DVD finally makes big time on small screen

As product launches go, the early days of DVD video, the compact disc version of the video cassette, were little short of disastrous.

Being billed as the "hottest new thing" did not help, but DVD's development was also marred by a row over hardware technology, and a battle with the Hollywood studios over their terms for releasing films on the discs.

When DVD players were introduced to Japan in 1996 and the US in 1997, sales were well below expectations. Yet sales have risen sharply in both countries this year, and are running ahead of target in Europe, where DVD was launched this year. Despite its inauspicious start, DVD now seems poised to become a popular, and profitable, product.

"We're very, very pleased with its progress," says Mr Warren Lieberfarb, president of Warner Home Video, part of Time Warner, the US entertainment group. "Over one million DVD players have been sold in the US in its first 18 months, against 90,000 video recorders and 275,000 CD players in their first two years. That means DVD has outsold the VCR 10-1, and the CD by 4 to 1."

If the market continues to develop at its present pace, DVD will provide a sorely-needed fillip for the world's consumer electronics makers, after a difficult time when their established products, notably VCRs and audio-CD players, have hit maturity.

It also promises to create a lucrative source of software sales for Hollywood studios and other film producers, now facing a squeeze on video revenue. They hope consumers will buy DVD versions of favourite films on video-cassette, just as they replaced old vinyl albums with compact disc.

But past efforts to launch entertainment software products, notably laser disc for film and digital compact cassette (DCC) for music, have proved consumers will not accept a new format, unless convinced it offers a big improvement over its predecessor at a reasonable price, and that plenty of software will be available.

Both the hardware and software sectors were determined not to repeat their past mistakes with DVD. They always believed in its merits as a product.

Even when the rows over technology were at their fiercest, both industries were emphatic that its audiovisual quality, combined with multiple language soundtracks, director's commentaries and added scenes dropped for the initial cinema release, made DVD superior to videocassettes.

Electronics makers tried to make the launch prices of players as low as possible, in the hope of moving swiftly to volume production.

"Everyone recognised the importance of competitive pricing," says Mr Frank Bauli, head of DVD video for Philips, the Dutch electronics group. "Players went on sale in the US from $500 (£340), and are now selling for $350-$400. And they'll soon ease again."

Hollywood adopted a similar approach to software prices. When video came out in the early 1980s, it cost $24 to make each cassette - because the raw materials were expensive, and dedicated production plants had to be built - which meant they would have retailed at $60, too high a price for consumer acceptance.

Instead, the studios sold their expensive cassettes to rental outlets and the more profitable video retail market only developed when cassettes were produced at high enough volume for prices to fall.

But DVD benefits from far lower production costs, because the raw materials are cheaper and the discs are made at existing audio-CD plants.

The first DVD software retailed in the US at $20, and prices have since fallen to about $15. Some Hollywood studios were initially wary of releasing software on DVD. But all of them are now committed to it, except for DreamWorks and its co-founder and Oscar-winning director, Steven Spielberg.

Buoyed by DVD's popularity in the US and Japan, and its strong start in Europe, the hardware and software sectors are investing heavily in promotion this autumn.

They are stepping up supplies to Europe, and broadening distribution in the US, where mass merchants, such as Walmart and KMart, are starting to stock it, as well as electronics specialists.

Matsushita, Japan's largest electronics group, now expects DVD to be installed in 10 per cent of US and Japanese homes within four years. Yet despite its promising progress, DVD still faces what could be its biggest obstacle: competition from video-on-demand when digital television comes on stream.

"Digital television will definitely be a threat, and that's why we've got to move quickly," says Mr Gildas Pelliet, head of DVD video for Sony Europe. "We've got two years at the most to make DVD go mainstream. Otherwise it'll be too late."