DVD Types
DVD Formats
MPEG Encoding Process
|  |
Can I Afford To Commit To DVD?
An independent video duplicator's concerns over DVD royalties.
By Bill Schubart, Chairman & CEO, Resolution, Inc.
DVD has indeed arrived. The myriad problems one would expect from a new media introduction are still with us and will be for a while. The manufacturing complexities that lead to elevated spoil rates in higher bandwidth media (DVD-9, -10 & -18) and the capacity problems of even the larger manufacturers are the subject of considerable industry talk. These problems are technical and process-based and will in time resolve themselves.
The thorn in the rose, one that could limit growth and deployment of the medium, is the intellectual property issue that will affect deployment, adoption and competition.
The entertainment/media companies that developed the digital versatile disc have yet to resolve their own proprietary issues fully. Their group, the DVD Forum, comprises some, but not all, of the companies that developed DVD. Those inside the Forum are generally agreed on who owns what patents; those outside are still quibbling about which patent claims are relevant and which are superfluous. The ownership and relevance issues present a hurdle that, in itself, is an intrinsic threat to the medium. Another threat is how and what to charge non-patent holding manufacturers who are risk-challenged and wish to invest $5-to-$10 million to compete with those who own and hold the patents. The following issues need resolution:
- Who owns patents that are in-deed relevant to the medium;
- What the aggregate license fee per disc will be for independent manufacturers who are not part of the original collaboration and hence the patent owning pool; and
- Decide how the members of the DVD Forum (or patent pool) will divide up among themselves the projected hundreds of millions of dollars from patent licensing rights they collect from licensees.
Independents Neglected
Media history has taught us that there are three types of manufacturers:
1. Commodity manufacturers: typically those who have the lion's share of the mass market and are often equity-linked to their major clients (vertically integrated).
2. Independent manufacturers: higher service, lower volume, geographically dispersed. These providers often cater to the middle markets, the evergreen, backlist or catalog markets as well as corporate marketing and special interest.
3. The consumer manufacturer: the individual who, when home recording technology debuts, buys it and makes their own media at home. Experience with the VCR and CD burner sales informs us that this is not for everyone. Few VCR owners ever record. People who buy CD burners buy them to record, but burner sales will never equal VCR sales.
Companies in the first category are generally within the patent pool and have presumably cross-licensed one another. Those in the third will pay their licensing fees when they buy a writable DVD when that technology becomes available. But those in the second category appear to be accruing an unknown liability with each disc they manufacture. If the developers are unable to resolve and clarify the patent licensing issues soon, it will dissuade the emergence of independent manufacturers and inhibit the growth of the medium in new markets.
DVD has applications in not only entertainment, but in personal computing, corporate business-to-business marketing, business-to-consumer marketing, education and training and hundreds more applications that will only emerge if allowed to reach its full market potential.
A company can play by any rules, but it must know what those rules are and trust their stability. The barriers to entry for DVD manufacturing are capital cost and expense cost. Capital cost is coming down, and expense is equivalent to competition. Can I compete at my cost to manufacture a DVD, or can I add enough value in my market segment to warrant the price I must charge? In short, is there a business here worth entering?
A Lesson To Be Learned From
Lets remember how a similar scenario regarding VHS played out. When Matsushita made the decision to revivify the enforcement of its VHS trademark, it made defensible patent assertions and sought to license VHS tape duplicators to use the patents it controlled in exchange for recognition of its mark. Matsushita did so for a few cents on a product that sells for slightly more than a dollar depending on length. With strong industry pushback from the AVDA, an organization of independent video duplicators, Matsushita acknowledged the program length differential in both manufacturing and selling cost and accommodated it. (This will be a factor in DVD as well). The end result, after much cordial wrangling, was that independents paid from a penny to several cents on a product for which they were charging 85 cents to $1.65, a manageable sum.
Let's now look at DVD. Those inside the patent pool are suggesting, but not yet actually licensing, a fee that has been reported at different levels over time from eight to 12 cents per unit. Others have suggested, but not to this writer's knowledge in any written form, fees that range from four cents downward. MPEG LA seems to be the only responsible organization to come out with a clear statement of fees for licensing its MPEG-2 encryption rights. [Editor's Note: Since the writing of this piece, the contingent of Philips, Sony and Pioneer have also launched a patent license program to collect royalties due those three companies. TDB, April '99] Word has it that some replicators are ignoring the issue, others are escrowing as much as 22 cents per disc against unknown future claims by patent holders.
This 22 cents is against pricing that in DVD-5 is nearing the $1/unit cost and may, with competition, settle in around 65 cents. That represents an unquantified and unquantifiable manufacturing cost of around 20 percent. In DVD-9, which may well be the entertainment industry flag ship, current prices are between $2-to-$3, reducing the unknown licensing fee to about 10 percent.
Again, a company can play by most rules, but it must understand them and know its cost before making investments. At a 10 percent-to-20 percent potential cost liability in DVD manufacturing, the risk is substantial. The risk at this point, however, is an implied risk as there appears to be no actual licensing program, or cost other than from MPEG LA [and now Philips/Sony/ Pioneer]. Further delay in clarifying these issues will only place in jeopardy the medium's ability to reach its full potential with service providers in all market sectors.
Bill Schubart is chairman & CEO of Resolution, Inc. For more information, contact: 19 Gregory Drive, South Burlington, Vermont 05403; Tel: 802 862 8881, ext 111; Fax 802 865 2308; Email: Schubart@resolut.com
Copywrite 1999, TapeDisc Magazine.
 
For more information from the CD, DVD and Video Industry Please visit TapeDiscs
Magazines website: http://www.kipinet.com/tdb/
|
