How the DVD Standard Won the 1990s Format War

In the mid-1990s, the digital video disc faced a dramatic birth, with two opposing camps vying for control over its future. On one side were Philips and Sony, the creators of the Compact Disc, proposing a CD for movies. On the other, Toshiba and Warner Brothers presented their own disc format. This conflict mirrored the earlier VHS and Betamax format war.

The Compact Disc Revolution

In 1982, Sony and Philips introduced the Compact Disc (CD), which revolutionized the audio industry. It was the first widely accepted mass-market digital consumer product, offering high-quality audio and features like pause, restart, fast-forward, and track skipping. Its small, sturdy design and jewel case packaging contributed to its appeal.

The 1980s saw an explosion in CD sales, generating significant revenue for the music industry. Cheaper CD player hardware emerged, record labels re-released their catalogs on CD, and retailers embraced the format. Sales grew from 5.5 million in 1983 to 400 million globally in 1988, and 600 million the following year. Manufacturing a CD cost about $2.35, but it retailed for around $16, leaving substantial profit margins even after accounting for royalties, marketing, and retail.

The CD-ROM Sequel

Following the success of the audio CD, the CD standards body developed sequels. The most successful was the CD Read-Only Memory (CD-ROM), introduced in 1983. The concept was to use CDs to store raw computer data, such as databases, instead of audio.

Initially slow to gain traction, the CD-ROM found its stride in the 1990s with the rise of personal computers. Its high storage capacity, combined with audio cards, color monitors, and speakers, transformed desktops into multimedia devices. Microsoft heavily supported CD-ROMs with popular software like Encarta and Microsoft Bookshelf. Interactive multimedia titles like the video games Myst and The 7th Guest further boosted adoption. By 1993, the CD-ROM industry was worth billions.

Philips, recognizing further potential in the CD format, explored new applications. Their next major initiative was CD-Interactive (CD-I), announced at Microsoft's 1986 CD-ROM conference. CD-I was a disc storage and interactive content hardware platform, initially positioned for "edutainment," museum tours, family content, and point-of-sale applications. Despite Philips' efforts, CD-I struggled to gain widespread adoption.

The Quest for Home Video on Disc

Hollywood and home video were obvious targets for disc-based technology. Disc-based home viewing technologies had existed since the 1970s, with the LaserDisc, developed by Philips and MCA and championed by Pioneer, achieving niche success among enthusiasts. However, the cassette-based VHS format dominated the market starting in the late 1970s. Cheap VHS tapes created a new revenue stream for studios, and video rental stores flourished, selling tapes to shops at wholesale prices of $60-$100 each. By 1988, the U.S. video rental market was worth $5.5 billion, with home video contributing over 50% of studio revenue.

By the late 1980s, VHS growth plateaued, and competition from cable and satellite loomed. Companies attempted to introduce new formats. JVC launched Super-VHS in 1987, offering better resolution with backward compatibility. Sony backed 8-millimeter tapes, which evolved into Hi-8, finding success in camcorders despite failing in the home video market.

Despite these efforts, VHS remained dominant due to its established ecosystem, affordable players and tapes, and "good enough" quality on CRT TVs. With 189 million VCR households worldwide, customers used VCRs for home theater and recording TV shows.

CD Video and Warner Brothers' Vision

The CD's first foray into video was with CD Video (CD-V), introduced in 1987. CD-V combined digital audio from CDs with an analog video track. While regular CD players could play the audio, a special player was needed for video. Available in various disc sizes, the standard CD-sized disc could only hold about five to six minutes of analog video and 20 minutes of audio. The initial pitch focused on music videos, but the user experience was often awkward, with short video segments followed by long periods of blank audio.

During its development, Philips demonstrated CD-V to Warren Lieberfarb, then president of Warner Home Video. Concerned about competition from digital satellite and cable, Lieberfarb believed that a video and audio quality superior to cable, at an affordable price ($10-$12), was the solution. Inspired by the CD Video demonstration, he realized that disc manufacturing costs could be half that of VHS cassettes at high volumes. He then made it his mission to bring movies to disc.

Lieberfarb pushed Warner Brothers to partner with Philips to develop a new standard with CD-quality sound and at least VHS-quality video. Early work with the MPEG-1 compression codec yielded unsatisfactory results. In 1990, Warner merged with Time Inc. to form Time Warner. In 1991, Toshiba and C. Itoh invested a billion dollars in Time Warner, seeking to combine their hardware expertise with Warner's media assets.

