Kenenter: H.264 patents: how much do they really cost?

H.264 patents: how much do they really cost?

5/05/2010 01:19:00 PM

If you’ve been following the recent controversy over video formats in HTML5, you know that software patents are a key part of Microsoft’s decision to adopt the H.264 standard as the native codec to use with HTML5 video in Internet Explorer 9.

The biggest fear I’ve heard expressed from opponents of the H.264 standard and advocates of competing standards is cost. But are those fears justified? I’ve taken a closer look at the legal and technical documents involved, and I’m convinced that those fears are vastly overblown. As I explain below, the cost per user is literally pennies, and there’s already a cap in place that guarantees the rates won’t rise more than 10% in the future. (As a side note, I completely understand and sympathize with the objections that some people have to software patents in general. But here in the real world, those patents exist and are routinely enforced in courts, at great cost to the participants.)

In my previous post on the topic, I spent a full page explaining the role of the MPEG Licensing Authority (MPEG LA), which administers the patent pool for the H.264 standard. It happens that H.264 is a very good way of delivering video, and it’s well supported by existing graphics hardware. So that’s a strong technical reason to choose it. But the legal reasons are even more compelling. As I explain on page 2 of this post, the H.264 pool represents 1,135 patents from 26 companies in 44 countries. By participating in that patent pool, software developers and device makers companies go a long way toward indemnifying themselves from patent lawsuits by guaranteeing that they are properly licensed for all of those pooled patents.

Yes, it’s possible that some company not represented in this list will come up with a patent that it believes is being infringed upon. But from a pure business standpoint, this arrangement makes much better sense for them.

How much do software makers and content providers have to pay the patent pool holders (via MPEG LA)? I reviewed the Summary of AVC License Terms, which sets out the royalties to be paid for different uses of the technology. (You can find all the MPEG LA documents here.) A perusal of the rates in that agreement indicates that the fees are not outrageous at this time. For example, here’s a breakdown of the royalties that must be paid if you use H.264 as part of a subscription-based video service. The amounts are charged annually and are based on the number of subscribers:

100,000 or fewer subscribers = no royalty
100,001 to 250,000 subscribers = $25,000
250,001 to 500,000 subscribers = $50,000
500,001 to 1,000,000 subscribers = $75,000
greater than 1,000,000 subscribers = $100,000

Do the math. If you have 350,000 subscribers, your annual royalty cost per subscriber is a little over 14 cents, or 1.2 cents per month. Not exactly exorbitant.

What if you’re a software developer? Assuming you’re building a “branded encoder and decoder products sold both to end users and on an OEM basis for incorporation into personal computers but not part of an operating system,” here’s the fee schedule:
0 - 100,000 units per year = no royalty
US $0.20 per unit after first 100,000 units each year
above 5 million units per year, royalty = US $0.10 per unit.

The maximum annual royalty (“cap”) for an enterprise as of 2010 is $5 million per year.

If you’re distributing fewer than 100,000 copies, you pay nothing. Beyond that, you pay up to 20 cents per copy. Again, that doesn’t seem exorbitant to me.

And finally, to answer one question that has come up several times in the comments to my post and in the comments over at the IE Blog: What guarantee do licensees have that MPEG LA won’t raise royalty rates by some outrageous amount when the royalty schedules come up for renewal? The current rates are fixed for five years, till the end of 2015, and are renewed again every five years for the life of the patents. That guarantee appears to be in place already in the Summary of AVC License Terms, which sets out the royalties to be paid for different uses of the technology. Here’s the language:

[F]or the protection of licensees, royalty rates applicable to specific license grants or specific licensed products will not increase by more than ten percent (10%) at each renewal.

That goes a long way toward making me feel more comfortable that the cost of H.264 content is not going to impact you and me in any significant way, even after 2016.

One reason for Microsoft’s decision to adopt H.264, as IE General Manager Dean Hachamovitch explained earlier this week, is that “H.264 … provides the best certainty and clarity with respect to legal rights from the many companies that have patents in this area.”

That’s an understatement. Microsoft has been sued more times than I can count on patent issues. They recently lost a bitter fight with i4i, one that will probably cost them $290 million if (as expected) it is upheld on appeal. And every video playback technology decision involves hundreds and hundreds of patents.

As I mentioned in my earlier post, I’ve downloaded the PDF file containing the complete list of “essential patents” for the Advanced Video Coding (AVC) technology that is the core of the H.264 standard. I have also downloaded the Summary of AVC/H.264 License Terms and looked carefully at it. I used Excel 2010 to convert the patent list to a table for further analysis. Here’s a summary of the details from that list.

First up, a list of the 26 companies that have added their patents to the pool, with a number that represents how many patents have been contributed by each one:

Panasonic Corporation (377)
LG Electronics Inc. (198)
Toshiba Corporation (137)
Fraunhofer‐Gesellschaft zur Foerderung der angewandten Forschung e.V. (82)
Microsoft Corporation (65)
Samsung Electronics Co., Ltd. (57)
Sharp Corporation (54)
Koninklijke Philips Electronics N.V. (42)
Sony Corporation (29)
Mitsubishi Electric Corporation (18)
Fujitsu Limited (16)
The Trustees of Columbia University in the City of New York (9)
NTT DOCOMO, INC. (9)
Dolby Laboratories Licensing Corporation (7)
France Télécom, société anonyme (7)
Robert Bosch GmbH (5)
Electronics and Telecommunications Research Institute (4)
Scientific‐Atlanta Vancouver Company† (4)
Telefonaktiebolaget LM Ericsson (3)
Hitachi, Ltd (2)
Victor Company of Japan, Limited (2)
DAEWOO Electronics Corporation (2)
Siemens AG (2)
Nippon Telegraph and Telephone Corporation (2)
Apple Inc. (1)
Sedna Patent Services, LLC (1)

That is a veritable who’s who of the consumer electronics industry, with Microsoft prominently represented.

And where are those patents from? Using an Excel PivotTable, it was very easy for me to extract the country codes for each patent and create a separate table breaking that down:

Countries with more than 100 patents
JP (226), US (169), KR (130)

Countries with 51-100 patents
CN (54), GB (51)

Countries with 21-50 patents
DE (44), FR (44), IT (38), NL (34), ES (26), MX (23)

Countries with 11-20 patents
AU (20), HK (19), SE (19), FI (16), CA (16), ID (16), RU (15), TW (14), DK (14), AT (14), HU (12), BE (12), CZ (11), TR (11)

An additional 18 countries were represented with 1-10 patents. That’s 44 countries in all. Any big company that decides to use a competing video standard without licensing the H.264 technologies from MPEG LA runs the risk of being sued in any or all of those countries. That’s a chilling prospect, and it probably explains why 810 companies (so far) are already listed as H.264 licensees by MPEG LA. That list includes plenty of big names, most notably Apple, Microsoft, and Google.

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