Good morning, everyone. I trust the mic. Oh, there it goes. It's good to be in San Francisco, and I am very pleased to have the opportunity to meet before you at the Worldwide Developers Conference. It's a great opportunity for us to explain these licensing terms, which have been the subject of so much discussion in the press and privately and so forth. And certainly, interest runs no higher among users of MPEG-4 technology than those of you in this room and at this conference because of Apple's, certainly, their great support through the QuickTime products. And obviously, that's very important to the start of this market.

The other element that is important to the start of the market is to clarify licensing terms. And I say that not only for whatever needs to be done still now, but what needed to be done even a year and a half ago when various controversies started over what this license was about and what it wasn't about.

The reason I say this as a platform is because, you know, to start out the discussion here, is because every technology such as MPEG-4, which is an open standard, is subject to technology that is owned by many, many different patent holders. And in the old days, I say the old days, the days before standards were widely implemented, before digital video and digital audio and other digital technologies were implemented, users were pretty much on their own when it came to clearing rights under relevant patents for the use of a technology.

Picture the situation where, for example, you as a user or other implementers of the technology go forward with the technology, or Apple, for that matter, goes forward with the technology. and does not have the availability of a license such as the one we present that provides access to many different patents owned by many different patent holders in one place. The consequence of that, unfortunately, is that the implementer, the user, the promoter is subject to potential infringement by 20, 25, 30 different parties that may own essential patent rights.

So they go out with the technology, and obviously there's a possibility of litigation or infringement allegations and so forth. And that's what MPEG LA tries to clear up. That is the entire purpose of our being, which is to try to bring as much of this essential intellectual property rights under one license as possible, so that when a user goes to market, they don't have to have 20 negotiations or 25 or 30 negotiations with individual patent holders. It doesn't take a brain scientist to understand that a technology that has to go through that many negotiations is, frankly, dead on arrival.

So what we try to do is bring the 20 or 25 or 30 patent holders together under one license so that users and implementers and promoters can get the rights they need in one place with one negotiation and move forward from there without fear of having infringement claims hoisted upon them by the patent owners.

Some of what I've said may seem kind of cloudy to you, so let me take it step by step, give you a little background about MPEG LA, and then let's talk specifically about the MPEG-4 Visual License. I did want to just set that up as background though for the general role that MPEG LA plays in this technology.

We all know that. A lot has been said. A lot has been written. I myself was a recipient of probably 6,000 emails. Some of you in this room I'm hoping I actually communicated with. We tried to respond to all of them. And by the way, they were very helpful.

They made a tangible change in the licensing terms as a result of what you wrote and what you expressed and the heartfelt feelings that you had about the ease of implementation that you faced or the difficulty of implementation you faced when the terms first came out. As you may know, they were revised about six months later, reflecting many of your views. Obviously, not everyone is always happy with licensing terms, but we went a long way, we think, to correcting some of the deficiencies in the original license. That's what we're going to discuss.

As I said, first I'd like to provide some background on MPEG LA. MPEG LA is not a patent holder. MPEG LA is not a user of any technology. In terms of promoting it or being a licensee, shall I say, of one of our own licensing programs. We are an independent company.

whose sole purpose is to try to bring order out of the market chaos. The market chaos is what I referred to earlier. The situation where a standard that everyone likes, many people want to use, has one single problem that holds it back from implementation. And that single problem is how can we get it out there and get it widely used by the biggest number of users without facing multiple infringement actions or essential patent claims. So where we began was in 1997. As a company, we began licensing the MPEG-2 video compression standard. That was our beginning. The single biggest challenge to MPEG-2's adoption was dealing with the essential intellectual property rights.

MPEG, as you know, stands for Moving Pictures Expert Group. It was a group of engineers from all over the world who still meet to discuss international standards. They are the authors of the MPEG-4 standard. They were the authors of the MPEG-2 standard. The standard was developed in the early '90s to the mid '90s.

It was an answer to where to begin with a high quality digital compression for real time video in the broadband sense, in the broadcast sense, by satellite, by cable, and by DVD player. And as I said, it was well known going into this process that the technology which the MPEG group had put together as a single specification to be made available widely to the world had one barrier to implementation, one significant barrier to implementation. I think it's obvious to all of you in this room what the benefits of interoperability are, which is what the purpose of these standards is. So the MPEG-2 standard sitting here on a voluminous amount of paper.

was no better than the paper it was written on unless it could be implemented. And many companies throughout the industry had a significant interest in seeing its implementation because obviously that answered the problem to interoperability. But, many patents owned by many patent owners caused potential for confusion, conflict, spelled litigation, and cost, spelled multiple negotiations, and possibly endless negotiations, and possibly negotiations that were inaccessible to the normally sized company.

