Digital media upstart DivXNetworks may yet see a Hollywood ending for its controversial video format.

The San Diego-based company is perhaps best known among file swappers, who for years have used its highly regarded DivX compression technology to speed video downloads--with or without the permission of copyright holders. Now DivXNetworks is hoping for a sequel as the technology partner of choice for film studios and consumer-electronics makers working to bridge the Internet and television.

What's new:
Tiny upstart DivX Networks--whose compression technology has long been associated with file-swapping--is hoping for a sequel as the tech partner of choice for film studios and consumer-electronics makers working to bridge the Net and television.

Bottom line:
With broadband and wireless networking taking off among consumers, the PC is poised to become a personal media file server, pumping out music, TV programs and more to devices around the home. The compression technology that winds up as essential to these file transfers stands to pull in a lot of money.

The tiny company, which has so far announced a mere $11.5 million in venture capital funding, might just pull it off. By this time next year, DivX-compatible DVD players will likely be standard fare at consumer-electronics outlets in the United States, increasing the pressure on industry giants such as Microsoft and RealNetworks to get their own formats off the PC and onto one of the hottest-selling consumer-electronics devices around.

DivX is still only a little way along the road to media redemption, however, and could yet falter. But the company is beginning to tout some successes, having recently inked a deal with consumer-electronics giant Royal Philips Electronics for a DivX-certified DVD player, now available in Europe. It has also partnered with News Corp.'s 20th Century Fox to encode films for a newly launched airline movie-rental service.

"DVD players are considered the killer app for convergence, and we're way ahead of our competitors on this front," DivXNetworks CEO Jordan Greenhall said in a recent interview.

DivXNetworks' partnerships come as entertainment companies and device makers look to new video formats developed for the Internet as potential glue to connect the PC to the TV screen--an arena that pits the DivX technology against a host of offerings from much-larger rivals, from various flavors of the proposed MPEG-4 video standard to proprietary technology from Microsoft to RealNetworks' multiformat Helix platform.

With broadband connections and wireless networking taking off among consumers, the PC is poised to assume the role of personal media file server, pumping out music, photos, television programs and other entertainment offerings to devices scattered around the home. Few devices currently support Internet video compression formats for television, but that's changing fast, analysts said.

"This fall, you can already hook up your TV to your PC," said analyst Richard Doherty of The Envisioneering Group. "By Christmas, even people who don't have a geek in the family will be able to do it, too."

Like TiVo on steroids
Like its rivals, DivX offers a huge improvement in compression compared with the current TV video standard, MPEG-2, which is used by most broadcasters and in most DVDs: Using DivX, a standard 4.7GB DVD can be squeezed down to about 700MB without significant loss of quality. (Microsoft and RealNetworks claim similar ratios.)

Using a DivX-compatible DVD player, consumers can play back files stored on their PCs, either through discs burned from computer files or by way of a direct connection such as an Ethernet port. That means hundreds of hours of programming could be stored and retrieved from a computer at will by consumers, creating a TiVo-like digital video recorder on steroids.

That's gotten the attention of consumer-electronics makers, who are looking for new ways to appeal to computer-savvy customers. DVD players have been among the most rapidly adopted consumer-electronics devices in history, with sales soaring from about 315,000 units when they debuted in 1997 to more than 17 million in 2002, according to the Consumer Electronics Association.

As DVD player sales have soared, prices have plummeted, from more than $500 seven years ago to well under $100 for a midrange product today. As a result, manufacturers of DVD players are eager to boost margins with new features. Many have already added audio support for the MP3 music format as well as for Microsoft's Windows Media Audio technology, allowing customers to play back music downloaded over the Internet on their stereo systems.

Denmark-based Kiss Technology released the first DivX-compatible DVD player in March, an Ethernet-connected device costing $299. Philips followed shortly afterward with the DivX-compatible DVD737, released in August with a retail price of 199 euros ($232).

PC retailer Gateway has also released a "connected" DVD player capable of fetching MP3 files or digital photos from one or more PCs over an Ethernet connection or Wi-Fi network.

The stakes are high for makers of standalone DVD players, which face plenty of competition from other devices that aim to bridge the gap between PCs and TVs--and could potentially make DVD players redundant.

This week, Microsoft unveiled partnerships with PC makers for its Media Center software, which supports a widescreen monitor for video playback and uses a TV-style remote control as well as a keyboard. Some models already sell for less than $1,000.

Apple Computer is banking much of its future on the Mac as the center of the digital consumer universe, with strong momentum in music through its iPod portable audio player and its iTunes Music Store. The company also offers home video production tools.

Sony has also bumped up the multimedia features of its Vaio laptops and PCs. In addition, top company executives have said they believe the TV will be the centerpiece of new digital entertainment, and recently released a digital TV in Japan with a direct Internet hook-up called the Altair.

Game consoles that support DVD playback, such as Sony's Playstation 2 and Microsoft's Xbox, and digital home theater projectors could also do the job.

The race to the living room
"We used to talk about a last-mile problem," said Kevin Foreman, general manager for RealNetwork's Helix platform. "Now it's the last-room problem: how to get from the den to the living room. There are a lot of devices in the running."

