Squeeze harder

It seems like broadcasters are being squeezed at every turn these days. The networks are putting the squeeze on compensation for affiliates. In many cases, the cash flow has been reversed; networks are forcing affiliates to return commercial inventory even as affiliate compensation has slowed to a trickle. Then there's the ratings squeeze, as the programming diversity offered by multichannel services like cable and DBS continues to fragment audiences and eat into broadcasters' viewing share. Recently, Clear Channel Communications announced an initiative to reduce commercial clutter on local radio, where it is not uncommon to find more than 20 minutes of each drive-time hour crammed full of commercials. Across the board, broadcasters are starting to acknowledge that they have maximized the number of spots they can squeeze into programming. Despite all of this, broadcasting is still a highly profitable business, which probably accounts for the desire of those who have business relationships with local stations to tap into the substantial cash flow the stations generate.

But there is one area where squeezing harder could benefit broadcasters. One of the big advantages of going digital is the ability to use digital compression to squeeze more programs into the bandwidth that previously could carry only one standard-definition (NTSC) program. With MPEG-2 compression, a 6MHz channel can carry HDTV, a mix of HD and SD, or a multicast with five or more SD programs. With the new Advanced Video Codec (AVC), a.k.a. MPEG-4 part 10 or H.264, such a multicast could carry up to 10 SD-quality programs.

But broadcasters may have to think twice about using AVC. For one thing, the ATSC standard does not currently support its use. And, as the FCC DTV-receiver mandates kick in, MPEG-2 becomes even more firmly entrenched. And then there's the issue of the royalty structure created for using the AVC codec. MPEG-LA, the licensing authority for both MPEG-2 and MPEG-4, is joining the long list of broadcast business partners trying to tap into a lucrative ongoing cash flow. Improved compression technologies, such as those offered by MPEG's AVC and Microsoft's Windows Media (VC-9), have the potential to squeeze more channels into a broadcast multiplex. But using these technologies could put a squeeze on profits as well.

Meet your new partner

Last year, in a column entitled “Devolution,” we explored the history behind the development of digital video compression standards, leading to the current crop of next-generation codecs. In that column, we noted that video compression technology is evolving rapidly. Faster processors and cheaper memory make it possible to use advanced algorithms that need computational power four to five times what the MPEG-2 algorithms require. And we noted that, since the MPEG-2 algorithm was standardized in 1995, processing power has increased by the requisite four to five times.

The past year has seen significant developments associated with the next-generation codecs discussed in that column. Most significant is the growing manufacturer support for both the AVC and VC-9 codecs, and the decision by the DVD Consortium to support three codecs in the new HD-DVD standard: MPEG-2, AVC and VC-9. Of most concern, however, are MPEG-LA's licensing terms for the AVC codec and the announcement that MPEG-LA will issue a license for Microsoft's VC-9 as well.

Microsoft took an unprecedented step last year, submitting the VC-9 standard to the Society of Motion Picture and Television Engineers (SMPTE) for standardization. In so doing, Microsoft was required to publish the complete specifications for VC-9. This revealed what many, including this author, have suspected: VC-9 shares many algorithmic techniques with the AVC standard. Microsoft helped develop AVC and was included in the AVC intellectual property pool. Early this year, MPEG-LA announced its intention to provide a license for VC-9, issuing a call for intellectual property. Companies with intellectual property claims on VC-9 are meeting now to work out licensing terms.

Meanwhile, MPEG-LA has been working on the terms of the AVC license. The organization created a firestorm of controversy last year when it announced its intention to include a wide range of new, so-called use fees for the AVC codec, including fees on broadcasters who use the codec to deliver advertiser-supported programming. MPEG-LA established the precedent for use fees with the MPEG-2 license, which requires DVD manufacturers to collect a small royalty on each DVD they manufacture that uses MPEG-2 compression.

