As a small business, must I pay royalties for H264 and H265?

Will they come after me?

There’s a shred of misunderstanding, to say the least, when it comes to grasping and facing the codecs licensing topic. General perception being that if you’re just starting out you don’t need to worry about it, the warning here is that it may crawl up on you as you grow, depending on how you put that codec to good use and especially how you monetize it. Let’s start with the basics though.

Intellectual Property

Many video compression techniques included in a codec are patented inventions. To use the codec, you’d have to license the patents from their creator or representative. Fair enough, except we are talking about a few thousand patents from a few dozen companies.

Patent Pools

To simplify licensing, copyright holders ‘pooled’ the patents through organizations that sell these collectively on behalf of their members. 

While there’s more than a single pool, and some patents are unaffiliated, it is commonly agreed that you only need to reach out to MPEG-LA to license H.264 (aka AVC), while in the case of H.265 (aka HEVC) you need to pay at least the 3 big pools (MPEG-LA, HEVC Advance, Velos), of which the latter does not even publicly disclose prices. 

Known pricing

Terms under which a license is sold are rather complex and highly nuanced. Cost will vary depending on the context respective codec is being used, volume, and revenue you may drive from it. 

Very much notable, some use cases bear no cost, while others carry a generous entry level threshold. Nevertheless, do pay attention, and let’s take these one by one.

Per-Device 

Applies to smartphones, tablets, digital and smart TVs, computers, video players and anything with a hardware encoder or decoder of the respective codec. Royalties are owned by the device supplier and not by the encoding/decoding chip or module manufacturer.

Also applies to software products that include an encoder or decoder. Royalty is owned by the product vendor/distributor, whether the product itself is commercial or free. Notable exception: free products (truly free, like Firefox) may include the OpenH264 binary, in which case royalties will be generously covered by Cisco. 

Per-Title PPV

These include platforms that sell access to content on a per-title basis. Royalties are either (A) a fixed value per sale or (B) a percent from sales to end-users, in some cases the lesser of the two. Note that tiles (i.e. videos) 12 minutes or less are exempt from such royalties.

Subscription-Based PPV

Royalties apply to subscription platforms like Netflix and vary depending on codec and number of subscribers. There’s a zero cost entry level for AVC if one has less than 100K subscribers. 

Free Television Broadcast

Applies to terrestrial, cable and satellite broadcasters, with pricing per encoder or size of the audience

Free Internet Broadcast

You own no royalties if encoding content to be distributed for free over the internet. 

Real world (small) business models, and how much they may own

Mobile apps

We’re obviously talking about mobile apps that either play or broadcast/manipulate video through either one of these codecs.

If you rely on a hardware or OS exposed encoder/decoder to do the job, you don’t owe anybody anything, godspeed!

If you include a software encoder or decoder in your app, you fit into the ‘Per-Device’ category. For AVC you don’t pay anything until you reach 100K units (i.e. actively installed apps). 

For HEVC, you’ll be paying from the ground up, think $1.5 to $4 per unit.

Streaming platforms

You owe royalties if you distribute AVC or HEVC encoded content, unless it’s free as in YouTube.

A TVOD platform (or the live streaming pay-per-title equivalent) should pay MPEG-LA 2¢ or 2% per title sale for H264 and/or 2.5¢ to HEVC Advance for H265. There is no entry level freebie for this model.

A SVOD platform (or the live streaming subscription-based equivalent) starts owing MPEG-LA between $25-100K for AVC after they go over 100K paying customers. HEVC is not as friendly to newcomers and you owe HEVC Advance ¢0.5-2.5 per customer from day one.

Cloud encoding

  1. If you operate a service that sells the encoding/transcoding service explicitly (like encoding.com does),  you definitely do owe royalties. How you will be billed is however rather uncertain. You’ll ultimately have to reach out to licensors and ask, I have at least 2 customers being charged very differently for quite similar business models. Common sense would even so dictate that
  • If you charge for encoding by the item (title) you will pay royalties per title
  • If you charge for encoding via a subscription, you will fit into the subscription-based royalty model
  • If you charge for encoding by the minute, you may (possibly) fit into the per-device category, where each encoding server counts as one such device
  1. If you transcode video internally, as part of a larger streaming platform, there’s no clear rule/guideline on how licensing works and you also have to ask. A couple customer stories would lead yours truly to believe that
  • If the platform distributes paid content (SVOD or TVOD) and already paying per-title or per-subscription royalties in that respect, there is no extra charge for the encoding part
  • If the platform distributes free or AVOD content, it may owe per device (i.e. transcoding server or server core/thread) royalties; or it may not 😐

Online TV Stations

If it’s free to watch, you’re in the clear, no royalties. 

If it’s a paid service (i.e. subscription) you do owe it. Even if streaming is powered by a 3rd party platform and/or commercial player, the organization that labels the content also has to license the technology. Now you know.

Will They Come After Me?

Possibly not. Interesting enough, the ‘pool’ organizations cannot and do not deal with litigation. 

Never heard of any small player being anywhere close to indicted but still…

As your startup begins to grow, you should start being aware of how much you owe and consider that you might someday need to pay it all retroactively. Balance your encoding needs and don’t shoot for the mightiest codec unless you really need it. Explore alternatives and know your options.

Are there free alternatives?

Sure! 

AV1 is everyone’s dream: royalty free, and backed by an alliance of 48+ members; but it’s rather new, half baked, and it will probably be long before you’ll find a decoder for it in every device out there; but definitely one to look after in the years to come.

VP8 and VP9 are roughly comparable in quality to AVC and HEVC respectively, and also royalty free; except they’re only supported by google. While they admirably carried out the complex (and expensive) job of bringing these to market and safeguarding them from patent claims, they failed to convince the other big boys to adopt it; so hardware support is still scarce some 10 years later.

Where to go next?

See Jina’s article on the matter of AVC licensing, it may help clear out extra concerns. Also a couple of great articles here and there

Leave a Reply

Your email address will not be published. Required fields are marked *