How much do DVD and digital media playback features really cost?

How much do DVD and digital media playback features really cost?

Summary: The amounts required to license digital media decoders on Windows PCs seem like chump change. But multiply those pennies times hundreds of millions of PCs, and the bill for Microsoft and its PC OEM partners could be as much as $800 million per year. Who pays, and who gets paid?

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TOPICS: Hardware, Mobility
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The software required for digital media playback on PCs isn’t free. In the United States and in many other countries, popular digital media standards, including MP3 music and H.264 streaming videos, require software decoders for playback. The rights to those decoders are secured by licenses that cover the use of underlying patents for those formats.

The dollars and cents required to secure those rights on Windows PCs seem like chump change, until you consider the size of the market. When you add up all of the licensing costs, the cost for Microsoft and its PC OEM partners is as much as $800 million per year. Where does that money go? Who pays, and who gets paid?

In my post over the weekend (“If VLC can ship a free DVD player, why can't Microsoft?”), I looked at a few of those costs. In this post, I want to provide a much more detailed breakdown of the economic costs involved.

Let’s start with Microsoft’s original announcement last week, which listed the decoders that will be included in Windows 8:

Video: H.264, VC-1/WMV, MPEG4 Part 2

Audio: Dolby Digital+ (non-disk), AAC, WMA, MP3, PCM

As the post noted, Metro style apps can use any of these decoders, which “cover all key playback scenarios for mainstream content such as YouTube video, Netflix video, Amazon audio/video, H.264 web browsing/streaming, Hulu video, MP4 video, AVCHD video from camcorders, Ultraviolet video, and the HTML5 video tag. Metro style apps can also include additional decoders (such as FLAC, MKV, OGG, etc.) in their apps package for use within the apps.”

Every Windows PC can use any of those features, and most PCs—even those used in business—will probably do so at some point. There are lots of business applications for video and audio decoding, including playback of streaming media and downloaded files as well as online communication.

So what does that collection cost Microsoft and its partners over the course of a year? For the sake of simplicity, let’s assume that 20 million Windows 7 PCs are sold each month, for a total of 240 million over the course of a year. Here’s the (somewhat oversimplified) bill:

Decoder Cost per unit Total annual cost
AVC/H.264 up to $0.20 $6.5 million (cap)
VC-1 up to $0.20 $8 million (cap)
MPEG-4 Visual up to $0.25 $4.75 million (cap)
Dolby Digital+ unknown unknown
AAC $0.48 $32,000 (cap)
WMA $0.00 none
MP3 $0.75 $180 million
For details, see the full listing of sources at the end of this post.

Most of the companies that administer these licensing programs publish their rates for all to see. MPEG LA, which administers many of the programs on this list, offers only summaries of the licensing terms on its web site; you have to supply a written request for a full license agreement.

The Windows Media format, of course, is owned by Microsoft, which doesn’t have to pay licensing fees to itself.

That makes the total bill for Windows 7 for those decoders just a sliver under $200 million. That works out to about $0.83 for every copy of Windows sold through an OEM.

Dolby Digital

As the Microsoft post notes, Dolby Digital+ audio technology will be included in Windows 8. But the license only covers streaming media. The Dolby Digital+ audio technology used for playback of disks, which is included with premium Windows 7 editions, will be included as part of the add-on Media Center Pack.

The only number I couldn’t fill in on the chart above is the cost of the Dolby Digital+ (non disk) license, which allows playback of Dolby-encoded surround sound on streaming high-definition content. You have to fill in Dolby’s license agreement application to get a quote. Dolby has a separate application for its Windows 8 licensing program.

The Dolby 10-K report filed with the SEC in November of 2011 offers some clues as to what Microsoft is currently paying for the Dolby technology included in Windows 7:

Microsoft Corporation is one of our licensees and accounted for approximately 10%, 12%, and 13% of our total revenue in fiscal 2009, 2010, and 2011, respectively. Most of our Microsoft revenue is generated from the Windows 7 operating system, which contains our technologies. We face the risk that Microsoft may not include our technologies in the commercial version of the Windows 8 operating system or future Microsoft operating systems. If our technologies were not to be included in the commercial version of the Windows 8 operating system or future Microsoft operating systems, we intend to support the playback of DVD, Blu-ray Disc, Broadcast, and online content on PCs by licensing our technologies directly to OEMs.

