(FORTUNE Magazine) – A SALESMAN emerges from the subterranean storeroom of HMV, a gigantic, fashionably gray-hued new record store on Manhattan's Upper West Side. He's bearing half a dozen tall, slim cardboard packages, each containing a small cassette that fills maybe a quarter of the box. These are prerecorded digital audiotapes -- DATs, for short. ''We had these by the register for two or three months,'' the salesman says. ''We didn't sell a single one.'' Down Broadway at Tower Records, where cartons of CDs spill into the aisles, DATs are nowhere to be found. The salesman there is emphatic: ''DAT is as dead as a doorknob.'' When digital audiotape broke on these shores last year, it was going to be the next great wave in sound, but today it is rolling back into the sea with scarcely a hiss. Its creators at Sony haven't even decided how to pronounce it, alternating at whim between ''dat'' and ''dee ay tee.'' Using the same digital format as compact disks -- recording music as a coded stream of ones and zeros -- DAT technology captures crystal-clear, noise-free sound on tape. Hooked up to a compact disk player with a fiber-optic cable, a DAT machine can make a flawless, bit-for-bit copy of a CD. Marvelous as the technology is, DAT may soon be supplanted by a rival that audio experts are not sure will be quite as good -- but that is cheaper, more convenient, and more versatile. The future of digital tape will be decided mainly by a slugfest between two consumer electronics giants, with retail customers and the record industry as referees. Sony, which sells more cassette players than any other company, invented DAT and is its chief champion. Philips, developer of the familiar audiocassette, is rushing to market with the new system. It's called DCC, for ''digital compact cassette.'' The Philips machines can't record as much information per second as DAT recorders, but the company claims that new signal-processing techniques achieve the same sound quality by sifting the incoming signal and discarding sounds that the ear cannot detect. DCC recorders will also play back standard audiocassettes. Paradoxically, the two combatants were collaborators in the last audio revolution -- compact disks. Each has a big miss or two in its past that it is eager to avoid repeating. Sony's Betamax was a technological success but a commercial failure; Philips left it to others to exploit the audiocassette. A digital audiotape looks like a miniature VHS videocassette, and indeed a DAT machine works much the way a VCR does. The recording and playback heads are inside a drum that spins 2,000 times a minute. The drum is pitched at a slight angle to the tape path, so each rotation of the head lays down a track of information diagonally across the width of the tape, like so: ///////. DAT makes CD-quality sound fully portable, unlike CD players such as Sony's Discman, which can skip when jostled. Sony's DAT recorders list for $850 to $950, and a blank two-hour tape is about $13. DAT ran into problems before it arrived in the U.S. -- not because the technology doesn't work as advertised but because it works so well. On sale in Japan since 1987, the players were delayed in reaching the U.S. market by the threat of a lawsuit from the Recording Industry Association of America. The RIAA worried that bootleggers could use a DAT machine to roll out perfect copies of the music on CDs, hurting CD sales. Eventually Sony and most other manufacturers of DAT machines, including Matsushita and Denon, agreed to add a chip that allows only one digital copy at a time to be made from a CD or a prerecorded DAT, and none from a DAT copy. That slows the copying process enough to make it commercially unattractive and prevents circulation of 12th- generation copies as good as the original. A group of songwriters and music publishers is pressing its own suit, with royalties on blank tape sales as a goal. Even with the agreement, though, most major record companies aren't producing prerecorded DATs, and they probably never will. High-speed machines for duplicating DATs commercially exist only in Sony's labs, so record companies must make copies of DATs in real time -- for example, an hour and a quarter for each tape of Beethoven's Ninth. Even if fast duplicators were widely available, the special tape necessary for high-speed DAT production isn't. Nor is the price right. Record companies spend only about 90 cents to make a CD; DATs cost more than ten times that to produce, and sell for around $25 -- roughly twice the price of a CD. SONY HAD HIGH HOPES when it introduced DAT. Last June, Martin Homlish, president of Sony's U.S. audio component systems company, told the Wall Street Journal, ''Once recording companies see DAT as a viable format, they'll come to the party.'' Although the number of DAT titles is about the same as was available on CD at a similar juncture, Sony remains alone at the ball. So far the only major record company to back the format is Sony's own, formerly CBS Records, with just a few dozen classical and jazz titles. The pop division hasn't signed on yet. From the Betamax disaster, Sony learned what it is seeing now with DAT: The consumer market for hardware swings on prerecorded software. DAT is entrenched in one segment: the recording industry, which uses DAT to make digital master tapes for transfer to CDs and, translated back into analog language, to regular cassettes (and even a few LPs). Sony's little DAT Walkman, which has a microphone jack, is also popular with musicians for making and editing demonstration tapes. Beyond