Panel Discussion:
A Look at DVD Technologies
(transcript)

Thursday, January 7th 

 
The DVD Technologies panel. 


The following is a transcript of the panel discussion, A Look at DVD Technologies, which took place at noon, at the Las Vegas Convention Center. The panelists for this event represented a Who's Who of the DVD industry, among them Warren Lieberfarb (Warner Home Video), Mike Fidler (Sony Electronics), John Thrasher (Tower Records & Video), Larry Pesce (Thomson Consumer Electronics), John Marmaduke (Hastings Entertainment), John Keating (The Good Guys), Jeff Yapp (Hollywood Entertainment) and Richard Sharp (Circuit City & Divx). The panel was moderated by Paul Gluckman (TV Digest). Several hundred people were packed into the standing-room-only hall for the occasion. Gary Shapiro, the president of CEMA (which sponsors CES), started the event with a brief introduction.

Gary Shapiro: My name is Gary Shapiro, and I'm president of the Consumer Electronics Manufacturers Association. And on behalf of the association, and its board of directors, I want to personally welcome you to the Consumer Electronics Show. It's a fabulous show, and it's breaking a lot of records, as is DVD, which is what we're here to talk about today.

Your moderator today, is an accomplished journalist. He created a well respected newsletter, Audio Week, and now is New York bureau chief of TV Digest, which is part of the Warren Publishing family. Ladies and gentlemen, please join me in welcoming Paul Gluckman. (applause)

Moderator (Gluckman): Good afternoon. This is A Look at DVD Technologies, 1999. Thank you all for being here. The DVD business has certainly occupied a lot of our attention - some controversy, some satisfaction. Whatever their outlook, or political agenda, all key players in the DVD industry will agree that 1998 was at least a banner year for the format that was launched here, only 21 months ago. CEMA reports that shipments to dealers roughly totaled 1.1 million DVD players for the 1998 calender year. What proportion of those machines have wound up as consumer installations in U.S. households, remains somewhat of a bone of contention, however all agree that DVD was a big banner Christmas selling season hit. DVD movies also had a phenomenal Christmas, according the VideoScan tracking service, which just for the week ended December 27th, reported DVD software sales at a record 722,000 movies. For year to date, VideoScan, through December 27th, pegged total software sales at 8.83 million dollars. I also want to emphasize that VideoScan doesn't track some key retail locations, and doesn't track Internet sales, as a result of that total pie.

Fourth quarter '98 also market the arrival of the Divx system at retail, principally under the banner of RCA and ProScan machines, but also with Panasonic and Zenith participating in the launch. Thomson executives last evening told reporters that they had shipped over 100,000 Divx-enhanced DVD players to retailers in the fourth quarter. They described Divx has one of their most successful product launches their company had ever been associated with. This morning, Circuit City announced that seven participating retailers had sold in excess of 62,000 machines to consumers in December, and a total of 87,000 in the fourth quarter - that's all combined. They said those same retailers sold 375,000 Divx discs to consumers in December, 535,000 for the fourth quarter, again including all seven, what they call, primary participating retailers. As you'll see, Circuit City and Thomson executives are here to discuss these results, and side by side with them on today's panel, are prominent members of the DVD community, who combined, give us a reasonably representative sample of the overall DVD pie.

I'd like to introduce our panelists now - we're very fortunate to have them here with us. Starting immediately to my left: Warren Lieberfarb, president of Warner Home Video, Mike Fidler, VP DVD marketing for Sony Electronics, John Thrasher, the key mover at Tower Records in the area of sell-though video, Larry Pesce, a manager of DVD product management worldwide for Thomson Consumer Electronics, John Marmaduke, a key management of Hastings Entertainment, John Keating, to his left, who is the point man in the DVD business at Good Guys, Jeffrey Yapp, of Hollywood Entertainment, and finally Rick Sharp, chairman and CEO of Circuit City. He also wears those titles for the Divx venture.

I'd like to begin by asking - Mike Fidler recently spoke before the International Recording Media Association, and at that point, Mike, you had some figures that showed the overall pie with regard to specifically the extent to which DVD shipments had exceeded even the most optimistic expectations going into 1998. If you wouldn't mind reviewing it?

Mike Fidler (Sony): Certainly, Paul. DVD, since its introduction in April of '97, has clearly been one of the fastest growing consumer electronics product categories ever introduced. And looking at - obviously, the sell-in of DVD as a format, as Paul had mentioned - based upon current CEMA numbers, about 1.4 million units have been shipped into retail, life to date. Now that's a remarkable number, given the obviously new technology and support infrastructure required to really expand this business for the industry.

Our estimates, and this is not an exact science, as you all know, are really based on the current industry conditions, meaning what our retailers are telling us about their current inventory levels. I know that I have no inventory, so clearly we're pretty sparse at our house. And we're estimating that at this point in time, and at the end of the calender year '98, that over 1 million units have been installed in consumer households. This is clearly a breakthrough for a new format, and clearly represents an opportunity to take this format to the next level in 1999, with a tremendous advocacy already built from a consumer, and a very strong infrastructure both of hardware and software retailers, that are supporting and building this foundation for DVD's growth.

Moderator: I wanted to - we have representatives of the DVD software community here. Hastings Entertainment has been very active in sell-through and rental, if I'm not mistaken. John Marmaduke, do you want to talk about how some of that business filtered - to the extent to which your own personal and professional expectations were exceeded or met...?

John Marmaduke (Hastings): Well, they were both exceeded, both personally and professionally. I think I have the most confident news to tell you. And that is that the markets that we service are generally under 150,000 population communities - often times, they don't even have a retailer that's selling hardware - and what we have done to encourage the adoption, is we actually rent the hardware. And we've had a remarkable adoption, from very following, non-trend-setting markets. And I think that speaks well for the future.

Initially, we were very excited about DVD, because it gave us a chance to reacquaint that laserdisc customer back into our video departments. But it's gone much broader than that over the Christmas season, and we're looking very forward to enlarging our assortments. We're already building dedicated departments to DVD in our video areas, and rental is uppermost, in the very front portion of our best rental walls. So we look forward to a great '99.

Moderator: I wanted to first ask Warren if you could comment on of some of Warner Home Video's activity, with regard to duck-tailing. And I'm gonna ask Jeff Yapp to comment, as he was one of you key contributing software retailers, on the promotions that you did for fourth quarter. Warren, do you want to tell how effective, from Warner Home Video's standpoint, those were?

Warren Lieberfarb (WHV): Well, I think the ultimate effectiveness of the program, which was tri-part venture between Hollywood Entertainment, another video chain West Coast Video, Best Buy and Warner Home Video... and Toshiba, was a $299 leader price on hardware, 5 free movies, 13 free rentals. I think the acid test of the performance, first is from a hardware standpoint. When we look at the business, we look at how the marketplace functioned from September through December, which we think was the essence of the full promotional program, from all the different parties that were involved in the DVD category. If you look at sales, from that period, we think that the industry sold 675,000 pieces in the four month period. We think that is an extraordinary off-take for hardware, and speaks to the popularity of this format.

Moderator: Jeff Yapp - you're on the retailer end of these fourth quarter promotions - a first hand account of fourth quarter results?

