A closer look at the costs (and fine print) of H.264 licenses

I read license agreements so that you don't have to. In an update on its decision to remove H.264 support from its Chrome browser, Google cites "significant royalties" as a contributing factor. Just how much are those fees, and who pays? I've got the answers.

I read license agreements so that you don't have to.

This weekend, I've been digging deep into the agreements that govern your right to encode and decode video content using the AVC/H.264 standard. Google's announcement last week that it intends to remove H.264 support from its Chrome browser didn't mention the word money at all. The original terse announcement raised more questions than it answered, which led Google product manager Mike Jazayeri to follow up on Friday with a second blog post, four times as long as the original. This time, he didn't duck the subject of pay-to-play and H.264:

To use and distribute H.264, browser and OS vendors, hardware manufacturers, and publishers who charge for content must pay significant royalties—with no guarantee the fees won’t increase in the future. To companies like Google, the license fees may not be material, but to the next great video startup and those in emerging markets these fees stifle innovation. […]

Our choice was to make a decision today and invest in open technology to move the platform forward, or to accept the status quo of a fragmented platform where the pace of innovation may be clouded by the interests of those collecting royalties. [emphasis added]

That raises a host of interesting questions that can only be discussed intelligently if one understands exactly who's paying, and how much. The group that licenses the AVC/H.264 patent portfolio, MPEG LA, publishes a summary of the license terms. I first looked at that document last May and published an analysis here, in H.264 patents: how much do they really cost? This post is an update to that information.

The agreement that I examined last May expired a few weeks ago, at the end of 2010. The renewed agreement, which is now available on the MPEG LA web site (PDF format) covers a five-year term from 2011 through 2015. According to the document properties, this version was last updated on January 5, 2011.

Using Microsoft Word, I compared the January 2011 version with a copy I saved back in May 2010. This post summarizes the current licensing terms and points out one eyebrow-raising change, which literally appears in the fine print at the end of the document.

To use H.264 features, you must have a valid license for MPEG LA's AVC/H.264 Patent Portfolio License. This is how the MPEG LA describes that portfolio:

[E]ssential patent rights for the AVC/H.264 (MPEG-4 Part 10) digital video coding standard used in set-top boxes, media player and other personal computer software, mobile devices including telephones and mobile television receivers, Blu-ray DiscTM players and recorders, Blu-ray video optical discs, game machines, personal media player devices, still and video cameras, subscription and pay-per view or title video services, free broadcast television services and other products. To align with the real-world flow of AVC/H.264 commerce, reasonable royalties are apportioned throughout the AVC/H.264 value chain.

Chances are, you're already licensed to use AVC/H.264. You may even have paid, indirectly, several times on a single PC.

MPEG LA neatly divides its customers into two categories and publishes royalty rates for different groups within each category.

Group (a) consists of companies that "manufacture and sell AVC encoders and decoders,” typically as part of a hardware or software product. These companies pay MPEG LA for a license. In exchange, their customers get the right to use the codecs supplied with that software “for personal and consumer (including internal business) purposes without remuneration but not for other uses.” The parenthetical language about internal business use was added in the most recent update.

Group (b) applies to “video content or service providers,” who need sublicenses to use AVC encoders and decoders to deliver H.264-formatted video that does not fall under the "personal and consumer" license.

On the next page, I take a closer look at what H.264 licenses really cost software companies like Google.

Page 2: Who pays for an H.264 license? And how much does it cost? -->

 

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The license terms for the Group (a) sublicense cover two types of "branded encoder and decoder products" that are sold to end users and to OEMs. The primary difference between them is whether or not they are intended "for incorporation into personal computers as part of a personal computer operating system."

In the software industry, this category includes some extremely well known tools for creating, editing, and playing back digital media. You will find the required notices for the AVC patent portfolio in the license agreements for Adobe's Flash Player, Microsoft's Silverlight and Zune software, and Apple's QuickTime.

With minor changes in wording, the published license terms (including the use of ALL CAPS) resemble this language found in the Flash Player agreement:

4.1.1 AVC Video Restrictions. The Software may contain h.264/AVC video technology, the use of which requires the following notice from MPEG-LA, L.L.C.:

 

THIS SOFTWARE IS LICENSED UNDER THE AVC PATENT PORTFOLIO LICENSE FOR THE PERSONAL AND NON-COMMERCIAL USE OF A CONSUMER TO (I) ENCODE VIDEO IN COMPLIANCE WITH THE AVC STANDARD ("AVC VIDEO") AND/OR (II) DECODE AVC VIDEO THAT WAS ENCODED BY A CONSUMER ENGAGED IN A PERSONAL AND NON-COMMERCIAL ACTIVITY AND/OR WAS OBTAINED FROM A VIDEO PROVIDER LICENSED TO PROVIDE AVC VIDEO. NO LICENSE IS GRANTED OR SHALL BE IMPLIED FOR ANY OTHER USE. ADDITIONAL INFORMATION MAY BE OBTAINED FROM MPEG LA, L.L.C. SEE http://www.mpegla.com.

