On Jan. 31, the agency charged with licensing MPEG-4, a standard for digital audio and video compression, announced a series of new fees. Manufacturers of software programs that incorporate MPEG-4 would be required to pay 25 cents for each copy they sell (up to a cap of $1 million per year). More controversially, the alliance of companies pushing the MPEG-4 standard also proposed a "use fee" -- a 2 cents an hour charge that either users or manufacturers of the software would have to come up with.
Cooked up by an alliance of 18 consumer electronics companies called MPEG-LA, the MPEG-4 standard is aimed at online and wireless multimedia. As such it has the potential to cover everything from online games to interactive TV to the Internet streaming of music, TV shows and movies.
So if you were playing a game of online Doom III that made use of MPEG-4 or were watching a similarly encoded Internet broadcast of a Britney Spears concert, you might have to pay an extra toll, just for use of the compression technology.
Compression formulas squeeze data down to a size where it can be uploaded or downloaded quickly and painlessly. The MP3 format (technically MPEG-1, layer 3), for example, made downloading digital music over restricted bandwidth relatively easy. It's a technology no one considers sexy. But the stakes involved in controlling it are huge.
Right now, consumers of Web-broadcast audio and video typically choose among a variety of options -- Microsoft, Real and Apple all market media players that use their own proprietary compression techniques. The new MPEG-4 fee, some argue, will pave the way for the proprietary versions to further dominate the market. The consequences, especially if one version wins out over the others, could be immense. Imagine a world in which every online download makes use of the same proprietary digital format -- a product of, say, Microsoft. Companies seeking to improve on the standard would have to get Redmond's permission. AOL-Time-Warner, News Corp. and other international media giants would all have to pay a software company to serve up their own content.
Content companies have been working hard to avoid such a scenario and believed that MPEG-4, which supposedly was going to be an "open" standard, would save them. But MPEG-LA's new plan dashed the hopes of both the content companies and some other industry players. Apple, which had based its next release of the QuickTime media player on MPEG-4 technology, delayed the product's release to protest the terms.
"Everybody was looking forward to getting away from proprietary [compression formulas], then the licensing terms came out," says Frank Cassanova, director of product marketing for Apple's QuickTime. "It knocked the wind out of our sails."
The patent holders will end up being the biggest losers," says Robert Saint John, marketing director for Ligos, a streaming media company. "I'm afraid these [MPEG-LA] companies are shooting themselves in the foot. They're impeding the progress of MPEG-4 implementations over licensing issues, and they're only hurting themselves in the long run."
So far, the debate over MPEG-4's terms has been limited to only the established players: Real, Microsoft, Apple and the consumer electronics companies that own MPEG-4's patents. But there are also some fast-growing challengers to the big players: open-source software compression formulas in which the underlying code is made publicly available to anyone who wants it. Late last year, for example, a company called On2 open-sourced its VP3 multimedia software, and software developers are also hard at work on at least two other projects that aim to create cheaper, if not completely free, alternatives to MPEG-4 and Real and Microsoft's formats.
The debate over MPEG-4 has shaken the market, say experts. And instead of accepting MPEG-LA's expensive terms, or simply staying with the proprietary formats provided by Real, Microsoft and Apple, parts of the multimedia universe might do what the Net has always done best -- route completely around the problem.
Emmett Plant is one free software fan who figures that MPEG-4's loss is the open-source movement's gain. The CEO of Xiph -- producers of Ogg Vorbis, an open-source alternative to the MP3 format -- Plant says that the MPEG-4 licensing terms will force developers and the market to give open source a more serious look.
"It's hard to see this as a bad thing in any way whatsoever," he says. "It's just going to open the gap wider between what should be used, open source, and what shouldn't be used, things like Microsoft Media Player."
Plant has a stake in the outcome of the battle over which "codec" -- the technical term for software that compresses and decompresses audio, video and other kinds of data -- will win. His company is in the early stages of developing Tarkin -- a new video compression format. He says that the nature of open source -- in which volunteers contribute their time and effort to the development of a publicly available code base -- will let Tarkin and other open-source technologies undercut the competition.
"It's a cost issue," he says. "With the expensive cost of MPEG-4 and Real and Microsoft, people are going to listen to us."
Even if Tarkin never manages to be as versatile as MPEG-4, the product of hundreds of millions of dollars in research and development, some believe that the market will still make room for it. Just as Ogg Vorbis-encoded songs now pepper the Web and can be found in several games, such as Bohemia Interactive Studio's Operation Flashpoint and Croteam's Serious Sam, Tarkin could satisfy content creators who want the cheapest available option.
"There's enough room on the distribution medium for a company to decide to use a codec that compresses less well but is a lot cheaper to use, says Lourens Veen, a Tarkin developer. "I don't think companies will be very happy to use MPEG-4 in their shelved products, and I wouldn't be surprised if they chose to use older, cheaper codecs, instead."
One possible alternative that's already on the market is On2 Technologies' VP3. The VP3 codec was made open source last year. And while it can't match MPEG-4 in terms of power -- its compression isn't as powerful, and unlike MPEG-4, it can't handle interactive gaming or wireless devices -- VP3-encoded content has already appeared on a few prominent Web sites, including U2's. With MPEG-4's new licensing terms, more will surely follow, says Doug McIntyre, On2's CEO.