Jeffrey Yapp (Hollywood): Yeah, I think - to tack on to what John had to say - both personally, and professionally, DVD has far exceeded our expectations. And like John, we operate stores in a number of markets that we did not expect to see DVD perform. I've spent the last two weeks in markets such as Murfreesboro, Tennessee, and the number one opportunity in our stores is DVD. It represents a little over 2% of our sales, in some markets as high as 3% of our total revenue, which is just incredible for us. We had a fairly limited selection - about 200 titles - we look to improve that in the future. 

But, I think what's exciting for us, is the consumer acceptance across a broad demographic. What you're seeing is consumers who are upgrading VCRs, and making the decision of buying DVD. The experience that they're getting, when you talk to them about the play, the quality of the picture and the sound, has far exceeded their expectations. They're renting more, and an exciting thing for us - they're renting catalog titles - titles that they had not rented in a long time, and we're seeing a lot of activity in that area too. So for us, the commitment we made to DVD early on, to roll it out nationally in our chain, has been terrific, and like John, we look forward to an outstanding new year.

Moderator: Ah, we're fortunate to have two key retail representatives on the panel, beginning with John Keating. I'd to have him please talk about the results of Christmas, and the activity of DVD, specifically with regard to what we were lead to believe was a rather tight inventory supply of certain categories of DVD hardware.

John Keating (The Good Guys): The Good Guys was extremely pleased with the results of DVD sell-though this holiday season. In December alone, The Good Guys sold almost 15,000 DVD players, and we estimate that we could have sold another 6,000 or 7,000 more if we'd had the inventory. There definitely was a shortage of inventory, and that certainly bodes well for the future. The demand is there. Not only did we sell a lot of DVD units, which we're very excited about, but customers are also buying a lot of other products along with DVD. This isn't just DVD sales for us at The Good Guys, we also interested in other products as well, and we're seeing a high percentage of consumers walking out with other products on the same invoice. And these consumers are also coming back to the store on a regular basis, and buying other products as well. So it's a very affluent customer, and a very profitable customer, as well.

Moderator: The Good Guys is somewhat unique, in the environment, because you cater to a large element of step-up buyer. And in speaking recently with Bob Gunst, with regard to the step-up profile of The Good Guys, and specifically how it related to your Divx involvement - in particular, about the ProScan model being a better seller - do you want to comment to that point?

John Keating (The Good Guys): Yes, Divx sales continue to gain momentum at The Good Guys chain on the west coast, and we're excited about that as well. It offers consumers another great home entertainment option, and the ProScan player was one of our best unit sellers in the month of December - the ProScan 8680 - was a phenomenal seller.

Moderator: Bob Gunst had made some statements at the out-set, that he didn't think that Divx would be anything but a very minor factor for '98. Is that still the outlook - the report card for '98? Did Divx have a significant impact?

John Keating (The Good Guys): Divx certainly did have a significant impact on our results. And we expect that to continue to grow and gain momentum going forward as well.

Moderator: Rick Sharp - a unique panelist, wearing a key retailer hat, and also the Divx chairmanship hat - if you could briefly reprise some of the key figures that were released to the financial community and also to reporters earlier today?

Richard Sharp (Circuit City & Divx): Sure. Digital Video Express announced today, that since the national launch over the last three months basically, October, November and December, that we sold - the Divx seven retailers that Paul mentioned - sold about 87,000 Divx-featured DVD players. And more than 62,000 sold in December. So it was - again, I'd be interested to know what various people think about the total DVD sell-through in December. There have been various estimates about that, and we're certainly not qualified to pine on the total industry sell-through - but we think that Divx had a very respectable share of that - the Divx feature.

In terms of Circuit City, we had a pretty good month as well. Circuit City sold 75,000 DVD players in the month of December. And a total of 106,000 for the quarter. So we were pleased with the performance. You know, there's been some question about whether the Divx feature could be explained to a broad market, and would be attractive to a significant number of consumers, and obviously I think we've demonstrated - the truth is that we didn't have our four models fully in stock in our stores until early December. I won't speculate about how many we might have sold had we had some other set of conditions, but the reality is that we were struggling for inventory throughout the quarter, and found strong consumer acceptance of the Divx feature. I'll point out that we sold a significant number of non-Divx DVD players as well, for those consumers who decided that the feature was not the right choice for them. And we were delighted to do that.

Moderator: If I'm not mistaken, you have not released the ratio of non-Divx open DVD to Divx-enhanced DVD players that you sold in December of fourth quarter, is that correct?

Richard Sharp (Circuit City & Divx): Ah, we have not. But it was clearly a multiple in Circuit City stores - a multiple of Divx-featured players to those that did not have Divx.

Moderator: Larry Pesce from Thomson, you and Rick, and Circuit City, share a common philosophy, not only in the sense that Thomson is the most devoted Divx hardware partner, but you two have very similar, positive, upbeat projections for 1999, of Divx as a portion of total industry sales for 1999. You want to state what those projections might be?

Larry Pesce (Thomson): Sure - in 1998, we were actually in a sold-out mode for both our standard DVD products, as well as our Divx products, essentially beginning in August. Every month, every piece we could manufacture, we got out the door. And we're going into the new year with virtually zero inventory, which is almost unheard of from a factory position. We anticipate next year that the industry could run well beyond 2 million units. And just from our own market demographics, having sat down with consumers who have purchased DVD and purchased Divx, we see that the Divx area will grow very significantly in the 1999 time frame, and will be a very significant portion of the total volume.

Moderator: What role did - um, let me make this a more open-ended question in the interest of promoting debate. (laughter from the audience) What is the take on the different philosophies and how they manifest themselves into the factors that made 1998 such a successful year? One thing, right of the bat, is that the very obvious huge amount of promotion done on TV. Another thing - wouldn't all the panelists agree that hardware pricing reached into mass market levels that were not foreseen at the beginning of 1998. Mike?

Mike Fidler (Sony): I would probably agree with that last statement, Paul. I think the one thing that is clearly, probably the most important part of this growth, and sustained growth and success of the format, is the consumer acceptance of this format. There is a consumer advocate that has been built. They understand benefits, they appreciate the benefits of what the DVD format offers. Clearly and demonstrably, it's not a stretch for consumers to go into retailers, and see the dramatic impact of what DVD does to their home entertainment system.

But along with that, clearly some of the things that Sony had talked about early on, was making sure that we took the pace to build the appropriate infrastructure. We now have all of the studios supporting the DVD format. We have over 15,000 combined store-fronts, both in hardware and software, that are selling, renting, both hardware and software product. We clearly have an open standard that has allowed for an expansion of the application of DVD as a format, with the introduction, and expected explosion, of DVD-ROM product. The introduction of DVD portable products, the introduction of new technologies here at the show for car applications, and navigations applications. So clearly, the opportunity is there to take this to the next level, and clearly the positive things that happened in 1998, set the stage for unprecedented and continued growth in 1999.

Moderator: I don't want to overstate, or put words in the mouth of what Thomson said last evening, but they seem to give a huge amount of credit to the Divx success, for the overall industry success for DVD in general. Larry, again to be faithful to what role Divx might have played...?