It didn’t take too much work on my part to do the math based on that disclosure. In FY 2009, Microsoft paid Dolby $72 million. In 2011, Microsoft paid $124 million to Dolby. That’s a 72% increase in just two years, which I suspect is the result of Windows 7 Professional including Media Center (Windows Vista Business did not). As the annual report notes:

In 2007 Microsoft introduced its Windows Vista operating system, which included our technologies within two of its operating system editions to enable DVD audio playback. In fiscal 2009 Microsoft released its current operating system, Windows 7, which includes our technologies within four editions to enable DVD audio playback. As a result, since 2007 the mix of our PC licensing revenue from operating systems has increased relative to that from OEMs and ISVs. Currently, we license our audio codec technologies directly to OEMs such as Apple, Toshiba, and Sony to support optical disc playback on PCs…

By not purchasing the license for disk-based playback in Windows 8 and including only the Dolby technologies related to streaming, Microsoft’s bill to Dolby will go down substantially. How much? We won’t know for certain until we see Dolby’s 2013 and 2014 annual reports.

DVD Playback via MPEG-2

And now we get to the last and most interesting number: the cost of licensing MPEG-2 software for DVD playback. Most of the decoders in the table above have caps on the total amount any enterprise has to pay (MP3 is a noteworthy exception). If Microsoft had to pay the full cost of all those decoders based on their per-unit price, the total royalty bill would be $451 million per year. But the license caps keep the actual cost down.

The MPEG-2 standard for DVD movie playback is a flat $2.00 per PC, with no cap. Two other oddities in the license agreements are worth noting as well:

Under the MPEG-2 Patent Portfolio License the party that offers MPEG-2 Royalty Products (Section 1.18) for Sale (Section 1.22) to the End User is responsible for royalties…”

In other words, it’s the PC maker that has to pay that royalty. (Microsoft pays the royalty on shrink-wrapped software it sells as upgrades and full licenses, and for copies of Windows delivered electronically—as part of TechNet and MSDN subscriptions, for example.)

In addition, the agreement includes a “most favorable royalty rates protection” clause, “to assure Licensees that no Licensee will get more favorable royalty rates than another (Section 7.7).” So, even if a company with the market clout of Microsoft wanted to negotiate a better deal, they’re prohibited from doing so.

If the code that enables playback of DVD movies is included in the base operating system, the PC maker must pay $2 in royalties for each device it sells, even if that device has no DVD drive. Over the past three years, I have purchased four notebooks—two from Dell, one from Samsung, one from ASUS. In each case, the PC maker had to pay $2.00 per notebook even though none of those notebooks included a DVD player.

That’s an increasingly common situation. More and more consumer notebooks are being delivered without any kind of optical disk. Look at Dell’s XPS 13, probably the best current example of the Ultrabook category. It has no internal optical media. An external drive ($80) includes Roxio CinePlayer for DVD movie playback and Roxio Creator 10 for disk burning. Apple’s MacBook Air line, which defined the standard for small and light PCs, has no DVD drives, only flash storage. Similarly, beginning with the 2011 release, Apple’s Mac Mini is also completely free of optical disks unless you buy a separate external drive.

In 2013, the first full year that Windows 8 will be generally available, I would bet that at least half of all consumer notebook PCs will ship without a DVD drive, and that number will go up over time.

So there’s your answer. By including DVD playback support in Windows 8, Microsoft would put its PC-building partners on the hook for a total of $480 million a year in payments, in addition to the millions of dollars Microsoft would pay to Dolby for its technologies.

If you’re Dell and you sell a million Ultrabooks, do you really want to write a $2 million check for DVD licensing rights that none of those customers will ever use? If you sell 50,000 PCs to an organization that orders them with no DVD drives for security purposes, do you really want to write a check for $100,000 for the DVD rights that none of those customers will ever exercise?

I didn’t think so.

Page 2: Summary of license terms and costs -->

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Disclaimer: Although I have exercised care in researching this information, it is by definition not complete and subject to change, and it is possible that some portions may contain errors. You should not use this information to make any business decisions without seeking independent confirmation and legal advice. See the note at the end of this post for additional details.