Just about every personal computer sold in 2010 and later includes licensed AVC/H.264 codecs. Every copy of Windows 7 includes Microsoft's version of these codecs, with the relevant terms incorporated into the operating system's license agreement (PDF here). Every copy of OS X 10.6 also includes this language in its end user license agreement (PDF here). Portable devices are well covered, too. The license agreements for iOS devices like the iPad and iPhone include AVC/H.264 licenses, and so do Windows Phone 7 devices.

And then there's Google. Section 8.7 of the current Google Chrome Terms of Service (last updated August 12, 2010, and retrieved on January 17, 2011) includes the AVC license terms quoted above. It also includes an additional set of terms that apply to "one or more components" of Adobe software, including a second license for the AVC patent portfolio.

As far as I can tell, Chrome is the only browser maker that includes the AVC/H.264 codecs as part of its distribution—a practice Google already announced it plans to change.

So, how much does those rights cost? Under the terms in place for 2011-2015, the royalty rates are the same regardless of whether a product is part of an OS. There's no royalty for the first 100,000 units of a licensed product; sublicensees pay 20 cents per unit up to 5 million and 10 cents per unit above 5 million. The current agreement includes an annual limit: “The maximum annual royalty (‘cap’) for an Enterprise [is] $6.5 million per year in 2011-2015.”

Although the license agreement uses the word sold, the royalties have to be paid even on software that is given away. The current cap of $6.5 million a year applies until the end of 2015. By my calculations, a company needs to sell just over 60 million copies of any AVC-licensed product before it exceeds that cap and gets to stop paying. Thanks to their enormous market share, Microsoft and Adobe almost certainly reach that cap every year. If you add up all Apple-branded products that include AVC/H.264 codecs, they're probably close too. Although Google has done well with Chrome, it's doubtful that it's anywhere near that level of popularity yet, which means Google's royalties are probably well below the cap.

The Group (b) sublicense gives video content and service providers the right to deliver AVC/H.264 video to you. This group includes publishers of Blu-ray discs as well as cable, satellite, Internet, and mobile providers of video-on-demand and pay-per-view services. How much do they pay?

For ad-supported videos delivered over the Internet, such as those on YouTube today, "for which the End User does not pay remuneration for the right to receive or view … there will be no royalty during for the life of the License.”

There's also no royalty for any title 12 minutes or less in length, even if it's paid for. For anything over 12 minutes, the rates depend on whether the end user pays on a title-by-title basis or as part of a subscription service. directly for video services.

  • For individual videos, the royalty is the lower of 2% of the price paid to the licensee or $0.02 per title. Under that scale, a video clip that costs $1 and a Blu-ray disk that wholesales for $20 are subject to the same royalty of $0.02.
  • For subscription video services, the royalty is an annual fee based on the number of subscribers. A sliding scale goes from 0 (for up to 250,000 subscribers) to $100,000 (for more than 1 million subscribers) per year.

As with software companies, there's a maximum annual royalty ("cap") of $6.5 million per year for the current term.

What happens in 2016? Under the MPEG LA license, the terms are "renewable for successive five-year periods … on reasonable terms and conditions.” The per-copy royalty rates "will not increase by more than 10% at each renewal.” If rates go up by the maximum 10% for that five-year period, the cost of 10 million licenses will increase by $150,000 from a current rate of $1.48 million to $1.63 million.

There's a small gotcha in the new MPEG LA license agreement. Footnote 17, which appears in tiny print at the very end of the summary of license terms, notes that “Annual royalty caps are not subject to the 10% limitation.” Although that sounds like a loophole, it really only affects the largest players in the market.

It's likely that MPEG LA will increase the cap, probably by more than 10%. But even if the cap were to completely disappear, the effects would be modest. A company that sold or gave away 200 million licensed products in a single year would see its bill triple, paying roughly $22 million at the 11-cents-per-copy rate. For companies the size of Microsoft, Apple, Adobe, and Google, that's still pocket change.

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