UHD or 4K services need a successor to the current generation of compression standards under the banner of H.264/AVC or MPEG-4 and HEVC emerged as the favourite, aiming to halve the bit rate required for a given video quality. Around 12 industry players collaborated to develop HEVC with each contributing IP (Intellectual Property) from which they all wanted to extract royalties to recoup their investment, just as for H.264. In 2014 the group MPEG LA was formed to pool patents and present all parties wanting to deploy HEVC, from device makers to content creators to broadcasters, with just a single body to deal with. But there were some notable absentees from the list of MPEG LA members, such as Technicolor, GE and Dolby, and so it should not have been so surprising when HEVC Advance came along to create a second patent pool. Indeed the very fact that these vendors chose not to join MPEG LA indicated they reckoned they could do better by forming a separate group.

The launch of HEVC Advance was greeted with dismay by some analysts and commentators, such as Frost & Sullivan’s Dan Rayburn, on the grounds that it raised the prospect of new payments or patent-infringement legal risks, which looked like it could delay UHD deployments. But HEVC Advance argued it would actually accelerate deployments by bringing clarity to the HEVC patents situation by including all those IP holders that were not part of MPEG LA. The argument seemed to be that having two groups to deal with might not be as convenient as one but was a lot better than having to negotiate prices with each rights holder separately.

The royalties imposed by HEVC Advance apply to HEVC encoders, decoders or combination of the two. The amount paid depends both on which of two geographical regions a given deployment is and on the type of device, HEVC profile, extensions and optional features. Developed countries including the USA, Canada, all of the European Union, Japan, South Korea, Australia and New Zealand are apportioned to Region One with a maximum royalty rate of $2.60 per device and 0.5% of revenue generated from HEVC-delivered video services for content. All other countries are in Region Two and charged the same content royalty but half the maximum per device royalty rate of $1.30.

In addition operators, content owners or device makers have to pay royalties to MPEG LA, with a cost of $0.20 per unit in all countries for licensed encoders and decoders, but with an exception for volumes under 100,000 and an annual cap of $25 million. One big difference with HEVC Advance is that there is no annual cap so that royalties on say a smartphone incorporating an HEVC decoder would in principle be payable for every single device sold in a given year. This could prove controversial given that HEVC Advance is demanding much higher royalties as well.

If device makers such as Apple only had to pay the original MPEG LA royalties, the impact on retail price, sales and the bottom line would be negligible, as a quick calculation can reveal. MPEG LA is asking $0.20 per device, so even allowing for the price mark-ups that occurs during distribution, which therefore tends to amplify the margin imposed by royalties by a factor of three to four, it would add at most $1 to the price and the total take per vendor would be capped at $25 million anyway. Given that Apple looks set to ship at least 150 million iPhone 6 models this year it would likely pay the capped amount of $25 million, which the company would be unlikely to challenge.

But HEVC Advance is asking for $0.80 per phone and with no cap Apple would be liable to $125 million in royalties this year, which is highly likely to provoke a challenge under the so called FRAND (Fair, Reasonable, and Non-Discriminatory) rule, which essentially states that patent fees charged should be comparable with those already levied by other technology licensees in related areas. Obviously this would point to MPEG LA as a yardstick in the case of HEVC Advance.

The upshot is that far from resolving the HEVC patents issue HEVC Advance has put it rather up in the air and given rival standards such as Google’s VP9 and the Perseus encoding technology launched in April 2015 by start-up V.Nova a chance to gain ground. Of these VC9 is the most likely contender, being royalty free and with Google’s weight behind it, having deployed it for YouTube.

VP9 has proved comparable in efficiency with HEVC in recent tests and plays on about 60% of browsers today, while none have yet deployed HEVC. It is true that HEVC scores in broadcast, OTT and on mobile devices, where the browser has made little impact, but VP9 looks like playing a crucial role in reaching the still substantial browser based desktop and laptop market.

The other angle to HEVC Advance is the content licensing, but unlike the device case this looks like being fairly uncontentious because the premiums involved will be small. Taking one of the biggest examples of Netflix, a customer paying $8 a month and consuming say 3GB of HEVC content out of a total 10 GB would pay just $0.015, or 1.5 cents. The main issue then is the device royalties, where we can expect some compromises to be struck either as a result of litigation or to stave it off.