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MPEG LA's HEVC Licensing Terms Are Flawed, Will Prevent Adoption

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As you might know, MPEG LA announced the licensing terms for HEVC back in January. At the time, I thought, as most observers did, that those terms would provide long-needed certainty. Upon further reflection, I think they’re flawed and will delay, if not prevent, the adoption of HEVC in the streaming space. For HEVC to flourish there, MPEG LA needs to dramatically revamp the structure for free players.

It’s not that I’m joining the “internet should be free” crowd, heaven forbid. Rather, it’s that under the current royalty structure, it seems unlikely that free HEVC decode will become available anytime soon, which is necessary to jump start HEVC in the streaming space.

Let’s start with the proposed terms. Briefly, MPEG LA opted for a “flat tax” system: $0.20 per unit of HEVC products distributed by a legal entity to end users. You can ship up to 100,000 units per year with no royalty, with a per annual maximum royalty of $25 million, which will increase over time, though there is no royalty for any content encoded with HEVC. All this is before the potential for payments to companies that aren’t in the MPEG LA group, which reportedly includes Microsoft, Toshiba, Dolby, Sharp and Samsung, according to CNET.

As structured, the 100,000 minimum gives a pass to most vendors selling HEVC encoders, very few of which other than Adobe and Apple come close to this number. At the other end of the spectrum, there are just a few companies that will benefit from the maximum -- after all, you have to ship 125.1 million units to reach it. In the streaming space, this would be the browser companies, like Apple, Google, Microsoft and Mozilla, plus Adobe, where this story got its start.

To explain, I was recently reading in The Economist that after introducing the Creative Cloud, Adobe’s net profit dropped from around $200 million per quarter to $47 million for Q1 2014. Don’t despair -- the share price has doubled from ~$30 to ~$60. The stock market likes business models with recurring revenue.

Later in the day, preparing for an upcoming presentation on HEVC, I was wondering what was keeping Adobe from adding HEVC playback to Flash. Then the $25 million maximum and the $47 million net income came together, and I realized that any quarter that Adobe added HEVC playback to Flash could result in more than a 50 percent drop in net earnings. Imagine that conversation between the Flash product manager and the financial types.

When Adobe added H.264 to Flash, the maximum was much lower and Flash was a crown jewel in Adobe’s product stable. Today, Adobe is focusing more on HTML5 playback and promoting Adobe Primetime, its premium content distribution platform.

Viewed in this light, it’s almost impossible to see Adobe adding HEVC playback to the Flash Player; what precisely is the benefit to Adobe? It’s like we’re expecting Adobe to pay the royalty so encoding vendors can sell royalty-free HEVC encoding products and services, and so Netflix and ESPN can stream royalty-free HEVC-encoded streams (and save massive bandwidth costs). That’s why Adobe announced at NAB that it will support 4K in Primetime, where it can recoup the licensing cost, but not the Flash player. Which obviously does nothing to promote HEVC for general-purpose playback.

True, if the HEVC patent holders make the distribution of free HEVC decoders royalty-free, they will lose big numbers from companies like Adobe. They could recoup some of that by losing the 100,000 minimum and boosting the royalty for encoders, or -- gasp -- charge a royalty for content. Or they could reduce the maximum for free decoders. Or perhaps the royalty group could give a single exception to Adobe, given its singular ability to jumpstart the market, though none of these options seem likely.

If I’m right, HEVC really won’t become relevant for general purpose streaming anytime in the foreseeable future.

This article appears in the June 2014 issue of Streaming Media magazine as "Don’t Expect Free HEVC Decode Anytime Soon.”

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