Sources:

AVC/H.264 (summary, PDF)

An Enterprise selling branded OEM for PC OS may pay for its customer

  • 0 ‐ 100,000 units/year = no royalty (available to one legal entity in an affiliatedgroup)
  • US $0.20 per unit after first 100,000 units/year
  • Above 5 million units/year, royalty = US $0.10 per unit
  • Enterprise cap: $3.5 M/year 2005‐2006, $4.25 M/year 2007‐08, $5 million peryear 2009‐10, $6.5 million per year 2011‐2015

Includes right to manufacture and sell AVC encoders and decoders with the right of End Users to use them for personal and consumer (including internal business) purposes without remuneration but not for other uses

VC-1 license agreement (summary, PDF)

An Enterprise selling branded OEM for PC OS may pay for its customer

  • 0 ‐ 100,000 units/year: No royalty (available to one legal entity in an affiliatedgroup)
  • US $0.20 per unit after first 100,000 units/year
  • Above 5 million units/year: US $0.10 per unit
  • Enterprise cap: $8 million/year 2006‐2012

Includes right to make and sell VC‐1 encoders and decoders with the right of End Users to use them for personal and consumer (including internal business) purposes without remuneration but not for other uses

MPEG-4 Visual (summary, PDF)

Decoders sold to end users and/or as Fully Functioning for PCs

  • 0 ‐ 50,000 decoders/year = no royalty (available to one legal entity in anaffiliated group)
  • US $0.25* per decoder after first 50,000 decoders/year
  • Annual cap per Legal Entity: $1M per year prior to 2009; $1.1M in 2009; $1.2Min 2010; $1.25M after 2010

Enterprise cap ‐ $3M per year prior to 2009; $3.3M in 2009; $3.6M in 2010;

$3.75M after 2010

MP3 Licensing, royalty rates

mp3 patent and software license

This patent and software license license [sic] covers patents and mp3 software (Windows, MacOS object code libraries) developed by Fraunhofer IIS-A.

Decoder US$ 0.75 per unit

AAC License Fees

There is an initial fee of $15,000 due upon execution of the license. This fee is a one-time charge and not an annual fee or an annual minimum. Small entities, defined as those with fifteen or fewer employees and with annual gross revenues of less than US $1 million, qualify for a reduced initial fee of $1,000. The initial fee will be waived for existing MPEG-2 AAC, MPEG-4 AAC, or MPEG-4 HE AAC licensees that take the AAC license.

Consumer PC Software

Decoder Products, Per Unit Fee $0.48

Maximum Annual Payment, $32,000 per PC Software Product

MPEG-2 License Agreement (summary, PDF)

Section 3 of the License provides the schedule of royalties that apply to the sublicenses granted under Section 2:

[…]

For MPEG-2 Encoding Products in hardware or software, the royalty is … $2.00 under the new extended License…. This sublicense does not grant a license to use MPEG-2 Encoding Products to encode/produce DVDs or other MPEG-2 Packaged Medium for other than personal use of Licensee’s customer.

Who pays:

No license is conveyed unless applicable royalties are paid. Therefore, only products on which royalties are paid are licensed.

Under the MPEG-2 Patent Portfolio License the party that offers MPEG-2 Royalty Products (Section 1.18) for Sale (Section 1.22) to the End User is responsible for royalties on the various categories of end product (in hardware or software) sold or placed into the Licensee’s stream of distribution to the End User. In other words, a product made by a Licensee that carries the Licensee's customer's brand name or is otherwise controlled by the Licensee’s customer is not a licensed product under the Licensee’s License; if the Licensee’s customer has also executed the License, such product would be a Licensed Product under the customer’s License once the applicable royalty has been paid. This is because the product is not Sold in accordance with Section 1.22 of the License to an End User through Licensee's chain of distribution (rather, it is Sold through Licensee's customer's chain of distribution). [emphasis added]

A most favorable royalty rates protection is included to assure Licensees that no Licensee will get more favorable royalty rates than another (Section 7.7).

Note: All links and excerpts were collected in early May, 2012. Some of this information can and undoubtedly will change over time. I am not a lawyer, and nothing I this post constitutes legal advice. Do not make any important decisions based on the summary information in this post without doing your own homework, including consulting with your own attorney before executing any contract.

Topics: Hardware, Mobility

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45 comments
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  • I understand this all perfectly

    What still does not make sense is why the media add-on will only be available to Pro users.

    I understand that VLC and other third party decoders will be available to Home users, but why would MS lock themselves out of that market?
    Michael Kelly
    • My guess

      It comes down to support costs. By making WMC a Pro-only feature they will reduce the support burden for OEMs and give them an incentive to upsell.
      Ed Bott
      • Another guess?

        Try; marketing. Why did they withhold something as simple as remote desktop from W7 Home? 'Advanced' (BTW I don't think you have to very advanced to want RDP) home users who would otherwise by satisfied with the standard version get pushed into ponying up more cash for Pro just to achieve one 'missed' feature. Not to mention PCs and laptops preinstalled with Windows Home where the owner then upgrades to Pro. Why sell them one license when you can sell them two?
        SuperluminalX
      • Huh?