Analysts said DVD players appear promising as a short-term favorite in the convergence race due to the existing support for the devices in most television sets and the price.

If that's true, DivXNetworks may be in the pole position among video technology developers in the race to the living room.

DivX is already a hit with consumers, who have downloaded more than 100 million copies of the software and encoded more than a billion files in the format, according to the company.

That popularity has helped attract consumer-electronics makers, who have less to lose from piracy than content owners. DivXNetworks CEO Greenhall said the company has been working for the past two years with leading DVD chipset makers, signing up 15 partners so far that either are now, or soon will be, shipping products.

Those deals are set to pay off with a flurry of new DVD players that support the DivX format, said Envisioneering's Doherty, who said Chinese contract manufacturers are slated to begin production on behalf of some well-known brand names, such as Apex.

That's put DivXNetworks well ahead of its main rival, Microsoft, which has announced development deals with several DVD chipset makers but has no products that support its video technology on store shelves. The first such device is expected from Samsung in the first quarter of 2004, said Jason Reindorp, group manager for Microsoft's Windows Digital Media division.

Reindorp denied that Microsoft has had trouble getting consumer-electronics manufacturers to support Windows Media, pointing to new licensing terms unveiled in January that he said have smoothed adoption of the format. In all, some 350 devices currently on the market support Windows Media audio technology, he said, and dozens more are in the pipeline.

"Our focus has been not only on the core format but the whole media ecosystem," Reindorp said. "Specifically, we are making sure that our technology gets deployed as broadly as possible so that as many people can use it as possible. Broadcasters are just as important as the (consumer electronics) makers, and we've worked very successfully in this area."

Envisioneering's Doherty said Microsoft's successes until now have been on the audio side and not on the video side.

"Windows Media costs more than DivX, and it requires a lot more computing overhead, which makes it more difficult to design chipsets to support it," Doherty said.

Microsoft could face another problem on the consumer-electronics front: Linux. Doherty said the vast majority of new network-connected devices will likely use the open-source operating system over Microsoft's OS for devices, Windows CE. But he added that it's too soon to count the software giant out. With an updated version of Windows CE in the offing, Microsoft "appears to be gathering for a second wind," he said.

RealNetworks has also announced chipset makers that plan to support its video technology, but no Helix DVD players are currently on store shelves. RealNetworks' Foreman said the first devices may be available in the first quarter of 2004, at the earliest.

The DivX files
Like many popular technologies that take on a life of their own, DivX was developed to solve a particular problem faced by its creator. Jerome Rota, more famously known under his online moniker "Gej," wanted to compile a portfolio of his work, but he couldn't find a way to compress it and transmit it in the popular AVI (Audio Video Interleaved) file format.

So he tinkered with a Microsoft program to make it AVI-compatible and sent the technology to a friend via an IRC (Internet Relay Chat) room. Soon he was deluged with tens of thousands of requests.

Gej has become something of a cult hero in the four years since he created DivX--especially among the file-swapping underground. The name itself (originally spelled "DivX;-)") is a sly poke at early failed efforts by the movie studios to market copy-proof versions of videos, also known as Divx.

Greenhall tracked down Gej and persuaded him to help create a company based on the technology.

Greenhall said the company re-engineered the original DivX;-) code in a clean-room to address any questions over the legitimacy of its software, which has been clouded by allegations that it was originally based on Microsoft code.

"DivX code is clean," Greenhall said. "That happened even before DivX was a company. In any case, it's not clear that any intellectual property issues were raised."

Aside from competition from Microsoft, DivX's biggest hurdle could well be mending fences with content owners who have long equated its technology with Internet piracy.

Microsoft is the largest technology presence in the world of legally sanctioned Internet video download services, powering studio-backed ventures such as CinemaNow and MovieLink, as well music videos on sites such as Yahoo's Launch service. Rival RealNetworks remains a force in Internet streaming through its RealOne service, but has focused on live sports programming and news rather than Hollywood.

DivX has actively courted studios, developing anticopying controls and seeking to present the face of a fully reformed citizen. But it remains an outsider.

"A huge amount of personal content is encoded in DivX--more than Windows Media," Envisioneering's Doherty said. "The dark side is that not a lot of that is legal. DivX is the lingua franca of movies that (Motion Picture Association of America CEO) Jack Valenti has a heart attack over."

DivXNetworks counters that its persistence in courting copyright holders is beginning to pay off, pointing to a deal earlier this month with Tacoma, Wash.-based airline movie-rental service APS. The service launched using DivX to encode programming provided by 20th Century Fox and a bevy of other content owners. Alaska Airlines has agreed to purchase 1,000 of the company's digEmedia players, which store up to 30 full-length movies and other content.

That follows on several smaller deals with alternative film distributor Strand Releasing and The Jim Henson Co., which used DivX code for a Muppets DVD project about two years ago.

"Senior media executives have been concerned about using DivX technology because of its history," DivXNetworks' Greenhall conceded. "The Fox deal is a first toe in the water...It's a political sign of detente."

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