With the Philips-Warner collaboration faltering, Lieberfarb met with Toshiba in 1992, impressed by their progress in digital compression. Warner subsequently reconciled with Philips in 1993, signing a letter of intent.

Video CD and its Asian Success

Philips continued developing the MPEG-1 codec, initially integrating it into the CD-I platform. A 1993 deal with Paramount to provide 50 movies on CD-I failed to boost hardware sales. This work eventually led to the Video CD (VCD) format. Unlike CD-V, VCD, thanks to MPEG-1 compression, could hold about 74 minutes of content.

However, VCD struggled in the West due to higher player costs than VCRs, inability to record TV, and compressed image resolution (around 240p) that was only comparable to VHS. Despite this, VCD found immense success in Chinese-speaking Asia. Jiang Wanmeng, after encountering MPEG-1 at a 1992 exhibition, partnered with C-Cube to produce the world's first VCD player, "Wanyan," in Hefei. Despite a hefty price of 5,000 RMB ($867), Wanyan sold out its initial run, as VHS had not yet established itself in Mainland China.

The lack of patents on Wanyan's design led to fierce competition from copiers, eventually forcing the original company to sell. Nevertheless, the VCD boom established it as a dominant standard in Mainland China, with 10-15 million players sold in 1997. Domestic companies like BBK, Aido, and Shinco emerged, driving foreign competitors out. VCD remained a dominant format for several years, despite studios' reluctance to release content due to the lack of copy protection. This led to widespread piracy, with movies filmed in theaters being sold on VCDs, particularly in Hong Kong.

The Call for a Unified Standard

In late 1994, representatives from seven major content creators convened, demanding a single worldwide optical disc standard for movies. Key technical requirements included: - Room for a full-length feature film (approximately 135 minutes on one side). - Picture quality superior to LaserDisc. - Support for surround sound, multiple languages, and aspect ratios. - Copy protection.

The financial stakes were enormous. Richard Cohen, President of MGM/United Artists' Home Entertainment, noted that a successful digital video disc could allow studios to resell their entire film libraries. Patent holders of such a standard stood to earn millions in licensing fees, similar to the billions made by record labels from CDs.

Two main proposals emerged:

Multimedia CD (MMCD)

Philips, rejoining forces with Sony, announced the Multimedia CD (MMCD) in December 1994. Originally named HDCD, the name was already taken. An MMCD was the same size as an audio CD, with each side storing 3.7 gigabytes, just enough for 135 minutes of video. The MMCD alliance had 14 initial backers, mostly hardware companies like Nokia, Bang and Olufsen, and Ricoh. Sony, having acquired Columbia Pictures in 1989, also aligned with this camp.

Super Density (SD)

A month after MMCD's announcement, a consortium of Japanese consumer electronics companies, led by Toshiba, unveiled their "Super Disc" or "Super Density Disc." SD discs achieved higher data density by using smaller pits packed tighter together (0.4 microns large and 0.74 microns apart) compared to MMCD's (0.45 microns large and 0.84 microns apart). This resulted in 5 gigabytes of storage on one side.

SD also featured a thinner substrate (0.6 millimeters), allowing two sides to be bonded back-to-back for 8-9 gigabytes of total storage (requiring disc flipping). An optional dual-layer approach offered even greater capacity: a semi-transparent first layer (Layer A) and a fully reflective second layer (Layer B). The laser could read Layer A directly or fire through it to read Layer B, achieving up to 10 gigabytes on a single side.

The SD Alliance comprised seven companies, primarily Japanese consumer electronics firms, led by Toshiba and Matsushita (Panasonic), a key player in VHS's victory over Betamax. Their allies included 10 other companies, mostly home electronics manufacturers, and movie studios, with Warner Brothers at the forefront.

The Battle of Vaporware versus Patents

The SD camp argued for their format's technical superiority, claiming it met all studio requirements, including longer playtime, higher data capacity, faster data transfer rates, better picture quality, and more audio and subtitle channels.

The MMCD proponents emphasized their format's compatibility with the successful audio CD ecosystem, allowing MMCD players to play existing CDs, thus minimizing customer confusion and ensuring backward compatibility. They also criticized SD as "vaporware," arguing that its dual-sided bonding process was too complex for mass production without defects.

