DVD has the capability to produce near-studio-quality video and better-than-CD-quality audio. DVD is vastly superior to consumer videotape and generally better than laserdisc. However, quality depends on many production factors. As compression experience and technology improves we see increasing quality, but as production costs decrease and DVD authoring software becomes widely available we also see more shoddily produced discs. A few low-budget DVDs even use MPEG-1 encoding (which is no better than VHS) instead of higher-quality MPEG-2.

DVD video is usually encoded from digital studio master tapes to MPEG-2 format. The encoding process uses lossy compression that removes redundant information (such as areas of the picture that don't change) and information that's not readily perceptible by the human eye. The resulting video, especially when it is complex or changing quickly, may sometimes contain visual flaws, depending on the processing quality and amount of compression. At average video data rates of 3.5 to 6 Mbps (million bits/second), compression artifacts may be occasionally noticeable. Higher data rates can result in higher quality, with almost no perceptible difference from the master at rates above 6 Mbps. As MPEG compression technology improves, better quality is being achieved at lower rates.

Video from DVD sometimes contains visible artifacts such as color banding, blurriness, blockiness, fuzzy dots, shimmering, missing detail, and even effects such as a face that "floats" behind the rest of the moving picture. It's important to understand that the term "artifact" refers to anything that is not supposed to be in the picture. Artifacts are sometimes caused by poor MPEG encoding, but artifacts are more often caused by a poorly adjusted TV, bad cables, electrical interference, sloppy digital noise reduction, improper picture enhancement, poor film-to-video transfer, film grain, player faults, disc read errors, and so on. Most DVDs exhibit few visible MPEG compression artifacts on a properly configured system.. If you think otherwise, you are misinterpreting what you see.

Some early DVD demos were not very good, but this is simply an indication of how bad DVD can be if not properly processed and correctly reproduced. In-store demos should be viewed with a grain of salt, since most salespeople are incapable of properly adjusting a television set.

Most TVs have the sharpness set too high for the clarity of DVD. This exaggerates high-frequency video and causes distortion, just as the treble control set too high on a stereo causes the audio to sound harsh. For best quality the sharpness control should be set very low. Brightness should also not be set too high. Some DVD players output video with a black-level setup of 0 IRE (Japanese standard) rather than 7.5 IRE (US standard). On TVs that are not properly adjusted this can cause some blotchiness in dark scenes. There may be an option in the player menu to use standard black level. DVD video has exceptional color fidelity, so muddy or washed-out colors are almost always a problem in the display (or the original source), not in the DVD player or disc.

DVD audio quality is superb. DVD includes the option of PCM (pulse code modulation) digital audio with sampling sizes and rates higher than audio CD. Alternatively, audio for most movies is stored as discrete, multi-channel surround sound using Dolby Digital or DTS audio compression similar to the digital surround sound formats used in theaters. As with video, audio quality depends on how well the processing and encoding was done. In spite of compression, Dolby Digital and DTS can be close to or better than CD quality.