The H.264 Licensing Labyrinth
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. 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 2 cents 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 "first 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 subscribers
As it is possible for a company, or a 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.
Summary
In conclusion, the MPEG LA aggregation of a patent bundle into a licensing portfolio is an attempt to make the licensing process easier for the user or manufacturer of an H.264 encoding or decoding system. While the process is not simple to understand, a complaint often lodged against the H.264 licensing process by competing codec solutions, it is much easier than trying to gather licenses from a large number of patent holders. While the process of figuring out which areas are applicable might be tricky, the fees themselves are easily calculable, with the exception of a few questions we’ve noted throughout this document.
Another key point to remember is that a licensing portfolio can be modified at any moment, and the licensing structure is very much a "living document" in the sense that patent holders may opt to use a different approach or market forces may shift the terms of the licensing to meet economic or growth realities. As none of these participation fees for "free" television and internet delivery have been adjudicated, over time there may be a shift in licensing structures as someone may challenge the current structure of the dual royalty charges or even on the more nebulous definition of the "broadcast market" term. It is the responsibility of MPEG LA (and its patent holder pool) to better define several of these areas, especially when other codec options exist.
In the meantime, two things will continue to occur. First, proprietary codec manufacturers will continue to market 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.
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