Blu-ray: Licensed to be killed

Back in 2008, explaining the lack of Blu-ray Disc drives on Apple’s newest line of notebooks, CEO Steve Jobs famously described the licensing process around the format as “a bag of hurt.” After this week’s announcement by the newly formed BD4C Licensing Group, he’s going to need some more bags.

Photo: ArsTechnica

The members of the new group, Toshiba, Warner Bros., Thomson and Mitsubishi, claim to own, collectively, a portfolio of patents “that are essential for BD Products.” Though none of the four are known to have contributed much original IP to the Blu-ray spec, they do own a number of patents essential to DVD products. Insofar as the Blu-ray spec requires that BD devices be backwardly compatible with the older format, device makers are stuck (or stuck up, depending on which end of the deal you’re on), to the tune of $4.50 per Blu-ray player, $7.00 per Blu-ray recorder and $4.00 per Blu-ray drive.

Blu-ray media manufacturers and replicators are also on the hook, the group claims, for 4 cents per disc and 8 cents per BD/DVD flipper disc.

While the press release put out by the group helpfully notes that potential licensees “will benefit from one-stop shopping for the essential patents owned or controlled by the four companies,” BD4C should not be confused with that other “one-stop” licensing shop for Blu-ray set up more than a year ago by Panasonic, Sony and Philips, called One-Blue LLC. It, too, established a fee structure for “essential” Blu-ray patents that amounted to $9.50 per player ($14.00 for recorders) and 11 cents for a pressed disc.

That fee schedule, however, assumed that other companies, including those now involved in BD4C, would join One-Blue, an assumption that now seems unlikely to come about, putting the published fee schedule in doubt.

At a minimum, then, potential licensees will now need to secure two, separate one-stop licenses, at a total cost yet to be determined, in addition to licensing the Blu-ray spec itself.

That’s not the end of the story, however. Since the spec also mandates the use of AACS, both device makers and replicators need an AACS license, from the AACS Licensing Agent. Content owners also must license AACS keys separately–one for each title.

The Blu-ray spec also mandates support for three video codecs, MPEG-2, H.264 and VC-1, which means you need a license from MPEG-LA. Device makers  need to include support for BD +, as well, which must be licensed from Macrovision, while replicators need to license the mandatory use of BD ROM Mark.

I’m probably leaving some out, but you get the picture.

It would be one thing, of course, if all of those licensing programs actually were functioning, but in fact they’re not. It’s not currently possible, for instance, to secure a One-Blue license because the group, officially, is still waiting for other patent owners to join the pool, even as those some of them set up their own, separate pools. One member of One-Blue itself, in fact, Philips, apparently got tired of waiting and has gone out on its own with an “interim” license for its patents, throwing the whole One-Blue effort into doubt.

While the lack of a functioning licensing program may seem like good news for hardware makers and replicators, allowing them to avoid paying royalties, the uncertainty surrounding licensing and royalty costs is hurting the format overall by discouraging investment.

In a press release issued in September, replicator association Media-Tech noted that Sony’s disc-pressing subsidiary, Sony DADC, commands a 94%-95% global market share for pressing Blu-ray discs. The big reason more replicators aren’t pressing Blu-ray discs, according to Media-Tech, is concern that Sony’s cross-licensing agreements with other Blu-ray patent holders is allowing Sony DADC to avoid many royalty payments altogether, giving it a huge competitive advantage over other disc manufacturers.

Uncertainty about ultimate royalty costs of pressing Blu-ray discs also makes it difficult for replicators to forecast their return on capital investments in Blu-ray equipment, further discouraging investment. Many also fear that going ahead now, without the appropriate licenses, will subject them to eventual demands for retroactive royalties.

While Sony DADC probably has sufficient worldwide capacity for now to keep up with Blu-ray demand, a market with only one vendor will grow increasingly problematic for content owners as Blu-ray demand increases.

The fracturing of the patent pools is also a concern to Blu-ray hardware makers. While the original fee schedule published by One-Blue a year ago drew criticism as excessive, the splintering of patent owners into multiple pools–or even into individual licensing programs–is almost certain to lead to a higher royalty stack than the $9.50 per player One-Blue was demanding, to say nothing of the higher administrative costs associated with negotiating and implementing multiple licenses.

Those higher costs could effectively put a floor under Blu-ray hardware prices, which will do nothing to help the format’s household penetration in these lean economic times.

The supreme irony, of course, is that a format war fought largely over the prospective profits from intellectual property produced a format so encumbered with IP claims as to threaten its own viability.