Implications of Formation of "The Alliance for Open Media"
Sep 08, 2015
Video growth statistics are easy and plentiful to find, and they all bear the promise of exuberant ongoing growth. Adobe reported online video consumption soared over 60% in 2015 even without any major sports or political events to catalyze consumption. Cisco predicts Internet video traffic will reach 105.2 Exabytes per month in 2019, up from 25.0 Exabytes per month in 2014. Pay TV service providers report increased bandwidth to the home as their number one investment priority. YouTube delivered tens of billions of hours of video to consumers in 2014, and Facebook recently announced the milestone of 1B concurrent logins – that’s one out of seven humans on the planet simultaneously logged in. Far beyond entertainment and social engagement, however, video is poised to become the lifeblood of enterprises and a first class data citizen in everyday productivity tasks. An enterprise like GE produces as much video in a week as all of Hollywood produces in a year. Education, government, worship, retailing, communication – every aspect of trade and everyday life is being transformed by video today.
What we often overlook, in taking video for granted, is the complicated network of patent rights and royalties underlying video ecosystems. For those of us old enough to remember MPEG-4 part II video, the consequent battle on royalty structures, and subsequent challenge from H.264, there were many lessons learnt through the process of compromise which gave rise to MPEG-4 Part 10… more commonly known today as AVC. For a while, it seemed like those lessons had been remembered as HEVC’s (very reasonable) initial patent licensing terms were announced. That complacency quickly went by the wayside as the newly formed HEVC Advance patent pool announced ridiculously onerous terms for the use of HEVC patents it would administer, including uncapped royalties that spanned not only per-unit charges but also content fees of 0.5% of “income attributable to the use of HEVC”. (See our blog post here on why this is actually impossible for many companies today to even calculate). Revenues subject to the HEVC charge would, in theory, span incomes as diverse as content subscription fees of online video service providers, advertising fees generated by broadcasters, merchandise sales generated by online retailers, tuition earned by universities, internal productivity efficiencies generated by the use of video conferencing, and more. To the myriad technology powerhouses of yesterday who are rich in MPEG-specific patents who have failed to evolve ecosystems that serve modern workflow, monetization and consumer experience needs and therefore have been more or less left off the modern online video juggernaut, this is a last ditch attempt to tap into the voracious growth of video in modern consumer and enterprise ecosystems.
The implications to IT business, however, are untenable. To any CFO or CTO, a risk of a permanent 0.5% burden to top line revenues is a worrisome level of risk to the financial bottom line. To most CEOs, the uncapped royalty clause represents undue power for a licensor to scrutinize sales, transaction and revenue data. It was only a matter of time, therefore, before a counter-initiative began in earnest. Sure enough, within days of the announcement of HEVC Advance’s patent terms, the formation of The Alliance for Open Media was announced. The group is taking a long-term view to the ongoing risk of patent royalties in video, bringing together (competing) stalwarts in the open source video space including Google and Mozilla; companies with strong legacies and current product lines in the video ecosystem including Microsoft, Cisco and Intel; and major retailers and service providers including Amazon and Netflix. Incidentally, most of these companies also run and/or power cloud infrastructures for video-based workflows and services.
Many news stories and blogs have explained the background of each company’s open source initiatives, the current dominance of AVC video and inevitable new delays in the rollout of HEVC as AVC is likely to be used longer than originally intended until the new standard can be finalized and rolled out. There’s also considerable discussion around issues of whether or not it is possible to craft a truly royalty-free video compressions standard, and the increased likelihood of success now that several leading vendors have come together in co-operation. What has not been discussed much is the implication of this endeavor on the 70-odd encoder and transcoder equipment vendors whose collective $1.2 billion market hinges on delivering video encoding, decoding and transcoding functionality to media, entertainment and enterprise applications. This market came to life with the prominence of MPEG-2, and has continued to grow as digital video spread across geographies and applications in the ever-widening quest for delivering better, more beautiful video in more cost-efficient fashion.
To be fair, this market has not been a particularly lucrative one for several years. Commoditization, spiked by widespread availability of low-cost silicon encoder cores, has decimated prices and eroded profitability. High fragmentation and single-digit market shares have limited growth, leading to a spate of acquisitions and market exits. Value has steadily been shifting away from core codec vendors towards the vendors of managed and quasi-managed workflow solutions, and will shift even more towards managed solution providers with strengths in delivering highly scalable workflows and effective monetization solutions (as emphatically evidenced by Amazon’s $500M acquisition of Elemental Technologies last week). Vendors like Telestream have already begun to step away from the compression efficiency rat race and chose instead to supporting open source initiatives such as X.265. Content and content service companies themselves are beginning to bring video compression and workflow expertise in-house, with examples spanning Facebook (QuickFire), Turner Broadcasting (iStreamPlanet), MLBAM, and others. With the rise of cloud-based processing, computational resources become cheap enough that historical emphasis on compression throughput and computational optimization becomes increasingly irrelevant. Traditional broadcast and Pay TV encoding expertise is therefore devaluing today, in favor of expertise in engineering reliable, scalable and flexible systems in the cloud. Market growth rates are reflecting this – cloud revenues in some segments are poised to soar more than 400% over the next five years, while traditional product revenues are projected to grow at modest single digit rates in many verticals and revenues are actually declining in some applications.
It is in this context that the potential for future impact by The Alliance for Open Media is most promising. While it is premature to say that HEVC will be superseded by some combination of VP10, Thor and Daala, we certainly believe that the need for a royalty-transparent (if not royalty-free) video codec is critical enough that a solution will be found and a compromise will be forced. It certainly did not need to be this way. However, once the stake for traditionalist approaches to royalty issues by legacy video technology participants was put in the ground, it was inevitable that the current MPEG-centric video landscape would fall into disfavor, with energy diverted toward a more IP-centric, IT-dominated standardization ecosystem. For current vendors in the encoding and transcoding ecosystem, our strategic guidance continues to emphasize an evolution away from delivery-centric point solutions towards monetization-enabling end to end solutions (an overview of this strategy is presented here, and subscribers can request a private workshop on this or any related subject). Agility in supporting new standards for compression, streaming, protection, captioning, analytics and more are increasingly important, and ability to help customers differentiate and optimize their own offerings will become the most important vendor differentiator over time. Viewed through this strategic guidance lens, this potential new standard can be accounted for simply as another potential line item in a product support matrix.
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