The SD camp, in turn, raised concerns about the substantial patent fees Philips and its partners earned from audio CD royalties, estimated at around 3 cents per CD, totaling $42 million in 1993. They viewed MMCD as an attempt to extend the CD's lucrative patent model to digital video and even approached the U.S. Justice Department, which was already investigating Philips and Sony for anti-competitive patenting practices.

The Path to War

The growing success of CD-ROMs as a data storage format meant computer manufacturers also had a stake in the outcome. In April 1995, Apple, Compaq, HP, IBM, and Microsoft urged both sides to compromise, but neither was willing. Sony's chairman and CEO, Norio Ohga, declared in May 1995 that a split was "unavoidable" and a matter of "liberalism and democracy."

In a surprising move, the MMCD camp announced they would adopt their own dual-layer technology licensed from 3M, which stamped a second layer of pits onto a transparent layer. This narrowed the data capacity gap between the two formats.

Despite the widespread desire to avoid another VHS-Betamax scenario, both sides remained entrenched. Quotes from July 1995 highlighted the animosity: Philips' Jan Oosterveld invited the SD camp to join them, while Warner's Lieberfarb accused Sony and Philips of trying to maintain hegemony. Sony's President Nobuyuki Idei argued against flipping discs, while Toshiba's Koji Hase countered that their format offered more room on one side. By the summer of 1995, it was clear a format war was imminent, with MMCD aiming for a holiday launch and SD targeting mid-1996.

IBM Breaks the Deadlock

The deadlock was finally broken by computer manufacturers, particularly IBM. In August 1995, a technical group of seven computer companies issued a press release stating that both formats met the requirements for next-generation data storage but insisted on a single, unified format. They refused to back either until a consolidation occurred.

When this failed, IBM, led by optical disc expert Alan Bell and CEO Lou Gerstner, intervened directly. They informed Sony and Philips that if a compromise wasn't reached within weeks, IBM would publicly endorse SD. This ultimatum spurred action. On August 24th, the two sides announced they would meet to create a combined standard incorporating aspects of both.

The resulting format adopted SD's bonded substrates and error correction, combined with MMCD's data modulation scheme. Adopting the MMCD scheme slightly reduced the disc capacity from 5 gigabytes to the now-familiar 4.7 gigabytes, a reduction IBM deemed insignificant.

For naming, Sony and Philips wanted "CD" in the name, leading IBM to suggest "SMCD." The SD camp rejected this, so they adopted the colloquial nickname "Digital Video Disc," or DVD. Later, the "V" was changed to "Versatile" to reflect its data storage capabilities. Officially, "DVD" simply means DVD. In December 1995, the DVD Consortium (now the DVD Forum) was established to manage the standard.

Closing the Movie Studios

The final hurdle was convincing movie studios to release their films on DVD. A major sticking point was copy protection, as studios feared perfect digital copies could be ripped, especially with DVD-ROM systems. Toshiba, Matsushita, and others developed an acceptable copy protection scheme, which took considerable time. Initially, studios like Paramount, Dreamworks, and Fox withheld their movies due to piracy concerns.

Toshiba announced the first DVD players would launch in Japan in late 1996, with the SD-3000 DVD player shipping in November. The following month, Warner Brothers released four movies on DVD in Japan. The U.S. launch occurred in March 1997, with over 20 companies offering players priced between $600 and $1,000, and about 30 titles available at $20. By June, this grew to 120 titles.

Conclusion

Despite initial challenges, including studio holdouts, high player prices, and controversies like the "DivX affair," the DVD boom eventually took off. Sales were slow in 1997 and 1998, with studios cautiously expanding their DVD releases. Paramount, for instance, didn't release DVDs until late 1998. DVD-ROM drives also struggled due to high costs and the popularity of Sony and Philips' rewritable CD-RW standard.

By December 1997, only 340,000 DVD players had been sold in the U.S., far below the projected 1.2 million. However, as issues were resolved and more titles became available, the market improved. In April 1998, Netflix launched its DVD rental-by-mail service, gaining traction. The 1998 holiday season saw strong sales, and 1999 witnessed a surge in volume with the introduction of affordable $200 DVD players from China. Momentum continued into 2000 with the release of Sony's PlayStation 2, a video game console that brought DVD into millions of homes, selling 10 million units by March 2001. By 2001, U.S. consumer DVD and VHS purchases reached parity, each totaling $5 billion, marking the beginning of the DVD boom.