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DVD Royalties - The Final Curtain

A longstanding and contentious issue for the optical disc replication industry has been the requirement to pay a royalty to a number of patent pools on each good disc manufactured. CD royalties expired in the early part of the last decade, except in the USA where they were enforced until 2008. Since 2013 the essential patents required for DVD production have begun to gradually expire. By early 2017 the royalty obligation on DVD production is expected to have ended thus easing the cost burden on the replication industry. BD patents, however, will largely begin to expire between 2020 and 2025 although some will remain active until 2030. 

A Bit of History…

At its peak no fewer than five patent pools were actively seeking DVD royalties from disc replicators, 6C (representing Hitachi, JVC, Kenwood, Mitsubishi, Panasonic, Samsung, Sanyo, Sharp, Toshiba and Warner Bros), 3C (representing Sony, Philips, Pioneer and LG), MPEG LA (which represented around 20 organisations including Sony, JVC, Thomson, as well as Scientific Atlanta and France Telecom) in addition to DVA (Discovision Associates) which was only active in the USA. Thomson also had patents on DVD.

At the launch of the format in 1997 the collective royalty level stood at US$0.198 per disc in the USA (US$0.168 in Europe), which at the time represented a manageable 4% to 5% of the overall DVD9 manufacturing price. By the turn of the century, as disc volumes and industry competition increased and pushed disc manufacturing prices downwards, the proportion of the average DVD9 replication price represented by the royalty began to increase significantly. Although the patent pools implemented reductions in the royalty rates, a combination of the competitive nature of the replication industry, customer pressure and increasing disc production volumes, meant that the reduction was invariably outpaced by the speed of replication price erosion. As a result, the royalty accounted for an estimated 15% of the DVD9 replication price in the USA (12% in Europe) in 2000, rising to close to a fifth by 2005, at which time the collective royalty had fallen to US$ 0.134 in the US and US$0.116 per disc in Europe.

At this point in time DVD production volumes were achieving healthy double digit growth rates year on year and industry wide capacity utilisation rates were healthy (65% of global capacity was utilised in 2005). However this was counterbalanced by rising oil prices and polycarbonate production issues which meant that raw materials prices were increasing and consequently production margins and disc replication prices were placed under immense pressure. This brought greater focus on the royalties issue and increased lobbying by the industry association iODRA.

The Uneven Playing Field

As with CD before it, a controversial element of the royalty was the subject of cross licencing, whereby technology companies holding patents would cross licence with each other to effectively discount their royalty obligations. As a result their disc replicator subsidiaries were able to gain a perceived price advantage over replicators without cross licensee status.

This situation was further exasperated by the inconsistent approach as to where patents were registered, for example not all patents were registered in Eastern Europe thus granting a price advantage to Eastern European plants over their Western European counterparts. Although attempts were made to counteract this, specifically by implementing the full royalty on discs exported to countries where the full royalty was in place, however this was difficult to police. 
The uneven playing field was further compounded by the issue of non-compliant replicators who sought to avoid paying some or all of the royalties, in order to either ease margins or make themselves more price competitive. 

Invariably this resulted in cries of foul play by compliant manufacturers and those replicators without cross licensee status, lamenting the lack of a level playing field, and resulted in a failed bid to petition the EU to intervene and harmonise the situation. 

Fallen on Hard Times. 

DVD production peaked in 2008 with global production volumes of 8.7 billion discs and the industry fell in to decline shortly after. Diminishing replication demand pushed industrywide capacity utilisation beneath 50% from 2010 and it has steadily worsened, placing greater pressure on replicators, replication prices and production margins. Although there is little scope for downward movement in manufacturing prices for many replicators. The worsening market conditions resulted in a slew of factory closures and industry downsizing and consolidation in the years that followed.

Expiry Dates

2016 finds the industry in ill health, the outlook is for global DVD output to fall to around 3 billion discs by the year end, with around one third of available global capacity being utilised and further rationalisation is expected. 

A positive for those manufacturers still active is the gradual removal of the disc royalty as the essential patents begin to expire. The AC-3 patent was the first to go having expired at the end of 2013. Since late 2015, there has been a gradual fall away of essential patents amongst the different patent pools. By Q2 2017 it is anticipated that all major patents will have expired; with the exception of a small number of territories which don’t currently have a replication industry.

Consequently the cost burden on replicators will lighten, although moving forward it is uncertain as to whether they will be able to use the lack of royalties to shore up margins or whether this will be passed on to their customers in a new round of price reductions, in reality it may well be both.

Submarine Patents
While the current disc patents become increasingly redundant, this may not be the end of the royalty situation. Throughout the history of optical disc production there have been incidences of companies emerging outside of the regular royalty groups with individual patent claims, some of which have traction and some of which have faded away. The latest “submarine patent” claim is by Laser Dynamics which is known to have made royalty claims against US DVD replicators. The possibility of yet to emerge patent claims may result in some DVD royalty payment requirement for the industry moving forward.

About the author

Michael Boreham

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Here at Futuresource Consulting we deliver specialist research and consulting services, providing market forecasts and intelligence reports. Since the 1980s we have supported a range of industry sectors, which has grown to include: CE, Broadcast, Entertainment Content, EdTech and many more.