Larry Pesce (Thomson): I think - I'd like to take credit for it, but unfortunately I can't - it really comes down to the amount of advertising that was put into the fourth quarter of the year. It was absolutely tremendous, for Divx specifically, as well as for DVD. I don't think you could have picked up a major magazine, that didn't have a DVD or Divx ad in it - it was incredible. And I think what we have noticed now, is that consumer awareness now is probably in the 45% range, which is a very nice increase from where we were. And it's now to the point where friends are telling friends about how satisfied they are with the product, and that's putting more pressure, I think, for titles and even earlier releases, which I think Divx fits that very, very nicely.

Moderator: Rick, your company was extremely aggressive on the sales floor, in bringing people in for Divx demonstrations. Are you going to continue that level of intensity on the sales floor?

Richard Sharp (Circuit City & Divx): Well, I'd like to believe we have an intense sales floor for every product we sell.

Moderator: This was extraordinary. (this gets a huge laugh from the audience)

Richard Sharp (Circuit City & Divx): Well, actually it wasn't. Not only were we the leading retailer of Digital Video Disc in December, we were the leading retailer of Direct TV systems, as we have been every month since its inception, to my knowledge. We're the leading retailer of digital camcorders, we're the leading retailer of projection TVs. This is nothing unique, about what Circuit City is doing with DVD and with Divx. This is an attractive product to the consumer. We present it to the consumer, and point out the features and the benefits, one of which of course is the fact that Divx is a feature, and the Divx players will do everything the DVD players will do, plus give the consumer additional options. And we performed well, just as we've performed well with a whole variety of other products over the years. And I would be willing to wager that we'll be the leading retailer of Digital television as it comes to market too.

Larry Pesce (Thomson): One other comment I'd like to make, is that when we polled customers after they purchased a Divx player, one of the things that consistently came to their lips and told us, was very simply this: when they actually bought their Divx player, they did not necessarily buy it because they wanted to use the Divx feature immediately. What they typically did, was they told us they bought it because they were planning on the future. And this was still a $300 or $400 investment for them. They saw this as a product that was going to be around for a while, and they did not want to lock themselves out to the options for the future. And that was something that kind of surprised us. It was not just use it today, it was looking forward.
 
Moderator: John Thrasher, with regard to the sell-through mechanisms at Tower - we obviously have two very respectful philosophies as to the future applicability of movies to own as a DVD model, and those who want to rent. Could you talk about the sustain quality of DVD as a sell-through item at Tower?

John Thrasher (Tower): Well, I think that certainly, we've always believed that our society is a collector's society. And that there are groups of folks out there, that are going to buy packaged goods and keep them, whether it's baseball cards, or filmed entertainment. And from our standpoint, DVD's success, in terms of this particular year, has been phenomenal. At this particular point, we're getting over 5 turns in our entire inventory, which is 40% higher than any other format that we carry. So it's something that people want to collect. However, on the rental side, I think that it's a consumer confidence issue - as you build and try to establish rental departments - to let them know that this is not a niche product like laserdisc was. Certainly, it's far more sexy in its look, and its ease and convenience, also its interactivity. So that's our stance.

Moderator: Warren, do you have anything? No? Jeff Yapp, with regard to your very positive visibility in DVD rentals, talk about the 1999 landscape for DVD rentals.

Jeff Yapp (Hollywood): I think what's exciting for us in the rental business, and you have to realize that the rental business is an enormous category - almost $9 billion - it's gone through a fundamental change this past year, as we've seen two of the most significant issues that have historically faced the rental industry, both product availability and discussions of late fees, and how that adversely affects our business. You have seen the industry shift, this past year, to a revenue-sharing proposition, which has really addressed the single biggest issue - product availability - and then as we go to multi-day rentals, we've also seen the continued reduction of our late fees. And I think, for the first time in a long time, you're seeing the rental business growing upwards of 7%, some estimates are as high as 9%, this year - really on the back of finding a model that satisfies customers' demands. We believe that same model can be applied to DVD, as we roll it out next year, and continue to broaden the expanse of rental - making the title available day-and-date consistently, as well as the depth at which they want to have that product available. So to us, I think '99 and the changes that have been happening in the rental business are very exciting.

Moderator: Rick, you had a comment?

Richard Sharp (Circuit City & Divx): I'd just like to agree with the last two panelists, that in fact society is a collector's society. And in fact, we do have people who collect, and we also have a society that rents, and who wants temporary access to this content. Because if Hollywood puts out 150 or 200 new movies next year, undoubtedly, not everyone will want to buy every one of them at $20 or $25. So we see here represented on this panel, both characteristics. We've got Tower that serves consumers that predominantly want to purchase and own their titles, and we have Hollywood that serves the rental market, which Jeff correctly pointed out is a huge market in terms of transactions. It has a 5 or 6 to 1 advantage in transactions. All we're attempting to do, is to present an option to consumers to collect those titles that they want to collect, and provide perhaps a more convenient way - a less expensive way - to collect the titles that they may only want to watch once or twice.

I would point out that we just completed some research with our Divx owners, that have had the product for four to six weeks, and they purchased about 11 Divx discs on average, which we found interesting. We were also pleased to find, on average, that they had also purchased on average between 4 and 5 basic DVD discs. And it's a behavior that is perfectly rational to us - they purchased those titles that they view as collectible titles for them, and they've made the additional financial investment to buy those in a completely unrestricted manner, and they've also said, "well, gee... here's some movies that I'd like to watch once or twice, and I'd like to have them conveniently available at home, and at a lower cost." And so, we're optimistic that Divx will continue to expand the market for DVD, by providing these options for consumers.

Moderator: Rick, did the research you mentioned now, and this morning, did it get into further elaboration as to why people bought those discs, rather than buying the Divx discs?

Richard Sharp (Circuit City & Divx): Well, it may in some cases be that those titles were not available on Divx. (laughter from the audience) Or it may be perhaps - the short answer is that research did not. We have talked to consumers in focus groups about this, and the answer is in general - look, in the VHS world, they make a rational decision about whether they want to rent a title, or whether they want to buy it. And there's no reason why that behavior won't continue in the new format of DVD. They'll choose to own some, and some they'll want to acquire in a less expensive way, whether it's through a packaged good media, or whether it's in the increasing electronic media. I know some of my panelists are not enthusiastic about some of the characteristics of the Divx product, but I would point out that it is a brick-and-mortar retail store-based concept, unlike what happens when, as digital cable rolls out and continued penetration of direct-broadcast satellite, which delivers content to the consumers electronically, and totally removes the retail channel from the opportunity.

Moderator: Warren, I believe you had a comment?

Warren Lieberfarb (WHV): I think the central issue is exactly what Rick is alluding to - what is the distribution model by which consumers are going to get movies in the future? Are they going to shift their rental habit from brick-and-mortar, be it Divx or VHS, to electronic, digital cable or satellite, or other broad-band distribution systems? So will the rental paradigm of the future, be it Divx or VHS, be done in a packaged media, or will it be done electronically? And that then goes to the question, what will consumers pay for the functionality, convenience, utility, of paying a low price to own it, program it and schedule it, at each family member's own individual election, as many times as they want, in as many different segments as they want, with portability perhaps, as a new utility associated with the PC? So I think what we're really talking about here, is not a static view of today's business, but a dynamic view, of a very dynamic media landscape, in which the interrelationship between brick-and-mortar retailers, be they sale retailers or rental retailers, Internet retailers, who are selling it in a package, or electronic retailers, who are transmitting it, and charging for it on a buy-use basis - how that equations solves, and who owns what piece, is really what the issue is here.