The initial terms for the MPEG-4 standard, which uses a compression codec less advanced than AVC, included use fees for Internet streaming, subscription video services and pay-per-view applications. The announcement of licensing terms for AVC included a proposal that broadcasters pay use fees based on the number of potential viewers in their market. Over-the-air broadcasters and cable/DBS systems that might use the new compression technology reacted to this proposal with broad concerns.

This past March, Japanese broadcasters helped MPEG-LA set another precedent, agreeing to new licensing terms for the AVC codec. The Japanese DTV broadcast system includes a robust channel that can deliver video services to portable and mobile receivers. The enhanced compression efficiency of AVC is a critical component of this reduced-data-rate service. The Japanese broadcasters agreed to a one-time $2500 license for each AVC encoder that they will use to program a channel in the new service. This approach is far less cumbersome than calculating royalties based on market size or per-use fees. Thus, the Japanese broadcasters have set the precedent for charging royalties for the ongoing use of a technology. Perhaps this is just a sign of the times, because the royalties associated with the manufacture of a digital television receiver dwarf the modest royalties paid for the use of the NTSC and PAL video-encoding (compression) standards.

There are no published figures for the royalties that DTV receiver manufacturers must pay to comply with the FCC mandates. The first of these requirements activated in July on sets with screens that are 36 inches or larger. These sets also include content protection systems to meet the FCC mandate for the broadcast flag. Estimates are that the total royalties may exceed $25 per set. By comparison, the royalty to build an NTSC receiver was approximately $1. A wide range of organizations are tapping into this new source of cash flow. LG Electronics (which acquired Zenith) expects to take in more than $100 million per year from the royalties on 8-VSB. Then there is the Grand Alliance patent pool and other patents related to the implementation of the ATSC standard. MPEG-LA tacks on a few bucks for the MPEG-2 decoder. Then there are royalties associated with IEEE 1394 for digital transmission content protection (DTCP) and DVI for high-bandwidth digital content protection (HDCP). Most of the large consumer electronics companies are involved in these patent pools, but the computer industry is starting to tap in as well.

In June, MPEG-LA announced the final license terms for the AVC codec. Broadcasters can pay either the one-time $2500 license per AVC encoder or pay annual use fees, which could be significantly higher, thus making this option largely irrelevant. Given the current cost of hardware encoders for AVC, the license fee represents only a small fraction of the cost. In a few years, however, it could equal the cost to manufacture an AVC encoder. The bottom line is that, while squeezing harder may be desirable, being squeezed harder is something that broadcasters may need to get used to, unless they want to keep using MPEG-2 for the next 50 years. Then again, this may be exactly what the companies behind the MPEG-LA patent pool are trying to achieve.

Competitive pressure

Unfortunately, broadcasters may not be able to sit on their legacy much longer. Improved compression technology is a significant factor that enables new competitors to capture market share.

One of the major stories coming out of NAB this year was the reality that a desktop computer can easily handle the task of producing HDTV content. Likewise, the home entertainment PC will soon be able to display HDTV-quality content using either the AVC or VC-9 codecs. Apple demonstrated a software AVC codec playing HD content on an Apple Cinema HD display. The company will include AVC support in the next major release of QuickTime. Microsoft demonstrated a variety of applications using HD video compressed using VC-9. And virtually all of the companies that supply professional MPEG-2 encoders for broadcasters were demonstrating support for AVC and/or VC-9. Just before NAB, a new start-up, Modulus Video, announced that it will offer AVC encoders for both standard- and high-definition video. The initial thrust for Modulus will be in the backhaul markets where bandwidth is at a premium and the more expensive AVC licensing provisions do not apply.

For more information, visit the following Web sites:

Download February 2003, “Devolution”
MPEG-LA licensing for MPEG-2, MPEG-4, AVC, VC-9
Modulus Video

Craig Birkmaier is a technology consultant at Pcube labs, and he hosts and moderates the OpenDTV Forum.

Send questions and comments to:cbirkmaier@primediabusiness.com