DECEMBER 2000

I’m a little jaded. I’ve spent most of the past five years on the internet, first as a hobby, then as something to write about, then as a business. And sometimes it feels that everything that could be invented has been invented. This is particularly true now, with the Nasdaq bouncing around its lows for the year, and Silicon Valley’s usual confidence, always correlated with the high-tech stock index, similarly depressed. There is nothing new to rave about.

The gizmo companies of 1999 – online bookmarks, how cool! – are waning. Maybe the internet is less mind-altering and world-changing than we thought. And then, boredly surfing the web on a Saturday afternoon in a limbo between work and leisure, I came across DivX, which shook me out of my torpor. This is what the new-economy pundits meant when they talked about technological discontinuity.

I had read about this new video format called DivX. After a bit of online detective work, I found a site from which one could download the DivX codec, a piece of software that decodes a file; in this case, a piece of code that decodes and expands a movie. After upgrading to the latest version of Windows Media Player, and finding a site that carried film trailers, I was ready to go.

Wow, as Keanu Reeves says in Matrix, the first piece of video that I downloaded. I always assumed that with more internet bandwidth, consumers and businesses would just do more of what they do now. They would visit Yahoo!, the pages would load faster, and that would be it. And I was expecting DivX video to be a postage stamp slightly larger and slightly less jerky than the formats currently standard on the internet.

But DivX is mindblowingly good – the trailer of Matrix taking up the whole of the screen, an immaculate picture and stereo sound. Three minutes, all in a 17Mb file. This, finally, is the internet the way the unwired imagine it: with the visual quality of the virtual world of Matrix, in fact.

It took another three minutes to work out the consequences for the movie industry. If a trailer can fit into 17Mb, a movie can fit into 600Mb, and the huge hard disks on the latest PCs can fit 20 movies. If a movie takes only as long to download as it does to watch, then video-on-demand is here, now.

What is so revolutionary about DivX? The codec is actually called ‘DivX;)’ – the name is a geeky joke on a movie industry DVD format. Radically simplified, DivX is a hacked version of the latest MPEG4 video-compression format. I do not pretend to understand how it works its magic, but DivX compresses video to a fraction of its former size.

Napster, the online music swapmeet, and MP3, a compression format for audio, have sent the music industry into a panic. It was just a matter of time before the movie industry was also hit by the collision of compression technology, accelerating download speeds, and unbounded storage capacity.

But most commentators reckoned the movie industry had another three to five years before it faced the Napster threat. Wrong. DivX has brought forward the moment

of truth. Perfect digital copies

of movies are being downloaded on the web, and the copyright owners do not

see a penny. Judging by the ferocity with which the movie giants are going after pirates, they know they run the risk of being Napsterized.

The web is now the scene of

a running battle between DivX pirates and the industry’s online investigators. Go to www.divxnews.com for leads to the latest ‘releases’ – a release being the launch of a free ‘ripped’ version of Gladiator.

So what does this mean? A movie industry that will change beyond all recognition. First release, in cinemas, is probably safe for the moment; but video sales and television distribution rights, on which Hollywood makes all its profit margin, will be gutted. My prediction for 2005: a massive increase in product placement. If individual web users are going to pirate movies and then redistribute them to friends, Hollywood will at the very least seek to compensate with advertising revenues.

In other words, the movie industry is coming head to head with a technological discontinuity. There is only one problem. Technological discontinuity is supposed to produce opportunity for start-ups, companies without a legacy business to protect. But I have not the faintest idea how anyone, incumbent or start-up, off-line or online, is going to make any money out of this technological discontinuity.

John Doerr of the Kleiner Perkins venture capital partnership, the man who backed Amazon.com and At Home Network, used to say that the internet boom represented the greatest legal creation of wealth the world has ever seen. More like the greatest destruction of wealth the movie industry has ever seen. But it is reassuring to see the internet still has the capacity to surprise.