You know, maybe large companies, maybe companies, small companies with significant technology would see the inside of the door of a particular patent holder who wanted to cross license for that particular technology. But in general, in order to foster the widest possible use of this standard, there had to be a different way of doing things.

So the MPEG group set in motion an intellectual property rights working group. It was headed by Baron Futa, who is the current CEO of MPEG LA. They worked for a number of years on coming up with a blueprint for overcoming this problem. The result of that deliberation was the creation of MPEG LA. Of course, MPEG LA used that blueprint, but as a private company, had to sell patent holders on, or shall I say convince patent holders to include their intellectual property under one license in a model that had never been tried before.

This was unprecedented. The venture, which became the MPEG-2 Patent Portfolio License, went before a six-month review before the Department of Justice. As a matter of caution and common sense, because it was new and unprecedented, and the Department of Justice in its review found the business plan of MPEG LA for MPEG-2 to be pro-competitive. It was designed with many elements in mind to achieve fairness, reasonableness, and nondiscrimination.

Fairness and nondiscrimination and reasonableness, particularly important elements. You'll probably hear me refer to them later today. They're big words. They don't mean much by themselves. But we hope that our licenses and the acceptance of those licenses in the market helps to define what is fair, reasonable, and non-discriminatory in the marketplace. Obviously, a license that is widely accepted can be viewed as fair and reasonable.

We administer them to be non-discriminatory. What does that mean? Non-discriminatory means that a patent holder, a licensor as we call them, who happens also to be a licensee, a user of the technology, and there are many, will be treated the same as any other licensee. They receive no favorable treatment over a licensee who does not have patents themselves. Very important principle. So not to pick on a particular company, but if you go on our website you will see that there are currently 22 patent holders in the MPEG-2 patent portfolio license.

They include names such as Sony and Matsushita and Columbia University. It's a wide spectrum of patent owners. And Columbia, of course, is not a licensee because they don't use the technology in the conventional sense. But a Sony, for example, pays the same royalty rates that any other user pays.

Obviously, as a patent holder, they get a piece of the revenue that comes as a result of any royalties that are collected for the use of this technology. But the technology was not developed for free. It was not developed at no cost. This is their way of getting a return, a reasonable return on their investment so that they, like other patent holders, can continue to develop new technologies that fuel the marketplace.

Our sole business is based on what we call one-stop patent licenses. Once again, MPEG LA itself is not a patent holder. We aggregate essential patents owned by many parties under one license. And then we have the right to sub-license those to the marketplace on the same fair, reasonable, non-discriminatory terms to everyone.

We'll get into that more in a minute. I apologize if we spend this much time on the background of MPEG LA, but I think it's important to try to understand where we're coming from, what we're trying to achieve, and I think it'll be easier to understand the MPEG-4 license once we begin that discussion momentarily. This is the problem that MPEG LA set out to solve. I won't review it all, but suffice it to say that in the last 10 years, Companies, individuals have understood, like they never have before, the value of intellectual property.

rapid patenting, voluminous applications before the US Patent Office. I'm unprecedented in history in terms of the number of patents that are entering the office and are being reviewed. I don't have the figures at hand, but I understand that it's probably doubled over the last 10-year period. It means that people are patenting Anything that they believe to be patentable, something that is an invention which was not subject to any prior publication and which they are the first to discover.

What happens is that there's growing interdependence among patents. When you put out a standard such as MPEG-2 or MPEG-4, it isn't just one invention like the telephone and Alexander Graham Bell or the other poor guy who had the real patent on that. But it is a situation where the standard that is established is subject to many patents covering many elements of the compression standard: the decoding, the encoding, the transport, and all kinds of elements surrounding that, whether it be spatial redundancy or temporal redundancy or whatever. So there are many patents to deal with, and it's not getting less. It's getting more. It's been referred to as the patent thicket. And the result is that licensing transaction costs for companies who engage in MPEG-2 or MPEG-4 or other such technologies are extraordinarily burdensome.

The possibility that a technology may do nothing except gather dust on the paper on which it is written is greater than ever. There needs to be a bridge, and the bridge is to try to set up a one-stop license as a transition to the marketplace that can allow people to have non-discriminatory access to the technology with one negotiation.

One-on-one licensing arrangements ruled the day before MPEG LA. That's the way people operated. They negotiated one-on-one. And they still negotiate one-on-one. MPEG LA does not replace one-on-one licensing negotiations. It works with those that are necessary in the market. It's one more element that technology users have to choose from in determining how they want to deal with their intellectual property rights.

And I know I'm talking to a group of knowledgeable people who do a lot of development. But basically, the laws of most countries worldwide, virtually all, recognize the right of an inventor to have the fruits of its invention. And what that basically means is, I always try to draw it like a boundary line of a piece of real estate.

