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The H.264 Licensing Labyrinth

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The back story is that the "free television" term in MPEG LA draft licensing was limited to traditional television broadcasts known as over-the-air (OTA) broadcasts. While covering a specific segment of broadcast, allowing broadcasters to use H.264 video transmissions within the MPEG-2 transport stream in a technical backward-compatibility move that might have warranted the licensing fee, the patent holders decided that only limited revenues would be derived from OTA broadcast transmissions.

MPEG LA subsequently broadened the scope of the "free television" term.

"Formerly limited only to over-the-air broadcasting, ‘Free Television AVC Video’ now refers to AVC Video that constitutes television broadcasting which is sent by an over-the-air, satellite and/or cable Transmission," the company said in a May 2004 release announcing final licensing terms. "The party (e.g., a broadcaster) which is identified as providing Free Television AVC Video service is the Licensee and assumes responsibility for the applicable royalties."

This point is important because it further solidifies the approach MPEG LA uses for "participation fees" that must be paid on indirect revenue based, in some part, on the use of H.264 decoding.

Like a state tax structure where a sales tax is counterbalanced by a use tax, MPEG LA's participation fees act in a similar manner and make the broadcaster liable for royalties or licensing fees. In terms of the state, the use tax means that some purchases from out of state that have not been charged sales tax will be liable for an equal use tax as a way to close a loophole in interstate commerce, meaning that any use of a taxable product purchased out of state is subject to the use tax upon first use. In terms of MPEG LA, these participation fees require content distribution companies to pay a fee if they make money on content distributed as H.264.

The licensing fee for "free" television is based on one of two royalty options. The first is a one-time payment of $2,500 per AVC transmission encoder, which covers one AVC encoder "used by or on behalf of a Licensee in transmitting AVC video to the End User," who will decode and view it. If you’re wondering whether this is a double charge, the answer is yes: A license fee has already been charged to the encoder manufacturer, and the broadcaster will in turn pay one of the two royalty options.

"The AVC License separately grants (a) a right to manufacturers to make and sell AVC products," said Tom O’Reilly, MPEG LA’s manager of research and public relations, "and (b) a right to content providers to use such AVC products to encode and decode AVC Video. A royalty applies to each."

O’Reilly noted that MPEG LA’s intent with these two royalties is to spread the charges across multiple parties.

"Rather than place the total royalty on one party in the AVC product chain (e.g., an encoder maker)," said O’Reilly, "royalties are aligned with different points in the product/service chain where value is received."

The second licensing fee is an annual broadcast fee, per "broadcast market." This one is interesting, especially given the expansion of the terminology of "free television" to include satellite and cable. MPEG LA’s licensing terms define a broadcast market as "a geographic area within which an End User could use an AVC Decoder to view Free Television AVC Video sent by a single transmitter or transmitter simultaneously with repeaters by a single Legal Entity." OTA appears to be at somewhat of a disadvantage here, as the signal for a geographic OTA area would be minuscule compared to the geographic area for cable and/or satellite transmission.

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