From a content owner's standpoint, Time Warner has very clear views about the co-existence of packaged media and broad-band electronic media. We are the largest cable company in America. We are at the forefront of bringing about digital broad-band transmission of all types of content. We are also the largest publisher of magazines, one of the largest movie companies, the largest book companies, and have a very clear view about how packaged content, be it a book, a movie, or a magazine, will co-exist, at very lucrative economics, with transmitted media. That is the central issue behind all of these competing means of getting entertainment to the home. 

Moderator: John Keating, you see this from the retailer perspective. What does your rather educated customer base tell you about this debate with regard to the various DVD factors, movies to own, movies to rent?

John Keating (The Good Guys): Well, I think to Warren's point, looking ahead the issue is gonna be more packaged media, versus what people can get via satellite, or cable lines, or phone lines, and those questions. But in the near future, we still see great vibrancy and strength of DVD, and of Divx as a feature of DVD. We think that they can co-exist, that it offers consumers a home entertainment choice. There was a lot of tension and debate and concern in the industry, that somehow Divx would cause mass confusion, and maybe rightly so those concerns were aired. And I think that retailers like The Good Guys and Circuit City have shown that through a trained sales force, and an aggressive sales force, we can explain DVD technology, and the Divx option, to consumers. So we've seen great results, and expect that the year ahead should be even better.

Moderator: I'd like to ask a series of devil's advocate questions, to the point of - when this debate began, it became a debate between business models, all of which are good and speculative. But we have a very short track record, but a track record nonetheless. Rick, your view recently of the DVD business is that it was largely a business devoted by sell-through to videophiles. Have you softened that position, given the product obviously seems to be flowing, to $299 price points, to people who are hardly videophiles?

Richard Sharp (Circuit City & Divx): Yeah, absolutely. I think at higher price points, when the product was introduced, it was absolutely a videophile product. As the products moved down to $299, and effectively, when you consider the value of the software rebates attached to that, a product that was effectively selling to the consumer for a net price of less than $170, you're gonna quickly move into a much broader, greater mass market product. So we're working hard to take cost out of the Divx products, so that we can get price points down as well, because our research has shown a significant jump in market acceptance as price points move down.

I think that clearly, the last couple of months have demonstrated that, at very low price points - now, I question whether anybody can make any money selling the product at that price - but, at very low price points, it broadens the market considerably.

Moderator: To the open DVD advocates, there were very passionate arguments a year ago, that Divx would poison the well for DVD in general. Obviously, we all agree it was a successful '98. Have you open DVD advocates softened your opposition to Divx as a killer of DVD?

Warren Lieberfarb (WHV): I don't think the issue is whether it's a killer of DVD. The issue is, at first quantitatively, when you look at the sales this year, when you start the clock at the beginning of the year and end it December 31st, it is clear, because Divx was in the market only since September, that DVD had a considerable number of months of head start. But in the September - December period, the story is really that sales were 7 to 1 in favor of open DVD. And if we take the CEMA number of 1.4 million pieces sold since March of '97, through the next to the last week, the installed base has to be in the area of a 1.2 to 1.3 million, of the 1,400,000 shipments. It's obvious, when you hear all of these out-of-stock issues that everyone's talking about, that the pipeline balance, at this point in time, is negligible. That in essence, created a ratio of open DVD to Divx, of 11 to 1. (Sharp reacts, shaking his head in disbelief, and the audience laughs)

Divx provides a feature, to those consumers who want to pay a considerable premium over the cost of renting a DVD at a traditional video store - there may be certain demographics that want to pay that premium for that disposable feature. It's my view, that the bulk of the populace, in the ratios or greater than what was described, will continue to support the existing VHS rental store, who will broaden their selection to include DVD. Hollywood is at the table today - 

[Note: At this point, the lights were inadvertently turned off, and the room went completely dark for a few moments. There was quite a bit of laughter, given the timing and context.]

Moderator: We didn't plan this. It's just the lights folks, it's just the lights. OK, calm down. Rick, I assume you didn't throw the lights?

Warren Lieberfarb (WHV): Rick, we don't have to get the thing completely hostile (laughter) - "I see my friends here - they get the room darkened."

Hollywood is here, supporting DVD rentals, has announced a chain-wide commitment to do it. Other rental retailers across the country have announced plans to be active in DVD rental. In an October 4th conference call with analysts, Sumner Redstone, in response to a question put to him by an analyst, said that Blockbuster will be in 4,000 stores renting DVDs. So the real issue will be how the marketplace chooses to get rental - will there be a segment that wants to pay a premium for the no return feature, and will there be another segment that wants a lower cost, existing retail store-base providing them rental, and then will there be another segment to want to buy them at affordable prices. The marketplace will determined the proportionalities of how consumers elect to get their home entertainment. And there will probably be a level of co-existence between the three.

My concern, is to have a formula that does not cannibalize our income stream, but grows our income stream, as these three alternative means are brought into the marketplace.

Moderator: Ah, Rick you wanted to respond before the blackout?

Richard Sharp (Circuit City & Divx): Now we're getting to the stuff you all came for. (gets a huge laugh)

I mean - it's really sort of disingenuous to compare Divx sales in September since we didn't have any to sell in September. So the relevant market, is that we had effectively 1 model for sale, that got into our stores in the month of October. We weren't fully inventoried until the end of the month. We didn't get our second model until Thanksgiving. The more relevant period to compare is December, where we were, I quote, fully inventoried. We had 4 models of DVD player that had the Divx feature, versus the approximately 40 out there that didn't. As someone kindly pointed out, there were 15,000 retail store-fronts selling the non-Divx DVD players, where there were about 750 stores in total selling the Divx feature, and it looks like we sold 1 in 3. So I think that may be the most relevant characteristic, because it is the most recent information. And I guess the final point is that we certainly don't view Divx as a disposable product. The consumer research that we've indicated, indicates that they don't view it as disposable.

This is the least expensive way for a consumer to own this content, and have it conveniently available in their home, to watch whenever they want, at a very modest, incremental fee. And yes, it's certainly a premium to a basic DVD rental, and we certainly don't suggest that we're ever gonna have the entire market. But, we certainly believe that, in that segment that Warren describes there, there's certainly a large enough chunk to make Divx a very successful product. It would obviously be more successful, if we all got together and got behind the entire category in all its forms, and tried to drive it as best we could. And certainly Circuit City is advertising both DVD and Divx, and selling both aggressively.

Moderator: Ah, I wanted to give Jeff Yapp a chance to respond...

Jeff Yapp (Hollywood): What I find interesting, sitting next to you here, Rick - coming from a studio and going to a retailer - is that your model now attacks both the VHS sell-though business, and the rental business. And I don't understand - you just said it's the lowest way to own - well studios sell tape at $14 and $18, and now you're saying we can sell them to them for $4.95. And in your newspaper ads, you attack the rental business, mentioning late-fees and inconvenience, so you're going after two major revenue streams for the studios. I find the whole approach, and your business model, to be interesting. It's, ah - especially coming from the studio side, where I sat and listened to it from one side, and now as a retail - I mean, I can carry both. I can carry Divx as well as open DVD, and you seem to be going after both revenue streams for the studios in your model.