That basically means that you carve out the four walls, the four corners, the four boundary lines of a patent. And if a user trespasses on that property, then what the law says is that the patent holder has the right to exclude that user from using that technology on which they trespass.

And that is the nature of a patent. So they're out there. They have to be dealt with. MPEG LA didn't make them. Obviously, we're glad they're there because that is MPEG LA's business. I can't apologize for that. But we take the marketplace as we found it, and we're trying to make it easier for users to deal with that issue rather than have to go through individual negotiations with each one.

So this is the way we do it. We put them in one license. We offer them on the same terms. And the result, for example, in MPEG-2 has been quite remarkable. MPEG-2 licensing, as I said earlier, began July 1997, following the Department of Justice's business review. Actually, I see a misspelling there. It should be licensors with an O, but it still means the same thing to everybody. We started with eight patent holders. Eight patent holders.

To become a part of the program, it's not your pedigree that counts. It's whether or not you have an essential patent. An essential patent is one That cannot be avoided in the implementation of a technology. If it cannot be avoided in the implementation of a technology, then it's essential. If there are other ways to perform that same technology that is in the patent, it is not essential. It's as simple as that.

And rather than make those decisions ourselves or rely upon our patent holders to make those decisions, the patent holders submit-- the patent holders who want to participate in this program submit their patents for evaluation by independent patent experts that we hire. We have independent patent experts in the US, Korea, Japan, and Europe who review these patents on a regular basis.

And if found essential, and if the patent holder is willing to agree to the terms of license that all the other patent holders agree to, they are included in the portfolio. So the license grows, and it grows quite phenomenally. We started with eight licensors, as I said, and we now have 22 in MPEG-2.

Why 14 in the six years that this program has been licensed? Why those additions? Well, in some cases, it was a matter of expediency to get the license going because the market needed it fast in 1997. So a line had to be drawn. There were already a few patent holders waiting to get in, but we started with the original eight.

Immediately after it began, some more were immediately added. As for the others, they fall into two categories. Some had patent applications that had not issued as patents yet when the program began. And this program deals only with issued patents, doesn't deal with patent applications, which, by the way, are not even licensable in the United States. They are licensable in Europe, it's my understanding, but not enforceable in Europe.

So we focus on issued patents because issued patents have the mark of validity that is basically the result of their review process by the patent office in the applicable country. So many of them had patents that issued after the program started. They came in. And yes, there were a number of patent holders who didn't want to be a part of the MPEG-2 Joint Licensing Program at all.

But they subsequently came in too once they saw that it would be successful. They were not early risk takers. They wanted to do it themselves. But they came in, and certainly we're glad to have them, because our objective is to include as much essential intellectual property in one license as possible for the benefit of the user.

And in fairness to the user, when we grew with this phenomenal growth, which by the way began with 25 patent families, approximately 100 patents worldwide, and now has grown to 123 patent families representing more than 575 patents in 56 countries, the royalty rate never increased. It never increased. Our promise to you, the user, is that the royalty rates remain the same during the current term of the license. Now, MPEG-2 has gone through multiple terms.

But it didn't go down even when it renewed for a new term. In fact, in January of 2002, the market saw a 40% reduction in the royalty rates charged for decoders and encoders. The patent holders in MPEG LA were able to do that, one, because, frankly, they saw the nature of the marketplace and the declining prices of product, and they wanted the royalty to fit comfortably with what people were charging for their products going out the door, whether it be a set-top box, a DVD player, a PC equipped with DVD playback or whatever.

Under the old rate, we had very high compliance in most market sectors, but not all. With the reduction to 250, we are now able to boast that we include north of 85% compliance in every major market sector that is using MPEG-2 technology. So it was a very significant thing to reduce the royalty and increase the compliance by many market sectors. And in this age of convergence, that is no small thing.

I'm sure you all realize, given the convergence, but we heard from set-top box makers who were upset that a PC maker was not paying royalties. And we have, once again, this may sound strange, but this is a licensing product, and we love our customers very much. And we want to keep faith with them.

And if we sense that something is off balance, we try to correct it. We try to go to the patent holders who make the ultimate decisions and try to talk out with them what we see of our view of the marketplace that may require a change in order to respond to a marketplace condition. And at the time, January 2002, we thought it was appropriate to reduce the royalties.

We now have more than 570 licensees in MPEG-2. We license now four other programs using this same template. This MPEG-2 template, so successful in seeing the widespread implementation of MPEG-2 across the marketplace, resulting in the inclusion of as much essential intellectual property in one license that saves users valuable negotiating time and creates a level playing field so that what they're paying, others are paying in other market sectors as well as their own.