those uses, however, DAT will probably appeal mainly to audiophiles who want to make their own compilations of music. Technology analyst Eugene G. Glazer of Dean Witter Reynolds says, ''At a minimum, DCC sharply reduces the mass-market potential of DAT.'' Sony originally projected first-year U.S. sales of 100,000 DAT machines industrywide, but now acknowledges that volume will fall short of that. Homlish insists, ''We never said DAT would be a mass- market product.'' Not lately, anyhow. Philips has won much more enthusiasm from music companies for its digital compact cassettes, which it plans to begin selling around the world in April 1992. Philips modeled its machine on existing audiocassette decks. DCC recorders use the same drive mechanism as the older decks and will be cheaper than DAT players -- $500 to $600 at introduction. Ninety-minute blank tapes will cost $5 or so, about the same as the most expensive audiocassette. The price of prerecorded DCCs will fall between those of analog cassettes and CDs, say $11 to $12. USING a fixed tape head and a straight-line recording format, a DCC system can't lay down as much information per second as a DAT machine. So instead of trying to replicate every sound that musical instruments can make, Philips did psychoacoustic research to determine which sounds the ear actually registers. The system will ignore sounds at a volume below the threshold of human hearing, or those masked by louder tones of roughly the same frequency. Philips officials claim that the DCC compression system (the company prefers to call it ''bit reduction'') can reproduce the sound of a CD with a quarter of the bits a DAT machine uses to slavishly record everything. The DCC system still must process about 750,000 bits of information a second. It does so by breaking the incoming signal into 32 frequency bands, allocating computing power only to the bands where there is audible sound at any given moment. Then it records the slimmed-down signal on eight parallel tracks. The eight recording heads are etched on a single piece of silicon. Listening tests by audiophile reviewers and this writer at a recent consumer electronics show in Las Vegas suggest that Philips's engineers did their homework well. No one said he could distinguish between a CD, a DAT, or a DCC. Philips's cleverest idea will appeal to consumers, music retailers, and record makers alike: Because DCCs are the same size as standard cassettes, the new machine will be able to play the ordinary cassettes as well. (The average household owns 60 of them.) Record stores won't have to retool their display bins. The new cassettes won't even need a protective box. A sliding steel shutter covers the open edge of the cassette as well as the spindle holes, which appear on only one side of the case; the album cover is laminated to the other side. Unlike DAT, the DCC format permits the use of high-speed duplicators much like those in use today for analog tapes. For the record companies, selling music in two formats may not be as simple as dealing in only one, but it is more profitable. Many people will buy prerecorded music in both formats, CDs and DCCs, much as they used to buy both LPs and analog cassettes. The record companies know that home digital recording, on either CD or tape, is inevitable. (Tandy, for one, is developing a CD machine that can record as well as play back.) They also know that once digital machines are in dashboards and home entertainment centers, the ordinary consumer, being human and lazy, will buy prerecorded music to play in them. In the looming contest between digital tape recorders and CD recorders, the music companies are rooting for tape. If it succeeds in the marketplace, they could sell prerecorded music in yet another format. A victory for CD recorders that are both portable and affordable would leave the record companies with a single digital format -- CDs, which they already sell. Besides Polygram, which Philips controls, three major labels have voiced support for DCC: the EMI group (including Angel and Capitol Records), BMG (which owns RCA Records), and the Warner Music Group (a division of Time Warner Inc., owner of FORTUNE's parent). Tandy has announced that it will produce DCC machines; Matsushita, which makes Panasonic and Technics audio gear, helped Philips with research and development of DCC and will probably become a licensee. The manufacturers are trying to resolve the royalty rights question with the songwriters' group and may choose to delay DCC if they cannot. But Philips, benefiting from Sony's wrangles with the recording industry, has forestalled objections on that front. As a condition of licensing, Philips will require other manufacturers to install a chip preventing second-generation digital copies, as most DAT machine makers do voluntarily. IF THE LISTENING PUBLIC latches on to DCC, the timing will be perfect for Philips. Last year was not a happy one at headquarters in Eindhoven, the Netherlands. The company lost $2.6 billion, mainly in its computer and semiconductor businesses, and ousted the chairman. It is cutting 50,000 jobs as well. One big hurdle remains for DCC. Before record companies commit to it, they need to know that the technology can handle with equal facility the varying dynamic demands of everything from motets to Motown. Golden-eared recording engineers are going to have to run a lot of different music through the system, which they should be able to do later this year. Without their support, DCC could make the quietest noise in living rooms since quadraphonic sound.