New HEVC Patent Pool: What Are the Implications?

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So while HEVC Advance can attempt to charge what it would like for their HEVC IP rights, if it ends up in court, it would likely be limited to something close to the MPEG LA terms. Historical antecedents are definitely not favorable, with H.264 at the same $0.20, and MPEG-2 at $2.00 unit.

I'm not a patent attorney, so I ran this analysis by David W. Long, a partner at Kelley Drye and editor of the excellent Essential Patent Blog. While he gave the normal caveats about each case being different, he agreed that FRAND licensing would likely apply, and that, if so, the court would consider MPEG LA's terms in deciding what’s fair and reasonable. Starting at $0.20, the HEVC Advance group would have a tough row to hoe to get up to $2.00, which makes sense for Elemental’s and Telestream’s professional products, but not for Apple’s $50 Compressor or Adobe’s free Adobe Media Encoder. 

Even at $2.00 a unit, the additional revenue that encoder-related royalties would deliver are modest. Let's assume that the total global encoding market is $500 million, and that the average selling price of an encoder is $500, a balance between the free Adobe Media Encoder, the $50 Apple Compressor, and the thousands of much more expensive hardware encoders. At $2.00/unit, an encoder royalty with no de minimis exception would bring in about $2 million annually. Not chump change, by any means, and it’s an annual figure, but you have to balance this against the additional administration and collection related fees.

What About the Decode Side?

Margins on decoder products are certainly narrower than on most encoders. Could HEVC Advance argue for a higher price? Again, they would encounter the same FRAND arguments for HEVC and H.264 MPEG LA pricing, though the license for MPEG-2 decoder products was $2.50. And mobile phone and CE vendors that would be paying these licenses have much deeper pockets and incentive to sue than the average streaming encoding company.

What About the Cap?

While the FRAND analysis presented above has court precedent, Long says he knew of no “guidance from the courts” about the cap issue. So while HEVC Advance would be free to claim royalties without a cap, there’s no assurance that they would win, and certainly anyone already paying $25 million per year would have plenty of money and incentive to litigate.

What about the Content Royalty?

The MPEG LA pool isn't charging a royalty for content, so it's unclear if the FRAND argument would apply here. Looking at the MPEG-2 license terms, content distributors paid a royalty on packaged mediums, not broadcast video, or (of course) streamed video.

The H.264 pool charged for free TV based upon market size, for subscriptions based upon subscriber count, and on a title-by-title basis for videos longer than 12 minutes in length. A potential license on free internet video encoded in H.264 format was quashed before it came into effect, so the charges or schema for charging were never made public. So certainly there's precedent for charging for content, though some of the streaming-related structure is unformed, and any charge for streaming on intranets is totally unexplored. 

The issue with content royalties has always been concern about killing the goose that laid the golden egg. Some technology battles are determined by vendor selection, most famously the Blu-ray vs. HD-DVD battle, which was swung when studios selected the former over the latter. For some in the MPEG LA camp, there was a clear concern that a content royalty could push some vendors towards VP9 (more on that in a moment). On the other hand, most industry observers, including yours truly, feel that HEVC has reached critical mass in multiple markets, including OTT, mobile, and broadcast. So there’s certainly an opportunity here.

How Does this Affect VP9?

Interesting question. On one hand, if there is a content royalty (which we will know about in 90 days), it may push some publishers towards VP9.

On the other hand, back in March, 2013, MPEG LA and Google entered into an agreement granting Google a license to technologies that may be essential to VP8 and VP9. By way of background, 11 of the 12 companies who participated in the license grant had responded to MPEG LA's call for patents essential to VP8. Though the twelfth company, Nokia, declined to join the MPEG LA group (and later sued Google in Germany) the threat of IP litigation from the MPEG LA camp was over.

Now that there is a separate group, it seems more likely that if VP9 makes serious inroads, additional IP owners will claim infringement. As mentioned in the Nokia article, Florian Mueller, owner of the authoritative Foss Patents blog, says the royalty picture for VP8 is far from clear. After the Google/MPEG LA agreement, Mueller wrote, "Claims that VP8 is now free from per-unit or per-implementer license fees are grossly exaggerated. There are simply too many video technology patents out there, and the backers of WebM/VP8 are primarily companies whose own patent portfolios are too weak to resolve patent infringement issues through royalty-free cross-licensing."

The bottom line is that the more successful VP9 gets, the more likely it is to be challenged.

What’s the Effect of HEVC Advance on the HEVC Market?

This depends upon the market segment. For example, both Elemental and Telestream were clear that they were going to follow the announcements and do everything necessary to continue offering HEVC encoding. As mentioned, however, their obligations under the license are comparatively minor.

Consumer electronics and smart phone vendors, which sell in massive quantities, must be concerned, though these are precisely the companies which knew additional HEVC-related IP claims were coming. Certainly their IP attorneys know the ins and outs of FRAND licensing, and are waiting to see the terms from HEVC Advance.

Large content owners selling subscriptions, like Netflix, can adjust their pricing should content-related HEVC royalties come to pass. Those considering HEVC to reduce bandwidth costs will certainly wait to see if a content-related royalty will apply before going forward. That said, the paucity of HEVC playback on computers or mobile devices almost certainly meant that few, if any, publishers were considering such a move in the short term.

What’s the End Game?

Not all patent pools make it; most famously, an H.264 patent group formulated by Via Licensing failed to reach critical mass, and most early participants joined the MPEG LA pool. So it’s at least possible that any or all of the group represented by HEVC Advance could later choose to join the MPEG LA group.

That said, the fact that GE is behind the group, at least temporarily, and the number of patents that HEVC Advance claims to represent, seems to give the organization critical mass. The plus side of FRAND licensing is that so long as their IP is essential to HEVC, there still should be money on the table, even if limited to the per-patent value of the MPEG LA group. FRAND also presents a logical structure you would expect HEVC Advance to follow to produce reasonable terms that would avoid litigation.

Overall, if you run the math, the MPEG LA H.264 group has grossed well into the hundreds of millions by now, and HEVC will almost certainly do the same. Big companies are chasing big dollars, and they have every reason to aggressively go for what they consider to be their fair share. 

The bottom line is that any companies using HEVC in a big way should have been expecting additional HEVC-related IP claims. While it’s never pleasant when the taxman cometh, the fact that it’s an organized effort will probably simplify matters for everyone involved.

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