Moderator: Rick, you want to respond?

Richard Sharp (Circuit City & Divx): Look, all I can say is, that we've presented the economics to virtually all of the studios. We have 5 major studios that are aggressively supporting the concept. Obviously, they must feel the economics are attractive, or they wouldn't be doing it.

Moderator: Mike, did you want to jump in?

Mike Fidler (Sony): You know, just to reiterate one thing that we seem to lose focus of here, is consumer use and utility of this format. I think that one of the things that's gonna make DVD as successful as we all expect and intend it to be, is the same kind of things that made CD the success that it was - that it was an open format, that allowed consumers maximum levels of utility and functionality, so that they could choose how, and when, and where they wanted to view and use this product. We see that same open standard, allowing that same kind of activity with DVD. We want consumers to have the options to use their products in both a mobile environment, a portable environment, in an environment inside and outside the home. We want to see them use it in applications that work towards the convergence model that we all know will happen in the future. And clearly that's the benefit of open DVD.

It's also the benefit of open DVD to give consumers a more compelling product. I think that one of the things that has really gotten the mainstream support of consumers, is the benefits of DVD Video itself. We all know it's difficult to just sell quality, generally, as the only substantive point of any new format. What they're responding to is the capabilities of the format - its features, its ability to do things like multiple aspect ratios, multiple languages - its ability to deliver the kind of added, extra-value elements that are not capable with either electronic, broad-band distribution, or with other current packaged media today. So we don't want to lose sight of that - that's what's really excited the consumers, because it's much more than just a format - it's a new experience. And we want to give consumers the complete experience, to make sure that we can take this to the appropriate levels we all know are possible, given the model we already have for the success that CD has as a business.

Moderator: Rick, there has long been the argument on the part of the Divx folks, "that those who criticize Divx don't fully understand us." On the panel here, are the bread-and-butter retailers that you would love to have on the Divx bandwagon. What can you say to them to dissolve their objection?

Richard Sharp (Circuit City & Divx): Well, I do think that the members of this panel understand us. I don't think there's any confusion about their understanding - we might disagree about the conclusions, but I don't think it's a lack of understanding.

In terms of seeking broader retail distribution for Divx, I think that our expectation here is that we've demonstrated that this is an attractive product. By the way, the consumers that bought Divx players have returned to their Divx retailer, and have returned to buy Divx software 3.7 times in the 4 to 6 weeks since they bought their players. It is generating repeat traffic to the stores. It is absolutely creating a new market. And again, each participant in their business, whether it's retail or manufacturing or a content provider, has to make a decision as to whether the economics work for them. And certainly, I wouldn't suggest that someone should participate if the economics don't work. Certainly, you should just understand that Divx has minority shareholders, that we're a publicly traded company. We must account for our cost, separately between the Divx business and the Circuit City business. And Circuit City, on a stand-alone basis, finds the economics of retailing Divx hardware and software attractive. And I believe that if retailers get behind it, that they can find the economics attractive as well.

Moderator: You said this morning that Circuit City accounts for roughly 80% of the store-fronts for Divx. Is that hardware, software, or both?

Richard Sharp (Circuit City & Divx): Hardware is what I was referring to.

Moderator: And return visits to buy more software - haven't they gone to Circuit City?

Richard Sharp (Circuit City & Divx): They've generally gone to the retailer where they bought the product.

Moderator: John Keating, have people returned to The Good Guys to buy software for hardware purchased at Circuit City?

John Keating (The Good Guys): We at The Good Guys have seen customers come back about the same number of times as Richard's research has shown as well - very similar results.

Moderator: John Marmaduke, do you have any factors - turning the question around - that would mitigate any objections you have towards carrying the Divx product?

John Marmaduke (Hastings): I really don't see a compelling reason, and I certainly don't see one coming from our customers. I think if you have a paid, commissioned sales staff, it's an easier proposition, but I e-mailed our video department managers prior to this panel, and it was an absolute non-event - the customers are not asking for it. Now we're in smaller markets, and there's not a lot of newspaper ads, but they're surely privy to all the television, and I was amazed that we hardly received one positive comment that customers were asking for it. They are excited about DVD. And Richard did make a point that it's very easy to sell this as maybe DVD with some other options, but the bottom line is it's DVD they're excited about. I think the rest they have to be sold on.

Moderator: John Thrasher, your company shares a unique corporate relationship with The Good Guys, which carries Divx, and Tower does not. What's the dynamic there? Do you watch their results? 

John Thrasher (Tower): Well Russ sits on the board for The Good Guys, who is our owner, but their information is private, and they're their own company. However, it is our view that there is confusion out there in the marketplace. We're in the major markets, as opposed to the smaller 150,000 populace or less, like Hastings, and we do find confusion, particularly for items that are on one format, and not on the other.

Let there be no mistake - there is a line drawn in the sand here, in terms of availability of titles between studios, and that does cause confusion. And from our standpoint, we believe that it causes some reluctance on the consumers' behalf, to buy right now. The hope is that with all the major ground swell, and with the terrific press that DVD at large has gotten, that consumers will go over the hurdle. But when you see an item for $4.49 being advertised, that you can't get on open DVD, or you see the equivalent at some other price point, that's a tough thing for a clerk making $5.75 and hour to tell the consumer - to know the difference.

Warren Lieberfarb (WHV): To that point, I think there's two issues. Rick talked in December about sales in Circuit City. I don't think there's any mystery, about the in-store presence of Divx versus open DVD, in terms of displays, signage, merchandising, the in-stock position, and price points of open DVD players at Circuit City stores. I think he does a fabulous job motivating his people - I would love to be a sales associate at Divx, and get spiffed the way that they got spiffed on Divx. (gets a laugh from the audience)

I think the real level playing field to judge - 

Richard Sharp (Circuit City & Divx): OK, you're hired! (this generates a huge laugh and applause)

Moderator: Is the show daily here? We have a scoop here...

Warren Lieberfarb (WHV): Rick, Rick - inducement to breach my contract with Time Warner caused Sony a LOT of money. (another big laugh) It was a long story - I'll tell you - not me, Jon Peters and Peter Guber. (another laugh)

I think the most interesting determination of the popularity of the product in the mind of the consumer, perhaps is in the month of December, although I don't really believe that looking at the full year, lifetime, or September through December numbers, is fallacious. But I think the clearest indication of how the product will preform with consumers, is the performance between Divx and open DVD in The Good Guys in the month of December. There, I think there was more equalized marketing, and both product lines were carried extensively.

Another thing - with respect to the 5 studios, 5 studios have provided their product to Divx, under long-term license agreements. Those same studios released their titles on open DVD. Perhaps they're hedging their bets? I would not venture to explain the arcane ways of Hollywood to anyone. Remember, it is the group that sued Sony for making the VCR (some laughter), which did become the means for Hollywood to develop its largest source of revenues. (even more laughter) So any time you ask me to provide insight as to why things happen in Hollywood the way they do, you can start on Entertainment Tonight, and go to any other source, and try to make rhyme or reason of it - it confounds the smartest people.

