Divx without the dial-ins? - Company Business and Marketing

Emedia Professional, April, 2000 by Lauren Wiley

SpectraDisc Corp., a small Rhode Island company, has developed a limited-play CD/DVD technology for the entertainment and consumer software industries. It has yet to sell it, however, and the company may face its greatest challenge in distinguishing itself from the failed Divx format in its quest to bring its products to market.

According to SpectraDisc CEO Nabil Lawandy, the new technology uses environmentally safe chemistry to prevent the readout of information on an optical disc after a certain amount of time. The disc's duration, Lawandy says, is set during the last step of the production process. The limited-play CDs, CD-ROMs, and DVDs will be compatible with conventional players. Once the disc's packaging is opened, the disc will work only for the amount of time for which it's programmed. SpectraDisc's target markets for the technology include return-free movie and game rentals as well as promotional offers of music and video games.

SpectraDisc was formed by majority owner Spectra Science Corp., a 3 1/2-year-old Brown University spin-off, for the purpose of developing the limited-play concept. The company spent eight months working on the prototype before announcing its technology in January.

SpectraDisc is seeking out manufacturing partners and "laying the foundation" to bring content providers on board, Lawandy says. "We plan to go to market in a year, depending on the enthusiasm of the content providers, who really have to drive this thing." Bob Pfannkuch, president of DVD replication company Panasonic Disc Services Corp., agrees that the cooperation of entertainment companies will be key. "The concept certainly makes sense as far as do-ability," he says of SpectraDisc's technology. "If studios have an interest, we believe we could make it."

The tepid response from film studios was partly to blame for the downfall of Divx, a pay-per-view DVD system developed by Digital Video Express (DVE). Six major studios agreed to provide content for Divx discs, but did not release them quickly enough, according to DVE officials.

The lack of support from studios and retailers prompted DVE, which is two-thirds owned by Circuit City, to start phasing out Divx in June 1999. Divx discs will no longer work after June 30, 2001, but the Divx players will continue to play "open" DVDs.

In the technology's year-long stay in the U.S. market, Divx player sales accounted for only a small fraction of all DVD player sales due in large part to the fact that only four brands (Zenith, JVC, Pioneer, Harman Kardon) were available in 742 stores (primarily Circuit City). By comparison, some 40 brands of "open" DVD players were available in 10,000 retail outlets.

Lawandy insists SpectraDisc will not suffer the same fate because of its differences from Divx. Divx movies could only be played on Divx players--which cost $100 more than comparable open DVD players--and had to be connected to a phone line to order viewing periods using a credit card. The setup caused the "Big Brother syndrome," Lawandy says, because "someone knew what (consumers) were watching and when they were watching it."

Lawandy maintains that SpectraDisc's DVDs will sell for $2 cheaper than the $4.99 Divx discs, which will equip them to better compete with DVD rentals. Time-limited discs will have an edge over rentals, he says, because they eliminate late fees and store returns. Once the time is up, he says, the discs can be tossed into the plastics recycling bin.

SpectraDisc aims to sell its discs in stores such as Wal-Mart and CVS, on retail shelves, and in vending machines. Shoppers will be able to pick up time-limited DVDs, CDs, or CD-ROMs, and use them whenever they want, because the clock won't start ticking until the package is opened. By making its technology compatible with current DVD players and doing away with the need for a phone line, SpectraDisc has overcome the two main factors that contributed to Divx's demise, according to Forrester Research analyst Ekaterina Walsh. If the company ensures that its time-limited DVDs are competitive with rental prices and feature many of the same titles, she says, "they should have a good chance with the mass consumer who values convenience."

The number of potential customers grows every day, Walsh says. In January, eight million U.S. households had DVD players--nearly twice the number the year before--and the industry expects to have another great year.

InfoTech Research analyst Ted Pine still doesn't believe the market is ready for SpectraDisc's DVD technology, and sees too many similarities to Divx. "It seems that the one-way rental concept is the Count Dracula of the home video industry," Pine says. "No sooner does the consumer stick a stake in its heart than it comes back demanding new blood." However, he concedes, "I suppose from the consumer's perspective, the Spectra disc is kinder and gentler than Divx." Pine does point out one potential problem for consumers that both Divx and SpectraDisc's technology have in common. If viewers had to stop watching a Divx movie midstream, and could not return to it before the time ran out, they had to pay full price to see it again. In SpectraDisc's case, there is no way to stop the timer once the disc is unsealed. If someone is interrupted and runs out of time, they are out of luck. Instead of simply being charged a late fee by a video store, the consumer has to go out and buy a new disc to watch the movie.