When the major patent holders of the MPEG-4 technology recently announced its proposed licensing terms for the would-be standard, it sent shockwaves streaming throughout the digital media community. The consortium in question, MPEG LA LLC, offered what it called "fair, reasonable, non-discriminatory," access to patents. Numerous organizations, such as the MPEG-4 Industry Forum (M4IF), the Internet Streaming Media Association (ISMA), and companies like Apple Computer that profitted by employing digital media were naturally concerned.

For the uninitiated, MPEG-4 is a open compression technology for digital multimedia created by the Moving Picture Experts Group (hence, MPEG), which also forged MPEG-1 (interactive video on CD-ROM) and MPEG-2, the core compression technology underlying the transmission, storage and display of digitized moving images and sound tracks. Featuring far greater compression than MPEG-2, MPEG-4 is the next logical step to bolster the quality of streaming video over the Internet. The format promises to send images using less data and network capacity, which ultimately enables full-motion video over the Internet.

"Wait one second!" you say. You already get streaming video over the Internet, don't you? Of course you do, and it's supplied by Microsoft Corp.'s Windows Media Player, RealNetworks Inc.'s RealPlayer, or Apple's QuickTime Player. The former two players, which dominate desktops, are based on proprietary technologies. MPEG-4, based in part on QuickTime, is a standard that calls for interoperability, or one open, universal route to deliver streaming video.

What MPEG-LA proposed at the beginning of the year was a set of licensing terms offered under the umbrella of one MPEG-4 (Visual) Patent Portfolio License. Under the license terms, licensees would pay 25 cents per encoders and decoders for personal use, with a $1 million cap. Firms such as Apple were fine with that.

What Apple and others were concerned about was the proposed, uncapped playback fee of 2 cents per hour for MPEG-4 streams or downloads that a service provider would have to pay to the MPGE LA to deliver video to consumers. This includes pay-per-view, subscription and advertiser/underwriter-supported services. The thinking is that service providers such as AT&T Broadband or NTT DoCoMo may not go for this. This royalty, to be paid by entities that disseminate the MPEG-4 video data, is not subject to a cap. Moreover, this same metered fee extends to MPEG-4 video on each copy of packaged medium. However, MPEG LA suggested users who sign the licensing agreement would be granted a year of MPEG-4 use royalty-free.

Dissenting opinions
That announcement went live Jan. 31, opening the floodgates to public outcry. On Feb. 5, M4IF praised the MPEG LA's progress in proposing a licensing program, but noted concern among M4IF members over whether the terms are practical for the variety of markets adopting MPEG-4. M4IF said it heard myriad reactions to the licensing program, ranging from "this sounds reasonable" to "this will never work." The group called for "further clarification and discussion."

The ISMA, a group of 34 companies whose goal is to create specifications for the interoperability of MPEG-4, voiced similar feelings.

"The ISMA is pleased to see that the outline of MPEG-4 video licensing terms have been made available, and we are asking that the MPEG LA opens the proposed terms for industry review and discussion," ISMA President Tom Jacobs told InternetNews.com. "ISMA is very concerned that the specific royalty model MPEG LA has outlined in its press release will not foster the development of a commercially viable market for MPEG-4 video streaming solutions."

MPEG LA's terms also fanned the fires of competition. Douglas A. McIntyre, president and chief executive office for On2 Corp., which has developed an open-source codec for video compression, decried the MPEG LA's licensing terms, and offered On2's VP3.2 as an alternative to MPEG-4.

"The fees announced by MPEG LA covering encoders, decoders, and usage will almost certainly curtail the adoption of a single standard for video compression and distribution," McIntyre wrote in a letter addressed to the ISMA. "These fees, which will be passed from content owners and infrastructure providers to the end user, unnecessarily restrict the use of streaming and downloaded video in the business and consumer marketplaces. It is antithetical to the main reason for which ISMA was founded."

But ISMA didn't bite and is sticking to its MPEG-4 guns. ISMA's Jacobs said in an e-mail that while "ISMA values such unsolicited input from the industry" it is "currently seeking to work with MPEG LA to achieve revised terms for the MPEG-4 Visual patent pool."

McIntyre boiled down his opinion on the terms for InternetNews.com.

