Increases in sales offset by burgeoning piracy trade as copied discs retain high quality.

This year will mark a turning-point in the video industry. Sales and rentals of DVDs will outstrip those of VHS in the US for the first time.

When digital video discs, as they were then called, came into being by an electronics industry agreement in 1995, they were seen merely as a way of encoding films into a more reliable format than the tired old VHS tape.

Today, digital versatile discs, as they are now known, offer much more than mere video and have rapidly grown to be one of the most popular content formats, used for computer games and software, music and enhanced digital content to go with films. Such has been their success that the point where the new technology outstrips its predecessor, VHS, is expected to arrive this year, according to analysts at Gartner Group.

In part, this is a classic technology story. As the format gained industry acceptance through an agreement between Pioneer, Toshiba, Sony and Philips in 1995, manufacturers began to work on producing DVD discs and players.

Competition, improvements in technique and the decreasing price of components all helped to bring the price down. As this happened, more people began to buy DVD players and discs, creating a virtuous circle of demand, competition and price deflation.

The rapid take-up of the DVD has been impressive. In Britain alone, sales of DVDs at music and video retailer HMV leapt by 83 per cent last year.

Data from Understanding & Solutions researchers in the US show there is room for exponential growth in continental Europe, where the total market for DVD sales and rentals was worth $6.6 billion last year and forecast to be $11.8 billion this year.

Although the cash figure in Europe is still small in relation to the US, Hollywood studios are encouraged by the soaring sales. In the US, 58 per cent of households will have DVD players by the end of the year, according to Gartner, and sales and rentals of DVDs will reach $33.5 billion by 2007.

Gartner believes the replacement of old formats is already taking place, and has factored that into its estimates. Viewers will also continue to watch old videos on video recorders for a long period, argues Mr Simon Shepherd, research analyst at IDC, who does not believe there will be a significant boost in revenues owing to VHS replacement costs. Just as important, however, more than any previous reproduction format the DVD raises the possibility of piracy on a scale that frightens the music, video and computer industries.

Analogue formats such as tapes and vinyl made widespread illegal piracy relatively unattractive, because the copies were of much lower quality than the original. DVDs do not suffer from the same problem; they offer better quality than VHS for domestic use and because the recording is digitally encoded, the quality does not decline in reproduction.

To safeguard their intellectual property, DVD makers have instituted a series of software protection techniques. But these have proved to be leaky.

DVDs are hitting the streets in large numbers as organised fraudsters begin to set up copying factories along the lines of those that have plagued the software industry for years.

There are consolations. The kind of casual piracy that occurs on the internet with recorded music, whereby users freely swap digitised versions of songs with little regard to copyright, would be much more difficult to achieve on DVD, because of the sheer size of the files involved.

A greater threat could come from DVD recorders, which are seen by many consumers as an instrument for copying films, says Mr Shepherd. "We have anecdotal evidence of people returning DVD recorders to the shops where they bought them after they realised that they couldn't just copy a DVD on to a blank disc."

Most people who want to copy DVDs in this way have little criminal intent but see their activities as a minor infringement, in the same way that for years people have taped records from each other without thinking twice.

Ironically, those people who returned their recorders could have found the technology they needed to copy DVDs freely available on the internet, where the successors to DeCSS have proliferated over recent years. At present, using these programs requires a reasonable degree of technical knowledge, to download, install and use the software.Staying ahead of the hackers will always be a cat-and-mouse game. - (Financial Times Service)