Moderator: Rick, has there been some change in the execution of the Divx model, in the sense that you were talking, at the early stages, of title exclusivity to some extent?

Richard Sharp (Circuit City & Divx): Let me just comment on that. We never talked about title exclusivity. What we did was reported the status of the studios who had signed up for Divx, some of which, at that point, had not made a commitment to basic DVD. We have neither lobbied, nor requested, in fact we have encouraged the studios to support open DVD. We're in favor of giving the consumer a choice, and then letting them decide. We're happy to have movies come out on both basic DVD and Divx. We're not looking for exclusivity. Again, we think the consumer will decide. We think there's lots of titles they'll buy on basic DVD, and there's lots of titles they'll decide to buy on Divx. And we don't understand why they can't both exist side-by-side, and let the consumer make their choice, and move on.

Moderator: With all due respect, I do recall some counter cards that said, "Get titles available only on Divx."

Richard Sharp (Circuit City & Divx): That was sort of, uh... not the best execution in the early days.... (another big audience laugh) We didn't even have Divx in stores when those cards got out, and you certainly haven't seen anything like that for well over a year.

[Editor's note: I saw, just two weeks ago at a Southern California Circuit City store, a sign that still claims DreamWorks, Fox, Paramount and Buena Vista are only supporting Divx. Go figure.]

Moderator: Larry, to bring you in, with respect to the comment from Rick earlier, that as successful as the Divx supporters believe the fourth quarter results were, it remains at present, an 80% Circuit City market. You've got the formidable RCA brand at your disposal, as well as ProScan - what is the outlook for 1999, in terms of bringing in more Divx retailers for those brands?

Larry Pesce (Thomson): Well, from a hardware standpoint, we're obviously encouraging as many of our dealers as possible to jump on the bandwagon, and we think the story is very, very compelling, because the premium is very good for the consumer for $100, especially looking at a futuristic type of a product that you have in your hands here. We're going to very aggressively go out, and try to encourage more of our dealer structure, and I think you will hear more announcements in the not too distant future, from some significant retailers, who will come on board, and will agree to handle Divx product as well. So what we see is very, very encouraging. Our sales in the fourth quarter of the year, were very strongly skewed towards the Divx feature. If I were a dealer, I think it makes sense to have that product, and not necessarily send your consumer over to another competitor, let's say.

Moderator: Would you say your product line would be more weighted toward Divx in 1999?

Larry Pesce (Thomson): No. We'll be pretty much split. We'll have about an equal number of what we'll call basic players, as well as Divx.

Moderator: Your company was extremely aggressive in open DVD, long before Divx became a household word - some of the promotions you did with Image Entertainment, for example - are you gonna continue, or revive some of those promotional activities at retail?

Larry Pesce (Thomson): Ah, yes.

Moderator: Any specifics you can get into?

Larry Pesce (Thomson): Not at this moment no. (laughter)

Moderator: Ah... we have about a half an hour left, which might be good time to turn it over to questions from the audience. I neglected to mention at the outset, that we had Bill Clark from Universal Studios Home Video as a panelist, but unfortunately, he was called away and couldn't attend the show. 

So any questions from the floor... there in the back?

Question #1: What is the status with progressive-scan DVD players?

Mike Fidler (Sony): I think the issue that is of utmost concern, to those that want to see a healthy and robust business develop, is to ensure that any of the devices that we bring to market, respect the intellectual property rights of content holders. And I think that clearly is what is delaying, and will continue to delay, any kind of solution to the outputs, relative to progressive. There is no solution now, that gives a secure bus, out of the player. It is clearly the intent, I think, of all the participants in the DVD business, to maintain the integrity of that, and I think it's important to grow the business, to make sure that we protect content - rightfully so - in that manner. And so, hard to say exactly when or if that will come to pass, but clearly, until we develop the secure methods of protecting that output content, I don't think there will be any players delivering that. I think that's clear, from even the comments of the manufacturers that are showcasing products at this point in time.

Moderator: On a somewhat related note, Rick and Larry - you want to mention what you announced last night, with regard to high definition DVD with Divx?

Larry Pesce (Thomson): Sure. We announced last night, a joint partnership with Divx, in the development of a standard of HD-Divx, or HD-DVD, specifically - and I disagree a little bit with Mike. What we proposed is that the standard be created in such as way that there is a fully encrypted signal, passing from the DVD or Divx player directly into, in this case, an RCA monitor, which would be guarded, if you will, by a Smart Card technology, so that the secrets are in the Smart Card itself. Consequently, at no time is the uninterrupted signal, or a signal "in the free" as we would say, passing between the player and the display device itself.

Moderator: Rick - you want to comment?

Richard Sharp (Circuit City & Divx): Yeah. Just to put it into context - I appreciate the kind words of partnership, but to put the roles in context - Thomson developed what we think is a pretty exciting way to deliver high-definition 1080i signals out of a basic DVD platform, and asked us to provide some content protection for that, which we think is one of our core competencies here - that we've received sign-offs from some of the studios, about the strength and robustness of our content protection. So we were pleased to put our content protection over-lay on their system.

Moderator: Again, clarification - partnership was Thomson's word, not mine.

Richard Sharp (Circuit City & Divx): I, uh... right.

Moderator: Mike?

Mike Fidler (Sony): Just a brief comment. I think Larry indicated HD-DVD - there is no HD-DVD format. Let's be clear about that - it's not part of the DVD specification. And honestly, we think at this juncture, when we're starting to build a very strong foundation in consumer support, it's a little premature to start talking to consumers about the next generation of product. We continue to add confusion to the marketplace, which is the last thing we need. And it makes sense to retain the integrity of the current product format, grow that, maintain the success of that format, then build upon that format for the future. I think at this juncture in time, I think it's premature to discuss a format that does not exist, it does not have the current support, as far as I understand it, of the content providers, and just to make sure you understand - this is not HD-DVD, this is HD-Divx.

Moderator: John Keating, how do you balance your store's position to provide the latest technology, to step-up upscale, early adopters-type consumers, that come in wanting to know about stuff like the Thomson / Divx announcement from the other night? How do you balance that or control it?

John Keating (The Good Guys): Well, I don't know that we control anything. I'd like to think that we can do it, but that's not realistic. We do pride ourselves on the fact that we have, what we believe to be, one of the best trained sales forces in consumer electronics retailing in the nation. And we spend a lot of time, and a lot of energy, and a lot of money, informing our sales counselors of technological developments, in addition to our retail strategies. And this will just be another case, in which we'll go back home after CES here, and put out some information to the stores, to let them know what technical developments are coming, so that they can at least explain to consumers what the future beholds. And we will serve that up as information and knowledge, and not try to control their purchase decisions - we'll just offer that up as education.

Warren Lieberfarb (WHV): There is a level of competition going on for the copy security systems in high-definition. So I believe what we're really hearing, is an initiative by Thomson and Divx, in its competency as a technology developer of security systems, to affect a security system for high-definition digital television, more than, I would hope, a near-term freeze on the sale of both Divx and DVD discs in their current iteration.

