The Future's So Bright: H.264 Year in Review
This makes royalties payable for "free television" the best predictor of where internet royalties will stand in 2011. Under the terms of the agreement, you have two options: a one-time payment of $2,500 "per AVC transmission encoder" or an annual fee starting at "$2,500 per calendar year per Broadcast Markets of at least 100,000 but no more than 499,999 television households, $5,000 per calendar year per Broadcast Market which includes at least 500,000 but no more than 999,999 television households, and $10,000 per calendar year per Broadcast Market which includes at 1,000,000 or more television households."
According to my discussions with Harkness, the AVC transmission encoder has no applicability to on-demand delivery. So the most likely result will be a yearly fee per broadcast market, which may be the internet as a whole, but, logically, it could also be applied on a per-country basis. In the case of my multinational equipment manufacturer client, which has more than 25 international subsidiaries, each with its own website, the potential royalty charge exceeded $250,000. When I outlined my findings with the client, it was clear that this would be a major factor in its decision to change over to H.264.
When I spoke with Harkness, he stated that the patent group hadn’t yet decided the license provisions for internet broadcast, or even if there would be a license, though he conceded that it would make little sense for the patent group to forego this revenue. The only thing certain is that the royalty provisions must be announced by January 2010 for royalties that would be payable the following year.
I asked about MPEG LA’s definition of "broadcast market" since this has such a significant impact for multinationals. Harkness felt that the group would make a case-by-case analysis of each business to determine if the internet as a whole was a single market or if each country represented a different market. Factors would include legal ownership and the uniqueness of the business in each country.
From an ownership perspective, if all subsidiaries were owned by a single parent company, it would move toward a single license, while a consortium of locally owned companies might need separate licenses. In terms of unique business, if a manufacturer sold a single product worldwide with basic sales and service offices in each country, one license might apply. If a manufacturer customized products for each country and operated almost as stand-alone businesses in each country, each entity might need a separate license.
Harkness cautioned, however, that the royalty group may go in a totally different direction when it came to license terms for internet usage. He did note, however, that the reference to royalties for free television was meant as an indicator of the appropriate dollar amounts, if not collection schemas.
Harkness also made it clear that it was the company that delivered the video to the end user that paid the royalty, not the content owner. For example, in the cable TV world, individual networks such as ESPN or the Golf Channel don’t pay the royalty; the cable provider pays. In this regard, hosting providers that actually deliver the streams to target viewers would likely bear the royalty obligation, with the ability to price it into their hosting services and spread the cost over all viewers. For a more detailed discussion of H.264 licensing costs and issues, see Tim Siglin’s "The H.264 Licensing Labyrinth."
Analysis
If you assume that MPEG LA stays within these guidelines, it’s unlikely that the potential for royalties will dissuade any substantial companies from adapting H.264 for several critical reasons. First, even the companies that don’t stream H.264 from their websites today are usually using it for multiple other purposes.
For example, I asked Richard Glosser, executive director, emerging media for CondéNet, if the company was streaming H.264 yet. He said no, but he added, "We are using H.264 for podcast, iPhone, Adobe Media Player, and Sony BRAVIA Internet Video Link services." Obviously, any use will trigger the royalty obligation and almost certainly push it to the $10,000 maximum, so changing over from VP6 to H.264 won’t cost CondéNet any additional royalties.
Figure 4. CondéNet uses VP6 for all streaming videos, but it uses H.264 for most other applications, including podcasts.
Second, one of the key advantages of the H.264 codec is that it was co-founded by the International Standards Organization and the International Telecommunications Union, the chief standards body for telecommunications companies. This makes H.264 the de facto standard for cellular phones. And while the market for cell phone video is relatively immature in the U.S., it’s very well-established in other regions. Several of the companies I interviewed thought that H.264’s success in the cellular market would start to boost the codec’s overall visibility in 2009.
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