PATENT ROYALTIES STILL A MAJOR ISSUE FOR DVD INDUSTRY
08/31/98
DVD Report
(c) 1998 Phillips Business Information, Inc.
With the launch of DVD -Video well underway in many parts of the world, and DVD -ROM a looming force on the horizon, replication capacity is ballooning at a healthy pace across the industry. But one all-important, unresolved issue is still hanging over the heads of current and potential DVD replicators - patent royalties.
With so many companies licensing patented technology to the DVD industry, it's no wonder you need a scorecard to keep track of the players. Two groups have already announced royalty rates. The contingent of Hitachi , Time Warner, Matsushita, Mitsubishi, Toshiba and Victor announced a combined royalty rate of 7.5 cents per DVD . Philips, Sony and Pioneer are charging 5 cents for use of their DVD patents, for a combined total of 12.5 cents.
But there are others who plan to join the mix, too. MPEG LA, for example, says its ready to start pursuing a 4 cents-per-video- event royalty for DVD -Videos using MPEG-2. And the likes of Thomson and Discovision are rumored to own DVD patents, although they have yet to declare any royalty rates. When all is said and done, it's expected that replicators will pay as much as 25 cents per DVD in various royalty fees - a pretty stiff surcharge, considering DVD -5 replication rates have already drifted into the $1.50 range.
Even though these companies claim DVD patents, replicators may not feel obligated to pay each and every royalty they're charged. Similar to the CD business, some replicators may feel that a patent either isn't valid or is inapplicable to them. In that case, the patent owner may sue the replicator, taking the DVD patent royalty issue into a state of legal purgatory.
To date, things are quiet. No one is pursuing royalty payments yet, although one replicator predicted it will begin within the next six to nine months. MPEG LA will likely be the first to come calling, according to Larry Horn, vice president of li-censing and business development. Thus far, MPEG LA has concentrated on consumer electronics hardware manufactur-ers, but now it's targeting replicators and computer manufac-turers.
Replicators In No-Win Situation
For now, replicators are in a no-win situation, not knowing exactly what they'll be charged. By underestimating what the royalties will eventually be, a replicator could have to cough up an unplanned lump-sum payment. For example, if a replicator assumes a 20 cents-per- disc royalty but it turns out to be 25 cents, and if the replicator has manufactured 5 million discs so far, that's an extra $250,000 to be paid.
On the flip side, if a replicator assumes a 25 cents-per-disc royalty and it turns out to be only 20 cents, it means customers have been charged an extra 5 cents a disc, which could have been the difference between making a deal or not.
At the very least, DVD replicators, or companies con-sidering entering the business, should start to plan accord-ingly - get in contact with announced patent owners and set aside an appropriate amount per disc.
DVD Patent Company Contact Information
Philips/Sony/Pioneer: Philips System Standards & Licensing, Licensing Support Tel: 31-40- 2734682/2734893; Fax: 31- 40-2732113; and email: cecoomms@am.umc. ce.philips.nl
* Hitachi /Matsushita/Mitsubishi/Victor/Time Warner/Toshiba: Toshiba Corporation, DVD Business Promotion and Support, Tel: 81-3- 3457-2473; Fax: 81-3-5444-9430.
* Thomson: Henry Linde, Manager Licensing, Licensing and Intellectual Property, Tel: 33-1-41865287; Fax: 33-1- 41860921; Email: lindeh@thmulti.com
* MPEG LA: Larry Horn, vice president of licensing and busi-ness development. Tel: 303-331-1880; Web site: www.mpegla.com
MPEG LA Royalty Rates
* sell-through titles: 4 cents per video event * commercial use/rental: 40 cents per video event (not expected to be pursued until 2000 at the earliest)
Source: MPEG LA
Announced DVD Patent Royalty Rates
Group Royalty
Philips/Sony/Pioneer 5 cents
Hitachi/Matsushita/ 7.5 cents
Toshiba/Mitsubishi/
Time Warner/Victor
TOTAL 12.5 cents
Source: Company information, compiled by DVD
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