I just recently purchased a 60" hdtv lcd and a 42" plasma edtv and from what I understand DVI and HDMI transfer video data in digital format. The only difference is that HDMI also transfers audio through the same cable.
Both of my tv's had hdmi connections but my satellite box only had dvi so i had to get a cable that had a hdmi connector on one end and a dvi connector on the other. Works great!
Basically they are both newer types of connections for all digital video signals that bypass the old analog inputs that TV's and audio components used forever. They replace composite, s-video and component connections (which all used analog voltages and converted to digital in most modern equipment). DVI and HDMI provide digital to digital connections (for example DVD playback starts as digital and remains digital to the display device instead of going digital to analog component back to digital again for a display device like a front-projector, plasma or lcd display which are all digital devices). That's the basics.
HDMI differs in that it also includes in one connector the digital audio connection as well. With DVI the digital video must be accompanied by an optical or digital coax audio cable. Not a big deal but an improvement.
Now for the really important and hard part. Both DVI and HDMI are available (and you should not buy without) a thing called HDCP or High definition content protection. This is not available on analog connections. This is the encryption system created by the content providers to ensure control over copying of digital material. It also contains the threat of lowering the resolution of displayed material at the whim of the provider. Without HDCP and a digital connection you can possibly be threatened with not being able to see or see at full resolution something you actually purchase and own. Welcome to lawyerville USA. However currently the threat is not being exercised.
Be aware that DVI and HDMI and HDCP are new technolgies and some snags with some devices that should work together don't currrently. For example it's possible for a DVD player with HDMI and a display with HDMI will not actually work due to being new and buggy interfaces. It's worth trying before buying or finding from actual users that a combination of devices actually work.
Great explanation Inexcess! I just wanted to add that HDCP is still a big mess where the details are still being worked out amongst software, hardware and content providers. Right now there are all kinds of loopholes in the system like raw uncompressed video is not required to be protected over a DVI connection.
The first phase of content protection is broadcast flag and that is coming into effect this July.
One thing to be careful about: some devices only transmit 2 channels of audio over HDMI. So if you have 5.1 or 7.1 you may end up wiring through separate optical audio anyways. If you can, research into your components ahead of time instead of trying to make the decision in the store.
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