All this while I've been creating VCD (Mpeg1) using a PC.
Will the video quality be much better (non pixelated) when transferring from DV tape directly to VCD using a VDR (like Terrapin VDR)?
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No, it'll be worse.
The benefit of machines like the Terapin (I have one, BTW) is the fact that it'll take a live source and digitize+encode+burn in realtime. Time is money, and there are some clients who can't wait, even that little bit extra.
When you go to a computer via DV and convert in software (e.g. DV-->Premiere-->TMPGEnc-->VCDEasy), the quality can be ~400% better. I know. I have done comparison tests.
Terapin doesn't have the worst encoding, but it's no great shakes.
Scott
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