The fourth quarter of 2001 is fast proving to be a key turning point in the fortunes of DVD, with sales records smashed week in, week out. When Shrek was released in the US on DVD it sold 2.5 million copies in three days. With a retail value of more than $50m, the release demolished a record set only two weeks before by Star Wars: Episode 1.

With numbers like these, DVD is on track to surpass VHS as the pre-eminent system in the continent's $20bn home video market. According to the US-based Video Software Dealers Association, many speciality retailers expect to be out of the tape business by the New Year. Blockbuster, the continent's largest renter and seller of home video, has already eliminated 25% of its VHS library to make room for the "high growth, high margin" digital format. "High margin" partly because the discs take up much less room and last longer than tapes, and mostly because Blockbuster is moving away from its revenue-sharing deals with the Hollywood studios.

Under that scheme, Blockbuster received tapes for free in return for passing on a portion of their rental revenue to the studios. Unlike VHS, however, DVD is a product people prefer to own than rent. According New York-based investment bank Veronis Suhler, sales of DVDs are outstripping rentals by a factor of 7:1 and the disparity is projected to continue to grow. It is therefore more profitable for Blockbuster to buy DVDs wholesale for rental and sale, as wholesale prices are generally 40% or more below retail. Additionally, the company does not have to take the studios' duds.

The driving force behind all this trade is the hardware. According to Bruce Kasrel, an analyst who tracks consumer electronics for US-based Forrester Research, the price of a DVD player is in the industry's sweet spot. "You're in the store, you see a DVD player for $150. That's the threshold where you can buy it on impulse, bring it home and it won't cause family strife." The DVD Entertainment Group estimates 2001 DVD player sales to reach 30 million units by the end of the year; Veronis Suhler predicts a more conservative indicator: 13 million TV households by year's end. Either way, for the manufacturers, for the retailers and for the studios it looks likely to be a greenback Christmas.

But the Ghost of Christmases-to-come has made an appearance as well. The DVD video recorder is now on store shelves throughout North America just in time for the holidays. Prices for entry-level models have dropped from $4,000 to $1,500 in less than eight months; a sub-$1,000 model will be available by next summer. "DVD RW is going to be huge," says Forrester's Kasrel. "Three years from now it will be the standard."

The threat presented by these machines, which are capable of recording DVDs, remains unclear. Imagine someone buying Shrek, copying it for 15 friends and then selling the original version on e-Bay. Extrapolate this across the continent and it presents the worst-case scenario. But Kasrel and his colleague Eric Scheirer, who watches the motion picture industry, will not go that far. "What's the difference between that and having the 15 friends come over and watch it with him'" says Scheirer. "How many of those 15 copies are displacing sales'"

"It's not threatening because it ultimately stimulates interest in the movie business," continues Scheirer. "More people have been going to the movies since the VCR came out than before. It makes more sense to go after the black market than the casual pirates. When someone buys on the street there is a sale being displaced."

DVD is not all about money. On the creative front, the format's 'additional material' is becoming a medium in its own right, with its innovations - the DVD edition of Shrek has a karaoke-style singalong - and its auteurs, such as Hollywood-based freelance Laurent Bouzereau.

His fan base may be small, but it is exclusive. Film-makers such as Steven Spielberg, Martin Scorsese and Brian De Palma have chosen him to create the content that will showcase works such as Jaws and Taxi Driver. He is currently working on DVD extras for forthcoming releases A.I. and The Color Purple.

According to Bouzereau, DVD content is subject to the same creative pitfalls as films. Just as FX-heavy films tend to forsake narrative, DVDs are coming out with an impressive interface - lots of fancy menus and clips - but the content is not compelling. "It's great to have tons on the disc, but sometimes it calls for one in-depth item. When I did Taxi Driver, I did a 90-minute documentary that stands on its own. I didn't want to split it into 20 parts and plaster stickers on the case saying that it had 20 'features'," says Bouzereau.

There will be one ghost for certain in this story: the VCR. Unlike the LP which was saved from CD annihilation by audiophiles and scratch-mix DJs, the VHS format has no champion. Says Kasrel, "It's toast."