Back to Basics: H.264 Licensing Terms

The biggest potential long-term pitfall here lies, again, with the definition of the "broadcast market" as MPEG LA and patent holders could argue that the geographic boundaries of an OTA local market would constitute the same market for traditional broadcasters who simulcast or deliver on-demand content online. The near-term pitfall, footnoted in the MPEG LA summary document is that, since no royalties are charged during the first term of the license for internet broadcast, "royalties for the license for Internet Broadcast AVC Video Use granted pursuant to Section 2.5 are not subject to this limitation."

In other words, as section 2.5 deals with internet broadcasts, there's more confusion in store. To add to the confusion, readers of the summary document are recommended to "see footnote 23" in the summary document, which only contains 17 footnotes.

Title By Title
Beyond participation fees for indirect revenue (revenue not directly from the user), MPEG LA also sets out amounts for title-by-title (rental or per-view). For videos less than 12 minutes long, there is no royalty, but for videos beyond 12 minutes in length, the amounts are decided at 2% of the retail price paid to the licensee or $0.02 per title. The retail price is specifically noted as a "first arm’s length" transaction, specifically between the end user and the seller of on-demand, pay-per-view and electronic downloads to end users.

Provisions are also made for a category of licensee that replicates physical media, in which case it appears the 2% of the amount paid would be based on wholesale prices for the "first arms-length" transaction rather than retail pricing. Confused yet?

Subscription
Where an end user chooses a subscription service that does not charge by title or a per-order basis, legal entities with fewer than 100,000 subscribers per year pay no royalties, although there is no definitive answer on two key questions. The first is whether "fist year" refers to calendar year or rolling annual year, while the second deals with the question of the "fewer than 100,000 subscribers" being simultaneous or aggregate users. The latter is important information for a company that may, perhaps, have 50,000 subscribers at any given time but may experience churn greater than two times per year.

For any subscriber based above 100,000, the following annual fees apply:
• $25,000 for 100,000-250,000 subscribers
• $50,000 for 250,000-500,000 subscribers
• $75,000 for 500,000-1,000,000 subscribers
$100,000 for greater than 1,000,000

As it is possible for a company, or group of commonly controlled companies, to have multiple business models—from indirect ad-based revenues to subscription or pay-per-view—MPEG LA also has set a maximum participation fee. It bases this maximum fee cap per enterprise. On an annual basis, these fees cannot exceed $4.25 million per year in 2008-2009, increasing to $5 million per year in 2010. Interestingly, MPEG LA calls out that fees cannot increase by more than 10% per year, but the bump from 2008-2009 to 2010 is almost a 20% annual increase.

In conclusion, it's worth noting two things. First, the fees are easily calculable, assuming that a few of the questions noted throughout are addressed directly with MPEG LA. Second, none of these participation fees for "free" television and Internet delivery have been adjudicated, but the potential here—untested by a court case—is enough to continue to drive fear, uncertainty, and doubt until such a time as a legal precedent has been set.

In the meantime, the continued uncertainty is a key area that proprietary codec manufacturers point to, marketing the fact that they charge no decoding license fee. Ignoring the fact that they do charge an encoding license fee that may or may not be equal to the total fee charged for encoding and decoding of H.264, the "no decoding license fee" marketing strategy has struck a chord that MPEG LA and its patent partners might need to further address.