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By SARA FISHER

Staff Reporter

All across the entertainment industry, executives are choosing sides in what might be called the “Battle of the Machines.”

In one corner stands the DVD, the digital videodisc player that has been on the market for slightly over a year.

The challenger? Divx, an enhanced DVD player spearheaded by Century City-based entertainment law firm Ziffren, Brittenham, Branca & Fischer and electronics retailer Circuit City Stores Inc. Divx discs are much like standard DVDs, but with one big difference: they can be programmed so that material can be erased (actually, digitally scrambled) after a set period of time.

This technology enables movies to be recorded on cheap Divx discs, for example, which consumers can simply throw away after they’ve viewed the film. There would be no need to return the disc. And because Divx has a higher level of encryption, backers say material recorded on the Divx format would be less vulnerable to piracy.

With the winner poised to dominate the burgeoning digital home entertainment market in the decades to come, movie studios and hardware manufacturers have been scrambling to position themselves for the upcoming skirmish which will begin in earnest as early as the end of April, when Divx hits the consumer market.

“Everyone wants a piece of the digital market and is positioning themselves now,” said Richard Giss, a partner with the trade retail services group at Deloite & Touche LLP. “No one wants to have a digital product that won’t be able to utilize whichever new technology takes off.”

The format battle recalls the total warfare that broke out in the early 1980s between the VHS and Beta home-video systems. In the current skirmish, Divx systems will be able to play DVD discs, but DVD players will not accept the Divx format.

The rival formats are based on different business models. DVD was designed primarily for retail sales, while Divx was designed for the rental market.

Each Divx machine will be equipped with a device that will enable its parent company, Digital Video Express of Herndon, VA., to monitor use of the rented Divx discs via remote modem. Thus, if a viewer decides to watch a movie beyond its expiration time, the disc could be reprogrammed remotely through the modem and the user would be automatically billed (similar to pay-per-view systems).

Digital Video Express is a joint venture between Divx’s two equity partners. Ziffren, Brittenham owns 40 percent, and Circuit City owns 60 percent.

A Zenith-brand Divx player will roll out in select markets this spring for about $500, or about $100 more than for a standard DVD player.

Analysts say both formats are likely to coexist before one emerges as the clear-cut victor. But the upcoming battle already is exciting passions among partisans on both sides of the fence.

Arrayed against Divx are a number of movie studios and electronics manufacturers, who are throwing their weight behind DVDs.

Sony Pictures Entertainment, for example, has refused to sign a licensing deal with Divx for its movie titles a decision tied in part to the fact that parent company, Sony Corp., has no current plans to manufacture Divx players.

“At this time, we have no plans to produce either Divx hardware or release Sony Pictures’ titles in Divx format,” said Mike Fidler, a Sony vice president. “We support the open DVD system, which we believe is the best model for succeeding in the market.”

Fidler did acknowledge that Sony would be carefully monitoring consumer reaction to Divx, and said that the company may reassess its business plan.

Warner Bros. has spoken out even more strongly against the new technology. Warren Leiberfarb, president of Warner Home Video and dubbed the “father of DVD” for his early efforts to promote the digital system, has sharply criticized Divx for impeding DVD acceptance and has no plans to release any movie title under Divx.

Analysts point out that these studios can undermine demand for Divx hardware by not releasing their movie titles in that format.

“The more titles that come out, the higher the demand for that disc player will be,” said Giss. “Divx is going to need a real plethora of attractively priced titles to compete with VCRs and even standard DVDs.”

Nonetheless, Divx officials seem to be taking their criticism in stride.

“I’m very surprised that Divx has attracted so many strong opponents,” said Paul Brindze, a partner with Ziffren, Brittenham and president of Digital Video Entertainment, the marketing arm of Digital Video Express. “Divx is about giving consumers choice. Basic DVD players will continue to be sold, but that more people will want the options Divx provides and that more movie studios will want the extra encryption protection.

Divx has assembled some powerful allies of its own, including the majority of major movie studios in L.A., which have signed licensing deals with Digital Video Express. Walt Disney Co.’s Buena Vista Home Video unit, Viacom’s Paramount Pictures, DreamWorks SKG, Seagram Co’s Universal Pictures and Twentieth Century Fox Film Corp. will for the most part release their movie titles under Divx format at the same time they release their movies on videocassettes and standard DVD.