"This is the chance to push open access to something without patents," he says. "It's the opportunity to have a complete free flow structure for streaming. When you use an open-source codec, you're talking about something where you know who the patent holders are; you know they have an open-source license so you can do whatever you want with it. There's no cost for the decoder or a use fee."
In short, "Open source has two advantages," he says. "First, it doesn't cost anything. Second, you don't need approval to toy with it -- you don't have to ask permission to go to the bathroom."
But however compelling the argument for open source may sound to the already converted, the question remains whether the big content-creation companies and mainstream entertainment consumers will go along. When everyone has a computer with Windows Media Player preinstalled, won't it just make more sense to produce content that Media Player will play? And will users feel any need to change, if they download a TV show or game and Media Player starts automatically? How are open-source alternatives going to gain any traction?
The Internet Streaming Media Alliance (ISMA) -- a nonprofit group of companies seeking to promote open standards -- believes there is a way. After the MPEG-4 licensing terms were released, McIntyre sent a letter to ISMA, reminding the group that VP3 was freely available. He says he immediately received a positive response. Tom Jacobs, the organization's president, asked McIntyre to join the group and began looking more seriously into open-source alternatives.
"Our first choice is to reach out to MPEG-LA," says Jacobs. But if the group refuses to kill the use fee -- which Jacobs calls a "revenue grab" that will double streaming costs for most major content creators -- he predicts that Apple, Sun and the other members of ISMA will move on to cheaper pastures.
ISMA's interest in open source could simply be a ploy or a bluff. In a game of high-tech brinkmanship, the theory goes, ISMA may simply be using open source to let the MPEG corporations know that high prices will drive the market to cheaper alternatives.
Jacobs denies the charge. "Honestly, that is the first time anyone has raised that question," he says. "ISMA's position is really clear. There are massive economic issues with use taxes, not minor points that get massaged at a bargaining table."
But even if Apple and the other ISMA members are sincere in their threat to go elsewhere if the use fee isn't nixed, will open-source alternatives measure up?
There are plenty of naysayers. "Open-source advocates consistently underestimate the difficulty, by orders of magnitude, of pulling off a complex, powerful standard like MPEG-4," says Ben Waggoner, a multimedia consultant. "The most viable competitor is Microsoft's Windows Media."
Legal problems could also hinder open-source development. MPEG-LA holds dozens of broad patents on audiovisual compression and when Dell Computer tried to include a DVD drive in its computers without first getting an MPEG-2 license last year, seven patent holders sued. Open-source companies could receive similar treatment.
"These members have the right to protect their intellectual property so to the extent that other technologies use similar algorithms, lawsuits will occur," says Shawn Ambwani, vice president of business development for Envivio, creators of an MPEG-4 media player. "The reason this hasn't happened is because there's no one to go after. But if there's money involved, I can guarantee that the patent holders will go after them -- independent of MPEG-LA."
Content creators also may not fear MPEG-4's terms as intensely as some critics expect. Jeff Handy, senior digital media specialist at Bisk Education, which offers online degree programs for several universities, says that he expects his company to go with MPEG-4 regardless of the cost. The main motivation: interoperability. By letting students download lectures to a variety of devices, MPEG-4 offers an advantage over all the other options, open source included.
And for Bisk, the use fee "is not a complete show stopper," Handy says. The company serves 65,000 students with about six hours of video material apiece, so the total cost of the use fee would be about $7,800 or 13 cents per student -- barely a fraction of the total $3 cost that Bisk spends on each student.
Bisk's experience may be an exception. An October 2001 J.P. Morgan analysis of RealNetworks' business model shows that an hour of encoded audio pays out about $.02 in profit -- meaning that the MPEG-4 fee would devour the incentive to use the product. Other estimates, cited by McIntyre and ISMA, show that the MPEG-4 use fee would double streaming costs for many providers.
MPEG-LA, faced with such figures, has a number of options that could thwart any turn to open-source alternatives, however. Primarily, it could decide to jigger the fee structure to gain back support. The group could place a cap on the use fee, as it did with the per-copy fee, or it could allow anyone who earns, say, less than $100,000 to use MPEG-4 for free. MPEG-LA could also cut the cost of the use fee. The companies behind MPEG-2 -- which covers DVD players and set-top boxes -- chose such options after its release, and the MPEG-4 crowd, which includes many but not all of the same companies, might be willing to do it again.
"At the end of the day, MPEG-LA is in the business of marketing a license," says Larry Horn, vice president of licensing and business development MPEG-LA. "If this technology goes totally unused, the patent holders lose out. We have an incentive to get it right."
But even if the published licensing terms -- due to be released by this summer -- contain concessions to critics, open-source advocates remain confident in their ability to affect the market.
Plant, Xiph's CEO, figures that it's only a matter of time before Apple and other MPEG-4 critics realize that corporate solutions can never be as affordable as open-source alternatives.
"[MPEG-LA] may not have come to the price out of avarice but rather because that's what it costs to pay its people," he says. "That may be the best they could do, and they may not change. I can write 5,000 letters to Sony and my PlayStation 2 costs won't go down."
The solution, he says, is not to call for cutting costs. The multimedia industry should stop trying to figure out a fair price for an unproven open standard. Instead, he says, they should ask themselves a more obvious question: Why pay for something that you might be able to get for free?