Phone DRM: the most expensive royalty operation ever

And that's after the 'climbdown'

Analysis We think the MPEG LA and the group of consumer electronics groups that it represents, who claim essential patents for the OMA DRM system, have pulled off something of a coup.

Initially they appeared to be in retreat over the slashing of their license terms this week from $1 per handset down to $0.65 and from 1 per cent of all transaction charges where the content is controlled by OMA DRM, to a maximum of 25 cents per user per annum.

The complaint had been that if every one of the 684m handsets sold last year had required the use of OMA DRM, then it would have cost the mobile operator industry at least $684m, and that was more than the total of protected content sales during the same year.

By cutting the handset charge to 65 cents, plus 25 cents as soon as that OMA DRM is used in anger, the handset charges on the same calculation would drop to $444m, plus $171m if every one of those phones as used to download one piece of protected content. That total is also more than all of the content sales made last year through mobile phones, at $615m, but at least it will give the operators a free run on the transaction charges for the rest of the year, once all handsets are upgraded to OMA DRM.

We would expect that when a consumer buys into a video or music subscription service as soon as they get their phone, then that subscription will immediately invoke the 25 cent charge.

MPEG LA spokesman Larry Horn told us earlier this year: "We always try to take into account the comments of licensees and we always listen to their point of view and we have often changed licensing terms to suit them."

And that must look like just what it has done here, especially with the sense of outrage that the cellular operators were voicing and the veiled threats that they would "use something else".

in January we pointed out that the OMA had initially suggested that this technology might be free of royalties, until the MPEG LA collected together five companies that all felt that their patents were essential for offering the technology. Those companies were ContentGuard, Intertrust, Matsushita, Philips and Sony and none of them were part of the OMA work to create the technology, but they had always warned that there would be a price to pay since they held most of the patents in this area.

Two weeks ago the GSM Association of mobile operators said they refused to pay these rate, and their backers included companies like Vodafone, Orange, T-Mobile and NTT DoCoMo.

We said at the time that, in the past MPEG LA has altered the terms of its licenses when they have proved too unpopular, without giving away too much ground, but then warned this particular group had a stranglehold on the technologies in question and that they were piqued at the clear attempts by the OMA to build a group of technologies that avoided their patents, putting them in an unforgiving mood.

But it looks like the license fees were always set with a view to a climb down and if the cellular operators accept this new "compromise" they will still have signed up for the most expensive royalty operation in the history of the planet. We think they will.

The other concession that also appears to have been wrung out of the patent holders is a promise that when all the technologies are added up that go into the second generation OMA DRM, version 2.0, that the royalties will be no greater (they certainly won't be less), than those charged for version 1.00.

MPEG LA said: "The licensors recognize that this market is in the early stages of development. As new applications for OMA DRM emerge, their coverage will be considered in connection with future licenses. The License will provide coverage for products from January 1, 2004, but royalties will be payable only on products from January 1, 2005, forward."

Copyright © 2005, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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