“For our part, we want to have our products out there in as many formats as possible generating as many revenue streams as possible,” said Charlie Katz, senior vice president of marketing at Universal Home Video. “Because of that, we are supportive of all these formats. Time will tell which business model (open DVD or Divx) the consumers will chose.”

Mitch Koch, general manager, North America at Buena Vista Home Entertainment, voiced a similar opinion.

“We want our consumer package goods to succeed in the digital age, and we want to retail our movies in a digital format,” Koch said. “I may be one of the most neutral people in the industry on this matter, but I’m pulling for both the open and Divx versions of DVD. We’ll have to see how the product is received by the consumer.”

Twentieth Century Fox has an exclusive licensing agreement with Divx, a studio official said. Brindze said Paramount does too, although the studio did not return calls for comment. In both cases, Brindze said, the studios prefer Divx because it is more resistant to bootleg duplication.

But it’s not only the studios that Divx must woo. The format also has alienated some powerful players in the computer industry.

With media rapidly going digital and the personal computer and television expected to merge form and function within the next decade, hardware manufacturers have an increasing stake in the DVD-Divx battle. Already, DVD-ROMs, which are starting to replace CD-ROMs as standard features on computers, read open DVDs but not Divx discs.

“Hollywood needs to figure a way to move safely into the digital age, and it behooves them to keep good relations with information technology (the computer industry) since that is where the future in media lies,” said Alan Bell, DVD program director at IBM. “Since Divx discs don’t play on DVD-ROM drives, the computer industry is simply not interested.”

Still, at least some hardware manufacturers believe Divx is worth the risk. In addition to Zenith, Panasonic and Thompson Electronics will debut their Divx machines this summer, and Pioneer Electronic Corp. and JVC Co. will release their players by 1999.

“You have to ask who is going to buy these things, and right now it’s the avid home collector,” said Bill Zinsmeister, a senior research analyst at Framingham, Mass.-based International Data Corp. “Divx has generated a lot of bad press among videophiles. For one, Divx movies will be incompatible with their current players. Second, Divx players are even more expensive.”

Consumers already appear to have embraced DVD technology with some measure of enthusiasm.

According to the Arlington, Va.-based Consumer Electronics Manufacturers Association, DVD sales totaled 350,000 from the format’s March 1997 debut to the end of the year. With over 20 manufacturers offering DVD players, the association projects 1998 sales to be around 750,000 units. Reflecting the growing interest, Camarillo-based Technicolor Inc., which makes pre-recorded videocassettes and DVDs, just announced that it will triple its DVD title production to meet demand. Also, Panasonic Disc Services Corp. recently announced expansion plans in Torrance to increase its production of DVD players.

“DVDs are taking off much more quickly than CD players did when they were introduced in the eighties,” said Amy Hill, a spokesperson for the association.

No projections are available for Divx players, according to Hill, because consumer reaction is impossible to predict at this time.

Whether consumers embrace Divx could depend on the response of retailers who have not yet lined up en masse to carry the new technology.

Right now, Circuit City and The Good Guys are the only retail chains who have committed to sell Divx players. (Although Circuit City is a part owner of Divx technology, a company spokesman said that the chain will continue to carry standard open DVD players.)

“DVD is the preferred type of digital player right now for retailers, and Divx is facing an uphill battle,” Zinsmeister said. “Circuit City is the only national chain so far committed to carrying Divx. The Good Guys are limited to the West Coast.”

Deloite & Touche’s Giss stresses that retailers need to educate consumers on the disc players if they want to see significant sales.

“The average consumer does not understand what a DVD does and offers, let alone Divx’s version,” he said. “This confusion will only add to the hesitation that consumers already show towards new technology. I expect that they are going to wait until the next generation of players are sold. Either way, Divx faces a retail problem. It’s going to be a hard sell.”

Analyst Zinsmeister says it’s too soon to predict a victor.

“Standard DVDs already have a lot of momentum with over a year’s jump on Divx,” Zinsmeister added. “But there is so much confusion about the players that it is hard to guess which will become a standard years down the road. It is also entirely possible that consumers will be totally alienated from both of the players and neither will end up surviving in the market.”