"What the MPEG LA has done is propose to charge fees to firms that are higher than what the firms think they can afford," McIntyre said. With that, the adoption curve is going to be much, much lower. The idea of MPEG 4 when people talked about it way back when, is that firms don't have to go to Real or Microsoft for streaming. They figured the best way to do this was to have 1) good technology and 2) rational pricing. Now they are very worried that the second of those two things didn't happen."

On February 12, Apple took action, in the form of inaction. Apple vowed to stall the release of its fully MPEG-4-capable QuickTime Player 6 until some changes were made in the licensing terms. Frank Casanova, director of product marketing for QuickTime, said he and his colleagues at Apple didn't see those questionable terms coming.

"We have no problem paying for the intellectual property [encoders, decoders] that we use, but asking service providers to pay a use royalty didn't seem right," Casanova said.

Casanova said the model resembled the model used, in part, to proliferate MPEG-2, but while it worked well enough for the former standard, he feared a similar model won't apply for MPEG-4.

Casanova posed the example of AOL Time Warner, saying that if it offers subscriptions that are uncapped, an end-user can turn on some video stream and that "2 cents an hour per stream can add up fast with 30 million subscribers. This will never let [MPEG-4] achieve its full potential."

MPEG patent holders are said to be reconsidering some terms of their licensing policy but for the most part they still stand by the usage fee structure. So where does MPEG-4 go from here? See Page 2.MPEG LA and others explain
Yankee Group analyst Ryan Jones, whose specialty is scrutinizing strategies for digital media and entertainment, sees it this way: "I think MPEG LA kind of missed the boat in terms of setting a royalty schedule that was advantageous to them for MPEG-2," Jones told InternetNews.com. "MPEG LA kind of let the horse out of the barn and overcompensated for that with the MPEG-4 terms...I expect a bit of change [in the terms] from the intellectual property holders that make up MPEG LA."

Like M4IF, however, Casanova said Apple isn't panicking, noting that the fees are not "cast in stone."

Larry Horn, vice president of licensing and business development for MPEG LA, said that the MPEG LA patent holders remain in discussion over how to make the license work. ISMA has already come out and said the industry can expect to see a downward re-adjustment. It's not as if MPEG LA didn't understand the potential for dissent upon unleashing such a proposal. When it announced the terms, MPEG LA Chief Executive Officer Baryn S. Futa noted: "The patent owners understand the risks inherent in a start-up technology in which companies large and small are asked to make a pioneering investment and are sensitive to the role that their licensing model will play in that process."

Horn called the proposal "our first shot out the box and was the consensus of patent owners."

"We continue to hold discussions with the patent holders, and the terms are subject to change," Horn explained. "Our goal is to create feasible licensing programs that serve a market need. We take all of the opinions serious and at the end of the day, we are intent on having a viable licensing product. We're listening and revisions are quite possible."

That said, Horn & Co. think a model involving usage fees is tenable. MPEG LA is looking into how it would be modified.

"Our philosophy is -- we have no intention of taking money where money was being charged or made. The idea here was to ensure that remuneration was being offered to patent holders."

As for suggestions that MPEG LA may be trying to compensate for fees missed with MPEG-2, Horn disagreed, explaining that MPEG-2 charges royalties on the end products, which include encoders, decoders, file servers, and packaged media such as DVDs. As MPEG-4 is streamed, MPEG LA determined that a usage fee was required because there is going to be a different level of distribution involved, particularly in wireless products, where MPEG-4 will be used on cell phones and personal digital assistants and such.

"What you try to do [for MPEG-4] is find something that fits the stream of commerce," Horn said. "Because it's distributed more freely, usage fees would help spread compensation across the value chain and better reflect the nature of the technology."

RealNetworks' and Microsoft's take
As for the technological aspects of MPEG-4, most seemed to agree that Microsoft's and RealNetwork's codecs offer superior quality to date. Yankee Group's Ryan Jones said as much. Gartner group analyst Robert Batchelder noted that that "all vendors will eventually adopt the new MPEG-4 standard because it is well-suited to on-demand digital video distribution and desktop use."

