- The Washington Times - Tuesday, November 18, 2003

From combined dispatches

BEIJING — China announced yesterday a government-funded project to promote an alternative to DVDs and “attack the market share” of the global video format.

The rollout of the long-planned project, known as EVD, or enhanced versatile disc, was timed to coincide with the beginning of what China calls the “golden sales” period — known elsewhere as the Christmas shopping season.

The EVD would give Chinese manufacturers and technology consortiums a homegrown platform to sell and build on. It is also aimed at relieving Chinese DVD producers from paying licensing fees to the companies that hold patents to the DVD format.

While EVD is designed to be better than DVD at recording and produce finer-quality images for high-definition TVs, the HDTV market remains small — and is already the focus of competing standards, such as Blu-Ray and HD DVD-9, developed by leading electronics companies in Japan, Korea and Europe.

Major film producers must also embrace the new format for it to be successful worldwide. A spokesman for the Motion Picture Association of America did not return requests for comment yesterday.

The Chinese government did not say whether it had contacted major film producers.

“Unless the studios agree to support the format, I think it’ll be difficult to create a market,” said Jeff Joseph, vice president of communications for the Consumer Electronics Association. “You have to have high-value content. DVDs didn’t take off until Hollywood [began using them].”

China is the world’s biggest manufacturer of DVD players. More than 100 Chinese DVD makers produced about 30 million players last year, almost double the 2001 figure, state media said. The communist nation exported 20 million units in 2002, accounting for up to 70 percent of the global market for DVD players.

Development of the high-definition compression format has been sponsored by China’s State Trade and Economic Commission and its Ministry of Information Industry, two powerhouses in the country’s efforts toward high-speed economic and technological growth.

The official Xinhua news agency said organizers hoped EVD “would attack the market share of DVD,” the acronym for digital video disc.

Research on EVD began in 1999 following a dispute with foreign electronics companies including Sony and Royal Philips Electronics NV over patent fees for DVD players. EVD was developed by a company called Beijing E-World Technology Co. Ltd. using video-compression technologies licensed by On2 Technologies, a U.S. company.

Because large parts of China’s economy are still controlled by the state, the country is in a better position than most to ensure such new technology will take hold in the domestic market.

More uncertain is the international market, which has moved toward DVDs as the standard.

On the surface, it would seem that EVD’s international impact would be huge, because China makes so many DVD players, said Vamsi Sistla, senior analyst with Allied Business Intelligence, an Oyster Bay, N.Y., research firm.

But there is no guarantee that standards regulators and Hollywood will endorse EVD, meaning that EVD machines for the foreseeable future will also need to play DVDs — thereby forcing Chinese manufacturers to keep paying DVD royalties.

“It’s too premature at this point to feel that EVD is going to change the entire ballgame,” Mr. Sistla said. “There is no guarantee for success.”

The government has said EVD players will cost about $240, though the cost of technologies generally drop as they are widely accepted. A domestically produced DVD player costs about $85.

Only five of China’s DVD makers have signed up to make EVDs. SVA Electronics, one of China’s biggest manufacturers, with annual output of about 5 million, has started mass production, a company spokesman said.

Up to 1.8 million EVD players would be manufactured in 2004, said Hao Chieh, president of E-World Technology. Production would be boosted to 3 million in 2005 and 9 million in 2006.

EVD’s emergence has not only economic but cultural roots. It is consistent with communist China’s broader intentions: carving out a place in the global economy, whose standards it complains have been defined by the West.

As it moves further from its planned-economy roots and deeper into its market-oriented experiment, China has made a point of saying it wants to develop Chinese answers to modern problems. EVD fits that goal.

The Communist Party newspaper People’s Daily said last month that EVD will let domestic disc-player manufacturers “shake off their previous dependence on foreign technologies.”

The government contributed one-fourth of the research and development costs in 1999 after nine electronic giants, including Sony and Toshiba, pressured Chinese DVD makers to pay $9 in retroactive royalties for each player exported.

Because China’s research funding came before it joined the World Trade Organization in December 2001, it would not come under scrutiny by the international trade group. Also, developing economies are subject to looser rules than developed nations.

Regardless, only subsidies based on export performance or on the use of domestic goods are explicitly prohibited by the WTO.

Research and development is a gray area. If government funding confers a benefit and is specific, it may violate WTO rules if another member country shows that the subsidies have harmed a domestic industry.

But it would be difficult to prove such harm for research subsidies directed at products in which identical or similar products do not already exist.

Staff reporters Donna De Marco and Jeffrey Sparshott contributed to this report from Washington.

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