        "By making WMC a Pro-only feature they will reduce the support burden for OEMs and give them an incentive to upsell. " The OEMs will still hav to support the Window 8 install. Unless Microsoft is going to support Window 8 "Pro"? Is there some tidbit of information you're not telling us? Or is Microsft sharing time on that call center in Bangalore with Dell?
        Jumpin Jack Flash
      • It's quite simple

        OEMs collect more money when they sell Pro than they do when they sell the standard edition. That extra money helps pay for them to support the features in that edition. (OEMs are the ones that support Windows. Microsoft only provides support for retail and enterprise editions.)
        Ed Bott
      • If it comes down to OEM profits

        why not just charge a bit more for the media add-on? Instead of charging say $20 for the add-on, charge $35. They'd only have the expense of supporting the media add-on, not all the Pro features, plus they get their additional profit, plus they'd have happier customers.
        Michael Kelly
      • Decisions, decisions

        I don't think there is any right answer. It's about balancing the interests of OEMs, end users, and Microsoft. No matter which solution you come up with there will be winners and losers. This is the path that Microsoft chose.
        Ed Bott
      • Perfect bribing example

        This is one of the good examples of the bribing policy Microsoft has towards their OEMs -- in an attempt to lock them in, of course.

        Any business, no matter what, is better selling their own products, instead of re-selling someone else's products.. with up-sells... As this does not generate any customer satisfaction.
        danbi
  • Nice Article

    Very nicely done, good article, well-researched.
    JohnMorgan3
    • not so well researched

      The author was only looking up the specific codecs mentioned on Windows Blog. There is almost certainly lots of other intellectual property outside of audio/video.

      Philips licensing has some information about DVD-Video licensing
      https://www.ip.philips.com/services/?module=IpsLicenseProgram&command=View&id=31&part=6

      Philips Licensing shows cost of $4.85 per DVD-Video player for their joint patent pool
      https://www.ip.philips.com/services/?module=IpsLicenseProgram&command=View&id=31&part=8


      Hitachi, Mitsubishi, Panasonic, Samsung, Sharp, Toshiba, JVCKenwood, and Warner Brothers in DVD6C patent pool - http://www.dvd6cla.com/
      Technicolor
      Rovi for analog copy protection
      DVD Copy Control Ass. for CSS
      DVD logo licensing - http://www.dvdfllc.co.jp/
      There are probably lots of other mandatory IP licensors for Microsoft to support DVD-Video playback.
      greatjuan
      • Sorry, those are not relevant

        If Windows and/or PC makers paid those licenses, you would see information about the agreements in Windows and OEM license agreements. There are no such details.

        The Philips licensing program and rates you provided are for standalone DVD and BD (Blu-ray) players, drives, and discs. The price list does not include PC software. Some of those fees will be paid by the maker of a DVD/BD drive that is included in a PC, but neither Microsoft nor the OEM will have to pay that price for the finished PC. The $4.85 figure is for a hardware-based DVD player/recorder.

        The DVD FLLC program primarily covers media and drives. Again, this fee will be paid by the maker of a DVD drive or disc, not by the maker of a PC (especially if the PC does not have a DVD drive).

        As for DVD6LC, if you look through its news archives you will see they are all about collecting royalties from makers of cheap DVD machines that you'll find at discount superstores:

        http://www.dvd6cla.com/news.html

        Here, for example:

        http://www.dvd6cla.com/news_20110309.html
        http://www.dvd6cla.com/news_20120217.html

        On the website whose link you provided is a comprehensive list of DVD6CLA licensees in the DVD Decoder category. Note that the list includes only hardware makers and no PC software companies:

        http://www.dvd6cla.com/licenseelist_7.html

        There are, of course, additional licensees who provide IP to Windows and PC software beyond those I included here. Some are covered by cross-licensing agreements that Microsoft has with other large companies. Toshiba and Microsoft, for example, signed a comprehensive cross-licensing agreement in 2005 as part of their HD DVD deal (which didn't work out all that well):

        http://www.microsoft.com/en-us/news/press/2005/jun05/06-27MSToshibaStrengthenPR.aspx

        But I believe my list covers the vast majority of payments.
        Ed Bott
    • Not really...

      It forgot to mention why Apple can do a new OS for far less tha MS & include the CODECs. Why? Because they care about the end user experience & count things per license. Whole of business cost is very misleading.
      mattmuir
      • Apple's ...

