD equipment may become obsolete and wondering whether Divx will slow the sales of DVD titles as producers hedge and new consumers ponder which format to buy.

Proponents of the technology say that Divx offers the video and sound quality of DVD with more compelling content and a more user-friendly distribution model, since users can throw out or recycle "used" Divx discs.

More clearly in its favor, DVE has signed deals with most of the major motion picture studios that support DVD, including Disney, Paramount, Universal, and MGM. Additionally, Twentieth-Century Fox and Dreamworks, two studios that do not yet support DVD, have backed Divx. Most studios have been worried about the copyright protections offered by DVD.

JVC, Zenith, and Matsushita have also signed on to manufacture Divx players.

"That's one of the impressive things they've done," said Tom O'Reilly, executive editor of DVD Report, a trade publication. "They've got Circuit City as a major financial backer, and most of the major Hollywood studios. [DVE also has], pretty solid backing on the hardware front [from the companies], that will be making the Divx players."

However, being second to the market has hurt Divx, as there is not yet a clear distribution infrastructure in place. Rental chains will probably not offer Divx titles as the technology has effectively cut off two revenue sources: late fees and return visit rentals.

"Not everyone is happy about this model of the disposable disc," said Ted Pine, an industry analyst with InfoTech Research. "The rental channel likes you to return, so you can rent another movie."

There has been speculation that DVE will offer Divx titles in supermarkets and convenience stores, as well as Circuit City stores.

Both Divx players and software titles also have to come down in price before being able to compete with DVD, O'Neil noted.

Despite these obstacles, if DVE continues signing agreements like the Nimbus CD deal, neither analyst is willing to count Divx out. "What they've done is position themselves well at the starting line," explained Pine. "They're in the blocks in a nice position, but we have yet to see if they can run."