Larry Pesce (Thomson): Well, I understand the point, but we have to understand also, that we have told the industry that HDTV is coming. Thomson showed numerous models just recently, in fact a full line of models, that will be released. We have not found, and maybe Rick is in a better position to answer this, but we have not found anyone stopping, at this point, that was going to buy a premium TV set, above a 36" set, that's now saying, "I'm now gonna wait for HDTV to come around," when that could be a couple years, in terms of price coming down to a low level. So I don't see this as being something that's gonna confuse the consumer. I think we're doing what any good consumer electronics company will do - which is essentially to offer consumers new features - advanced features - for the future. And from an innovation standpoint, that's all we're trying to accomplish.

Warren Lieberfarb (WHV): It's helpful to avoid premature announcements, Larry. (some laughter)

Moderator: Rick?

Richard Sharp (Circuit City & Divx): Let me just suggest - I understand the merits of both arguments here. Our concern is that we expect Digital TV to be a bigger business for Circuit City, than all of the others that we've been talking about this morning combined. And we're concerned that we have a Digital TV environment, where it's not clear how the content is going to be provided. And we're supportive of any activity that will help us get a solution, to get the content providers to deliver content. Now we don't know - look, Thomson just put the wraps on this, and they're gonna have to take this and demo it to the studios, and the studios may say, "we have no interest in this." All we're suggesting is, and we encourage all the manufacturers, to come up with some way to get some content on these Digital TVs, cause we'd like to sell some.

Warren Lieberfarb (WHV): It will also have to be, Richard, the cable set-top box manufacturers, as well as the computer manufacturers, that will have to be satisfied with the Thomson proposal. Which is not saying it's bad - just that we're at day one of a long journey.

Richard Sharp (Circuit City & Divx): Agreed. 

Moderator: Questions?

Question #2: Thus far we've been talking about different formats for DVD players. An interesting side note, is that depending on who you believe, as many as 40 million DVD-ROM units could ship this year. And Creative Labs has some research that a lot of people are hooking their DVD-ROM drives up to their TVs, and watching entertainment, either from their desktop, or through their desktop. There's also talk about DVD movies with content that would be unlocked via credit card, over the Internet. I wanted to throw that out, and get some comment on that.

Moderator: Any comment on that? (no one steps forward to comment - more laughter) No? Next question...?

Question #3: Is DVD the last physical medium for entertainment content, given all of the broad-band delivery systems that are being developed for the future?

John Thrasher (Tower): Well, I think it's a long way to that point. However, the indications are that there is going to be some fairly severe cannibalization of VHS in the very near term. We've already noticed those consumers, that just 9 months ago, who were buying widescreen editions on VHS for their VCRs, have moved over to DVD. And the amount of sales that we're seeing on tape for the widescreen format, have dropped precipitously over the last year. From our standpoint, we're looking at the old 20 / 80, where 20% of the market is one format, and 80% is another. This next group of people that acquire DVD players are - hey, they're the most voracious collectors on the VHS side. And so, this first year has been great, where we're phasing out laserdiscs, we've got a very strong VHS market, and we have this exploding DVD market. So for the very near future, hey - you gotta wear shades it's so bright. (laughter) But at this particular point, you have to look two years down the road - the VHS market will be severely impacted. And I think you'll see price erosion on VHS, where you'll see price come down, and standard will be $9.95. DVD offers a great value for both the retailers and the studios, to protect that price point, and to still stay in business. So we're very bullish on the future, but there's a series of things that are gonna be taking place in the very near future.

Warren Lieberfarb (WHV): But like with the compact disc, where you had analog vinyl records and analog cassettes in the market at the same time as the CD was produced, the trend in the record business, for a good 6 or 7 years, was that the new media brought incremental revenues to the music companies. It is our view that the incremental performance of DVD, net of the displacement in VHS, will be the largest source of growth in our company, for the next several years.
 
Moderator: Question?

Question #4: How long will it be before Divx software becomes more widely available at retailers other than Circuit City?

Richard Sharp (Circuit City & Divx): Just about as soon as they want it. (laughter)

Moderator: Do they want it? (more laughs)

Richard Sharp (Circuit City & Divx): Well, all that want it so far, have it. (a huge laugh now from the audience) No whether the performance of the business over the last quarter - and look, I understand all the confusion. Let me be real clear about this - this was a very successful launch of this product. And I don't think anyone can argue about that. We are very encouraged, and we have demonstrated that, with the existing retail partners we have, we can build a very successful market for this product. And we're going to be here. And I believe as others see the growth of this business continue, whether it's this month, or next month, or next year, we will gain additional distribution. I can't tell you today that I have someone ready to sign up.

Moderator: In fairness, I want to give the other panelist an opportunity to comment, with regard to what Rick's numbers were this morning. Do you consider that a successful launch? They believe it was. Obviously, in fairness to Divx, some people were writing it off as dead some months ago, that the product wasn't selling despite Circuit City's best effort. Any comment on that?

Warren Lieberfarb (WHV): I think it's very important to understand the out-of-stock position in the month of December of open DVD, the in-stock position of Divx, and ask oneself how much of the Divx sales were generated by open DVD having run out? It's a number none of us are gonna know.

Moderator: Ah, John Keating is pulling the microphone closer...

John Keating (The Good Guys): I'd just like to say, from our 79 stores on the West coast, that we did not have enough Divx players in our stores to sell, and I'm sure Richard would echo some comments on the Circuit City side. And although I don't want to quote exact numbers, we still did sell a very significant portion of our overall DVD hardware units to be Divx players. One of our most significant hardware units in the DVD arena, was the ProScan Divx player, and shortly behind that was the Panasonic, which we didn't have enough of either one. There weren't enough open DVD players and Divx players.

Warren Lieberfarb (WHV): So that being true, there wasn't enough in either, what was the ratio, in The Good Guys, between open DVD and Divx in the month of December.

John Keating (The Good Guys): Uh, that's... that's something we're not prepared to announce at this point in time. (some laughter again)

Moderator: OK, further questions?

Question #5: I was wondering, does the consumer ever really own the Divx movie, or just the plastic platter?

Richard Sharp (Circuit City & Divx): Well, there's a - in defense of the gentlemen who asked the question earlier, what he described was basically a conditional access system, despite all the talk about - what the consumer wants is video on demand. What they want is to watch what they want, when they want, they want to be able to pause it, stop it, restart it, and have all those flexibilities. And they want it conveniently delivered to them. And we've said for some time, that if the infrastructure could be built, to provide that capability to consumers cost effectively, then there wouldn't be a need for Divx. There wouldn't be a need for you either - for your chain either - and a whole lot of players here. The reality here is that today, the infrastructure to get that capability to the consumer, with Divx, is $399. It will be going down just like all DVD will be going down. That and giving them all the features - watching what they want, when they want, without having to leave home. And now, another way to do that, would be to provide the media in the home, and unlock it through some sort of connection in the computer. We actually think we're a little more convenient for that, because the player unlocks it without having to use the phone line each time, it records the information and sends it in in the future. So, again, we think there's an infrastructure capability here, where we can provide - we will stay ahead of the infrastructure cost of providing video on demand to the consumer, as the price of this product comes down, and it gives the consumer virtually all of those capabilities. You know - shop for Divx discs when it's convenient to buy them, you take them home, put them on your shelf, watch them when you want, and you don't have to return them. I think that's pretty darn close to video on demand.