        ??? is a vertically integrated business. They design and produce the hardware, OS and most of the software shipped in its products. They charge a significant premium for their products and include such licensing costs in the price users pay.

        Windows is a different world - Microsoft builds the OS and sell licenses to the OS to PC OEM's who produce the hardware which is sold to end-users at highly competitive prices that are typically 30-70% lower than Apple's for the same internal components.

        In the PC world, value for money is a key driver and differentiator of product.

        Are you suggesting that you'd be happy if every PC manufacturer increased their prices by 30%?
        bitcrazed
      • Are you serious?

        [i]why Apple can do a new OS for far less tha MS[/i]

        When you buy a Ford, you get the stereo for free. As an exercise, try going into a Ford dealership and telling them that you want the free stereo but that you already have a car and aren't interested in buying a Ford. After their laughter has subsided, try buying a $30 copy of OS X and installing it on a Dell without violating Apple's EULA.

        Apple also has a different release schedule than MS. Apple releases a new version with tiny minor upgrades about once a year for $30. MS releases service packs at no charge about once a year and then a major new version about once every 3 years. If you purchased every single OS X upgrade since 2000, you actually would have spent more money than if you had purchased every single Windows upgrade since 2000. Don't be fooled by the price per upgrade when Apple charges you far more often for far smaller updates.
        toddbottom3
      • Depends on perspective

        @ bitcrazed

        It all depends on how you look at it. Instead of saying "Apple charges significant premium" one can say "Apple makes significant profit from each sale, as they do their best to not waste money for useless things".

        All Apple products are cheaper than same spec non-Apple products. It is not Apple's fault, that Microsoft, Intel and their OEM slaves cannot compete.

        This discussion is about software license prices. Apparently, Apple can do it for way less money than Microsoft (any Apple software, fully licensed has always been way, way cheaper than any Microsoft software).

        But if you wish to discuss hardware prices, go ahead --- list an Apple computer and any PC OEM computer with the same spec, that has lower price. Current products please.

        @ toddbottom3

        The stereo in your new Ford is not free. As a "non-essential" part it is optional, you usually have a choice of models to install when you order the car and the price of the 'basic' one (or, even a high end if your car is the Ghia [or whatever it was with Ford]) is included in the price of the car. You definitely CAN buy an stereo listed in the Ford catalogue, without buying an car from them.
        Not sure, you can mount it on any other car, but that's not bothering you, I understand :)

        Abut the upgrade schedule... let's say it depends on how you look at it. In some cases you might be right (but it's likely these cases aren't that many) and in other cases your calculations simply do not matter.
        Also, when you "compare" do account the fact, that Apple sells two OS versions actually: an "client" OS and an "server" OS package. The OS is the same of course, not crippled in either case. The server version just includes additional software.
        I guess you won't compare OS X Lion Server pricing with pricing of any Windows "Server" OS :)
        danbi
  • Great article.

    However, I think it's for naught, as the FUD continues to fly despite what you have written.

    But I agree, I own two circa 2009 notebooks and neither of them have built in optical drives, and nor do I want or need them. The hardware would be wasted on me. Even on my desktop, DVD playback is wasted functionality. No need for it when I have a BR player sitting on the shelf next to me.
    The one and only, Cylon Centurion
    • On the contrary

      I think blind obedience on your part abounds as anyone disagrees with Ed is accused of flinging FUD over this topic.

      So what "FUD" are you talking about? Not that I'd expect an answer...
      ScorpioBlack
      • You seem like a rounded guy.

        Search the Internet.
        The one and only, Cylon Centurion
      • Still no answer

        Just like I expected from the Cylon shill.

        Maybe you should worry about your own FUD before you worry about someone else's. Don't-cha think?

        Tell me, do you have a job? You seem to be in just about every blog I've read around here. I'll bet you're here all day. And then some.

        Or is this your real job? Shilling for Microsoft. ;)
        ScorpioBlack
  • DVD drive distributors offer different units.

    When I buy a DVD drive from a distributor, they offer both bare units, and Retail units.
    The retail units include software and drivers that enable DVD writing (data, audio, video, DVD) and Player software that includes the codecs needed to play commercial DVDs. On Windows XP these drivers needed to be loaded before WMP could play protected DVDs.
    In this case it is the drive manufacturers that pay the licence costs for playback through the software supplier (PowerDVD being a major product in New Zealand).
    Codecs can be downloaded but they are not legal (although there is no indication that they aren't) and unless very careful can come with additional unwanted payloads......
    TrevorBirdCH