While some groups (media included) are quick to point out that open-source and proprietary groups are diametrically opposed, RealNetworks and Microsoft have both demonstrated a desire to listen. Microsoft is, after all, an MPEG LA patent holder and first tinkered with the standard a few years ago.

Since December, RealNetworks has offered MPEG-4 support through server and client-side plug-ins of Envivio's MPEG-4 technology. Its next version of RealSystem will feature native support for MPEG-4. As Mark Donovan, group manager for B2C solutions at RealNetworks pointed out, this is consistent with the firm's strategy to provide support for some 50 media formats to give customers greater choice and flexibility.

"What the market is telling us about MPEG-4, is that while current mobile and embedded devices have limitations and are not upgradeable at this point, there are an awful lot of people building new products that want to bake that into the device," Donovan noted.

David Caulton, Microsoft's lead product manager for its Windows Media Division, said Microsoft had an early start with MPEG-4, noting that it demonstrated interoperability with the standard in 1999 with an MPEG-4 camera made by Sharp.

However, Microsoft's next generation of the Windows Media Player, code-named "Corona," doesn't support MPEG-4 like RealNetworks does.

"We are constantly monitoring its value," Caulton told InternetNews.com. "The big thing for you to look at is 'what kind of tools are being made with it'?"

Caulton noted that Microsoft has offered a superior digital media experience through Windows Media Player and said that unless users have a specific preference for MPEG-4, users tend to choose Windows or RealPlayer. He also said Microsoft understands the issues surrounding the licensing terms and that "everyone is wondering 'how much is this going to cost me'? What is this going to cost my customers? But we think it's great that progress is being made in terms of video licensing terms."

Still, Caulton is wondering when the market will see more mature MPEG-4 tools and licensing terms are sorted out and more tools emerge, MPEG-4 will remain "all about possibilities."

Where does MPEG-4 go from here?
Caulton isn't the only one to wonder about MPEG-4's possibilities. Yankee Group's Ryan Jones addressed the future of MPEG-4 at an ISMA meeting in New York City earlier in February, where he noted in a presentation that its adoption will depend on PC/TV device convergence.

With consumers buying such devices as set-top boxes, PCs and all manner of mobile gadgets, Jones said MPEG-4 "opens up the entire digital marketplace of the Web" because it will let consumers match devices with networks and content sources in the value chain.

Jones contended MPEG-4's existence as an open standard, as opposed to a proprietary one, can determine the distribution of consumer influence and revenues around the digital media value chain, which, of course, consists of content, distribution networks, applications and services and devices.

"MPEG-4 gives consumers the flexibility to jump away from the influence of the broadband service provider to experience the full media value chain," Jones told the ISMA group.

Jones' prognostications aside, MPEG-4, it seems, is in a period of stasis until the licensing fee issues are sorted out. But that hasn't stopped firms such as MPEG-4 software maker iVAST, which just this past week opened the doors of its MPEG-4 development studio in Los Angeles. Loaded with facilities for developing rich media based on the standard, the firm will use it to provide creative services, extended resources and training to its customers.

And competition versus MPEG-4 progresses, as On2 this week unveiled a new version of its compression codec, VP5, which its boasts has a 50-percent improvement over its previous codec VP4.

Of the company's attempt to gain momentum with its video compression technology while judgment hovers over MPEG-4 licensing terms, On2's McIntyre said "VP5 can do at 340k what VP4 does at 500k and other proprietary codecs do at 600k."

"This advance means that On2 compression no longer has any direct competitors for higher-quality video at lower data rates, not Windows Media Player, not Real 8, not Sorenson and not Divx. This codec is in a class by itself."

Competition indeed.

MPEG LA patent holders include: Canon Inc.; France Telecom; Fujitsu Limited; Hitachi Ltd.; Hyundai Curitel Inc.; KDDI Corp.; Matsushita Electric Industrial Co. Ltd.; Microsoft Corp.; Mitsubishi Electric Corp.; Oki Electric Industry Co., Ltd.; Philips Electronics; Samsung Electronics Co. Ltd.; Sanyo Electric Co. Ltd.; Sharp Kabushiki Kaisha; Sony Corp.; Telenor AS; Toshiba Corp.; and Victor Company of Japan Limited.