Warren Lieberfarb (WHV): There are people building that video on demand infrastructure: AT&T, TCI, Time Warner, Cox. There is going to be a near term, installed base of digital households, with digital set-top boxes, with highly developed servers, in the next two to three years, in tens of millions of households, the capability that Richard is taking about. That is the risk that we all face in this room, be it VHS rental, DVD rental, DVD sale, or the Divx alternatives. I go back to how that set of distributions work out, and who survives economically - being economically viable, is what this essential question is about.

Moderator: I did want to ask a question earlier. Rick and others on the panel mentioned the promotional environment, in a somewhat different context. Is the DVD format, software and hardware, at this point, self-sustaining enough to allow it to continue it to flourish, without the 5 free rentals, the buy a machine get 5 free Divx discs? Is this a self-sustaining market yet? Jeff, from a marketing standpoint...?

Jeff Yapp (Hollywood): Yes, we do believe the market is now at a point where it self-sustains. I think someone mentioned earlier, you're getting enough word of mouth from consumers who have had the experience, and shared it with other people, that it's gonna continue to grow. There's no questions that the promotions this quarter, for both Divx and open DVD, were critical in getting it to explode. But I think you're getting to a point now, with a million units or 1.1 million units installed, where people are going to begin talking about it, and where word of mouth will start to take over. And you're at a point, where the basic market now looks at open DVD as an alternative upgrade to their VCR, which is an on-going business. So we do believe that it has momentum.

There's one other thing I'd like to mention, which is that the video on demand - the pay-per-view that we've been talking about - is great for hit titles. But the drop off for lesser titles, and catalog titles, is tremendous. Video on demand also can't deliver the extras that consumers are starting to appreciate. Both of those areas are met by the current packaged goods media - by DVD.

Moderator: More questions?

Question #6: Mr. Sharp, earlier you said that your research indicated that your consumers are buying 11 Divx discs, and yet you also said your totals are around 500,000. Can you reconcile those numbers with your hardware numbers?

Richard Sharp (Circuit City & Divx): Sure. The research I quoted was for Divx owners that had had their players for 4 to 6 weeks. You know, 2/3rds of Divx players have only been in consumers' hands for less than a month. A significant majority of them have only been there for about two weeks. So we had to go back to history. Of those that bought their player recently, and took their 5 movies home, they probably have a while to go before they're ready to get back to the store and buy some more, so it's merely a timing difference. We expect that the demand for Divx discs will increase significantly, as this group of players that was sold through the Christmas season, sort of works through the 5 or more they took home with them, and gets into the market for the next set.

Moderator: You mentioned this morning Rick, that you couldn't talk about consumer activations, but there is somewhat of a lag between the purchase of the player and the activation of the account?

Richard Sharp (Circuit City & Divx): Correct. The consumer takes the player home - it's obviously capable of playing open DVD discs right out of the box - to the extent that they are ready to start their Divx experience, they do need to install it with a phone line, and call the Divx registration center. I think to some extent, during the holidays, there's gonna be a lag there. We've seen a consistent lag since we started in June, but our research indicates that they all get there in a reasonable period of time. So we'd expect, by the end of this month, to see virtually a very large percentage of those players sold in December registered.

Moderator: It would suggest that either people haven't taken it out of the box, or are renting or buying open DVDs.

Richard Sharp (Circuit City & Divx): Absolutely.

Moderator: Further questions?

Question #7: You earlier said that there would be some 2 million players sold in 1999. Do you have any further estimates beyond that?

Moderator: Larry?

Larry Pesce (Thomson): Ah, we haven't made anything published yet on going beyond that. I'm not sure we know well enough to be able to predict that.

Moderator: CEMA just, in a report issued today, said 1.6 million, so we're already... ah, Mike?

Mike Fidler (Sony): Nothing beyond... I think I'd be fairly consistent with what Larry's estimates were for 1999 with 2 million units. We think that might be a little conservative, given the kind of explosive growth we've had in this year, but I think that's a reasonable expectation of growth for next year. I have nothing at this point in time for beyond that.

Question #7 (follow-up): Isn't 2 million a small percentage, given a household base of 110 million?

Warren Lieberfarb (WHV): We think by the end of 2002 or 2003, there will be an installed base of 12 million households in the United States, and the growth rate will accelerate as CD-ROM is replaced, and is replaced with DVD-ROM, and people have two platforms on which to play their movies.

Moderator: Question?

Question #8: I think it's pretty clear that open DVD is the way to go. (big laugh from the audience) Given all of the DIvx rental fees, it seems that open DVD rental would be cheaper, and you can take it over to a friend's house at no extra charge. So tell me how Divx is better?

Moderator: The gentlemen makes an argument for open DVD... Rick?

Richard Sharp (Circuit City & Divx): Well, I really don't want to bore the audience. I think you all have been through the DVD versus Divx battles, and understand. Again, let me point out that we don't view this as a battle. Divx is a feature for DVD. We want DVD to be successful, for Divx to be successful, and we're absolutely supportive of both kinds of players, both with Divx and without. The benefits Divx offers are pretty straightforward - the ability to purchase digital quality content, at the lowest possible price, and if you only want to watch the movie once or twice, it is absolutely a low cost option. And is highly convenient.

Question #8 (follow-up): What about all the fees?

Richard Sharp (Circuit City & Divx): There are no fees. If you buy a Divx movie for $4.49 and take it home and watch it, there's no charge. That includes one 48 hour viewing period.

Question #8 (follow-up): One - that's the magic word. With open DVD, you can watch it as many times as you want!

Richard Sharp (Circuit City & Divx): Right - at a significantly different price. Next. (laughter)

Moderator: (to questioner) I invite you to, um...

Richard Sharp (Circuit City & Divx): No, no thanks. (lots of laughter now)

Moderator: OK, invitation rescinded. Further questions?

Question #9: Who is going to set the baseline rental fee for DVD? Will it be Divx, or will Hollywood step in? 

John Marmaduke (Hastings): I can tell you right now that we're matching pretty much what we do with VHS. And the consumers think that's a great bargain. And it's less than the fee that we were just arguing about. (more laughs from the audience)

Jeff Yapp (Hollywood): And at Hollywood, we do the exact same thing - it's in line with our VHS rental price, which is less than the Divx fee.

John Marmaduke (Hastings): Let me say one other thing - I think something's being lost here. I really don't care as much about the Divx versus DVD battle as everybody seems to in this room. Because our customers don't seem to care a heck of a lot about it. And that's really what drives me. And the bottom line is, it's a great format - meaning DVD, and whatever mousetrap you want to add to it - and our customers see it as a clear step-up. And that step-up offers more features, and more clarity, that hopefully is going to take some of the couch potatoes away from the death star [Editor's note: meaning satellite and Direct TV, I assume] and all these other things that are keeping people out of our stores. I think that we've got to consistently improve our offering all the time, or somebody is going to do it for us. And so I'm really excited about DVD, and I hope Divx doesn't confuse the customer. They haven't in small town America, but they sort of like it simple anyway. (laughter) And I think it's going to happen, regardless of some of the arguments on this panel.

Moderator: Thank you for a lively and intelligent debate.

(vigorous applause)