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New HEVC Patent Pool: What Are the Implications?
Last week, HEVC Advance announced it is forming a new patent pool in addition to the one offered by MPEG LA. While the new group—which will likely include Dolby, GE, Mitsubishi Electric, Philips, and Technicolor—did not announce licensing terms, past precedent indicates that the royalties won't likely be onerous for most encoding and decoding vendors, though how it will affect content publishers is less clear.
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On March 24, HEVC Advance, an independent licensing administrator announced a new HEVC patent pool, in addition to the one being offered by MPEG LA. In this article, we'll explore exactly what that means and what the implications are.

To gather this information, I spoke with Mike Callahan, senior director of product marketing at Elemental Technologies, Shawn Carnahan, CTO of Telestream, and Pete Moller from HEVC Advance. I also spoke with several other knowledgeable industry professionals who wished to stay off the record. I sent requests for interviews to two of the companies in the new group, Dolby and Technicolor, but did not hear back.

What is HEVC Advance?

HEVC Advance is an independent licensing administrator forming a new HEVC patent pool.  The spokesperson, Pete Moller, is currently a managing director of IP Equality at GE, one of the five companies with IP rights listed in the HEVC Advance press release.

In our conversation, Moller stated the he's just a spokesperson. Though GE was obviously involved to some degree in the organization's formation, Moller indicated that HEVC Advance is transitioning to an independent entity that will be independently owned and managed.

From my perspective, GE’s backing, to whatever degree, gives HEVC Advance a lot of weight. This isn't a group of dissatisfied patent owners corralled by an aggressive hustler; it's a huge company attempting to get more for their IP than they thought they could through the MPEG LA patent pool.

Who is in the Group?    

The press release states that, "The initial list of licensors is expected to include GE, Technicolor, Dolby, Philips, and Mitsubishi Electric." Given Moller's presence, GE is probably a given. The press release also states, "HEVC Advance expects to attract a critical mass of intellectual property (IP) holders, with more than 500 essential patents expected to be available for license at launch, with the number of patents expected to grow significantly."

For what its worth, of the companies mentioned, Technicolor was the only one to issue a press release on the subject.

What are the Royalty Terms?

Terms were not disclosed. In our conversation, Moller stated that the group hopes to announce general terms in Q2 2015 and to start offering licenses in Q3 2015.

Is the Formation of a New Group a Surprise?

Only if you weren't paying attention.

By way of background, when MPEG LA announced its HEVC pool, I reported that there were multiple notable companies missing, including AT&T, Microsoft, Nokia, and Motorola, and that "one of the biggest concerns about HEVC was that essential patent holders would opt out of the patent pool, forcing HEVC users to enter into multiple licensing agreements with multiple companies." So most companies who have licensed or plan to license HEVC from MPEG LA were probably expecting to hear from other owners of HEVC-related IP.

As Elemental’s Callahan stated, "generally speaking, quite a few unknowns remain across the broader HEVC patent, license, and royalty landscape. It's in keeping with the 'land-grab' mentality typical of early-phase technologies and markets."

To put this in perspective, the MPEG LA H.264 patent group included more than 4,000 patents, and as Telestream's Carnahan pointed out, there were still other companies asserting H.264-related IP rights outside of the MPEG LA group, including Motorola, which I discuss below. Current participants in the MPEG LA pool own about 500 patents (a number that will grow over time as more patents are granted), while HEVC Advance states that they will have 500 at launch. So while HEVC won’t have the same number of patents as H.264 (could be more, could be less), there may still be a lot of IP owners out there in neither camp.

Why is Another HEVC Patent Pool Necessary?

It's all about the money (but you knew that).

Let me start by stating that the formation of another pool is a good thing; it will be more efficient for HEVC licensees to deal with an organized group than with individual IP owners. Groups also tend to produce more reasonable proposals than individual IP owners, who sometimes overestimate the value of their technologies.

All that said, everyone in HEVC Advance had an opportunity to join the MPEG LA group and chose not to. The obvious motive is that they thought they could earn more with another group.

How Will HEVC Advance’s Terms Differ from MPEG LA?

Since HEVC hasn't disclosed its terms yet, we can only speculate. Let's examine the terms of the MPEG LA HEVC license to get a feel for where some IP owners might feel that they left money on the table.

Here are the main points of the HEVC license:

  • The cost is $0.20/unit for all licensed encoders and decoders
  • There’s a de minimis exception for units under 100,000
  • There’s an annual cap of US $25 million.
  • There is no license on HEVC-encoded content (as there was for H.264 and MPEG-2)

Clearly MPEG LA's license is designed to capture the maximum revenue at the lowest possible administrative cost. That's not to point the finger at MPEG LA. These were the terms agreed to by the 25+ participants in the HEVC group; MPEG LA didn’t formulate them in a vacuum. Still, each major point reveals pretty specific revenue opportunities.

License Fee and De Minimis Exception

Essentially, the license fee and de minmis exception ensures that multiple companies making serious coin from HEVC encoding or HEVC encoded files will never pay a dime into the MPEG LA pool. These include:

  • Encoding companies selling encoders ranging in price from $50 to $25,000 and higher
  • Cloud encoding companies selling encoding services
  • Companies creating multiple-server encoding farms to encode their own content.

Both Elemental and Telestream recognized that encoding vendors were receiving a pretty good deal under the MPEG LA HEVC license proposal. Certainly Elemental would be well under the 100,000 unit de minimis exception. But even if it wasn't, under the current license structure the fees they would owe would be trivial. 

Let's run a quick and dirty estimate. If you divide their estimated $50 million in 2014 revenue by the average selling price of a hardware encoder ($25,000), you get 2,000 units. There’s some cloud and other revenue included in the $50 million, of course, so the unit estimate is probably high, but even if it wasn’t it, 2,000 units translates to $400 in revenue at $0.20/unit. 

Even if the royalty was 10 times higher—$2.00—the net from Elemental would be only $4,000, probably not worth the administrative cost involved. Why $2.00? While I picked this number out of the air, HEVC Advance (or any IP owner) has to choose a number beneath the threshold that would force the affected class to sue. Why?

Because patent rights granted by IP owners who participate in a standard like HEVC have to be fair, reasonable, and non-discriminatory (FRAND). And when assessing what is fair and reasonable, a court will consider rates assessed by other technology licensees like MPEG LA. That’s what happened when Motorola and Microsoft ended up in court to determine the FRAND value of the Motorola H.264-related patent rights that Microsoft was using. Specifically, the court considered MPEG LA’s H.264 license fee to determine what was fair and reasonable.

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