Back to Basics: H.264 Licensing Terms
Like a state tax structure, where a sales tax is counter-balanced by a use tax, MPEG-LA has what it dubs "participation fees" that act in a similar manner and make the broadcaster liable for royalties or licensing fees. In terms of the state, the use tax means that some purchases from out of state that have not been charged sales tax will be liable for an equal use tax as a way to close a loophole in interstate commerce, in turn meaning that any use of a taxable product purchased out of state is subject to the use tax upon first use. In terms of MPEG-LA, these participation fees require content distribution companies to pay a fee if they make money on content distributed as H.264.
The licensing fee for "free" television is based one of two royalty options. The first is a one-time payment of $2,500 per AVC transmission encoder, which covers one AVC encoder "used by or on behalf of a Licensee in transmitting AVC video to the End User" who will decode and view it. If you're wondering whether this is a double charge (in other words, a license fee has already been charged to the encoder manufacturer), the answer is yes.
The second licensing fee is an annual broadcast fee, per broadcast market. This one is interesting, especially given the expansion of the terminology of "free television" to include satellite and cable. As MPEG LA's licensing terms define a broadcast market as "a geographic area within which an End User could use an AVC Decoder to view Free Television AVC Video sent by a single transmitter or transmitter simultaneously with repeaters by a single Legal Entity." OTA appears to be at somewhat of a disadvantage here, as the signal for a geographic OTA area would be miniscule compared to the geographic area for cable and/or satellite transmission.
Regardless of the technological questions that arise from the "broadcast market" scenario, the annual broadcast fee is broken down by viewership sizes:
• $2,500 per calendar year per Broadcast Markets of 100,000-499,999 television households
• $5,000 per calendar year per Broadcast Market of 500,000-999,999 television households
$10,000 per calendar year per Broadcast Market of 1,000,000 or more television households
Some might ask: Why not just pay the per-encoder fee? This might be the most feasible model for a cable or satellite delivery system, as the content could be encoded at a centralized location, multiplexed, and then transmitted across the network to multiple geographies within a single "broadcast market" but for local OTA there may be multiple encoders involved. In fact, for those who already have the digital OTA convertor boxes, take note of the fact that many broadcast stations are sending out three or four signals per single traditional analog signal
The other two issues here, somewhat addressed by MPEG LA, are the question of developing countries being able to maintain the fee structure and the corollary of countries that choose to assess a viewership tax on their television sets. Countries across Europe assess a viewership fee for OTA, and it brings up an as-yet-unanswered question.
MPEG LA's approach on the developing countries is to footnote the issue, stating "It is recognized that broadcasters in developing countries may have different circumstances to be considered."
Grazing the edge of the television viewership tax, MPEG LA also notes: "There may be AVC Video services that qualify as Free Television AVC Video rather than Subscription AVC Video or Title-by-Title AVC Video where a nominal (but no other) payment is required or where other relevant circumstances taking into account the nature of the video service may apply."
While both of these may mean a case-by-case basis, no details have been published.
Internet broadcast
With all the issues around "free" television, why should someone involved in non-broadcast delivery care? As mentioned above, the participation fees apply to any delivery of content. After defining that "free" television meant more than just OTA, MPEG LA went on to define participation fees for internet broadcasting as "AVC video that is delivered via the Worldwide Internet to an end user for which the end user does not pay remuneration for the right to receive or view." In other words, any public broadcast, whether it is OTA, cable, satellite, or the Internet, is subject to participation fees.
This is a big deal for those whose primary focus is distributing content on the web. It would be quite fair to say that those companies choosing the "give away content for free in hopes of getting advertising" business model together might want to think through their strategies.
Careful consideration should yield models that would work, but the point is this: Content encoded, distributed, and viewed by end users is subject to the participation fee, even if the viewership is advertising- or sponsorship-driven. There's even a grey line around the use of content to drive donations, as it could be argued that these participation fees are due since the content was a compelling part of the donor's decision to fund the not-for-profit.
The fees are potentially somewhat steeper for internet broadcasts, perhaps assuming that internet delivery will grow much faster than OTA or "free" television via cable or satellite. Adding the "free television" broadcast market fee together with an additional fee, MPEG LA grants a reprieve of sorts during the first license term, which ends on December 31, 2010, and notes that "after the first term the royalty shall be no more than the economic equivalent of royalties payable during the same time for free television."