The program has caught on to be popular with helping to foster other technologies. One quite familiar to you as developers is 1394, mostly known under the Apple trademark FireWire. It's been a very successful licensing program. It was organized in November 1999 to cover the 1394 standard, including a portion of the IEC standard that dealt with the peripherals that are attached to the network. It has eight patent holders, licensors, and now has more than 220 licensees. And I'm proud to say, of course, Apple is a patent holder in that program.

And of course, I think it's not unfair to say that Apple, if you look at our list of patents, which was posted on our website, this one on 1394LA.com, and if you look at our list of licensees, which are also posted, you'll certainly see that Apple is a major player in the intellectual property that was developed for this technology.

Along with others, but certainly Apple has the, has a large, maybe the largest volume of patents among all the patent holders that are represented. Our third licensing program was for the implementation of the DVBT standard. DVBT being the terrestrial broadcast standard used in Europe and Asia and other parts of the world, I think all except for the US and Canada, which have chosen the ATSC standard for digital broadcast transmissions. We are licensing that program as well. And we have a London office to try to work in the European market where that technology is getting its commencement point.

And most recently, we began licensing MPEG-4 Visual. I know, that's still the topic today. And the MPEG-4 Systems License. And I just note, for the record, the MPEG-4 Systems License also includes Apple's intellectual property that is essential to that standard in the form of the MP4 file format.

Let's turn to the topic, MPEG-4 Visual License. That's the background. What I just said really is our operating procedure for all of our licenses. They deal with essential patents. They issue on a fair, reasonable, non-discriminatory basis. They go through patent reviews by independent patent experts so that there is some sense of credibility and reliability that people aren't just sitting in a smoke-filled room and saying, "I'll let you include your patent if you include mine." That is not what happens. There's no horse trading going on here. A patent can only be included if it meets the essentiality standard as applied by the independent patent examiner.

Every license, first to understand it, you must lay out what it covers. What do you get for this license? Now we don't ever say that we have all patents, because we don't know that we do. You who deal with intellectual property may know there are a lot of what they call submarine patents out there, or likely to be.

There's a possibility of submarine patents. Second, even if we were to know about other essential patents, this is a voluntary exercise for the benefit of the market. It's a way of marketing the technology. It's a way of marketing the patents. It's a way of providing a service to users who want to use the technology.

But we have no way to compel an essential patent holder to include their technology. We can only hope that by the way we do business and the way we present the license to the market, and by the acceptance of the royalty rates and other terms, that patent holders will want to be a part of the license.

They will have the incentive to be a part of the license because they believe, one, it's the best service they can perform for the market to make them available, and two, that it's actually the best way to market their patents for this technology. So what does it cover? A lot of words here.

I'm not going to go over them with you, but MPEG-4 Visual Standard refers to Part 2 of the MPEG-4 Standard. There is a Part 10, which has been the subject of much discussion, and we can take some questions on it later if you like, which is often referred to as H.264 or AVC. But the MPEG-4 Visual Standard is divided into profiles.

The profiles accomplish different results of different complexity and different quality. And you, more technical than I, probably know them far better than I. So I hope to avoid that today for myself. But the objective of this license, initially when we started this license, and this was actually before your QuickTime conference, we were only focused on two of the profiles, which were called Simple and Core. And when we went back to the drawing board, we thought it made more sense to include all of the profiles in part two.

We didn't want to set up a situation where a user starts to get married to the technology, decides to migrate along its path to a higher complexity, and then, as a result, And then only to find that the next shoe drops from the patent holders and say, oh, that'll be another license fee, thank you. So we decided to throw all the profiles under one license so that users didn't for themselves have to decipher one, whether they were using one profile versus another. In some cases, that's not so easy.

We leave the complexity on the inside for us to figure out in terms of dividing the royalties. And then second, we didn't want them to have to, as I said, come back for another license. We wanted this license to be evergreen for any use of MPEG-4 Part 2. So it covers all those profiles, and this happens to be the official reference to where those profiles and this standard can be found. and not to confuse you anymore with that, but it is the basis, by the way, on which the independent patent examiner makes their evaluations.

Okay, so how is this done? I just went over the coverage. It's the entire MPEG-4 visual part two. How does it accomplish this result? Okay, most of this you've already had, but I'm going to repeat myself again. It's always a good thing to do it in different examples, I'm We rely upon patent submissions by parties who believe that they have essential intellectual property.

We ask them to submit the essential intellectual property for evaluation by the patent examiner, and if found to be essential, and a prerequisite for their submission is that they will agree to the licensing terms. They are admitted to the license. So that's the first thing. Each patent in the license is essential to the MPEG-4 visual standard. Second, it's evaluated by independent patent experts. Third, each patent holder promises to us worldwide coverage.

What does that mean? Obviously, they can't provide worldwide coverage where they don't have a patent, but it means that wherever they have an essential patent, in whatever country worldwide, they may have an essential patent. That patent, under legal obligation to MPEG LA, must come into the patent portfolio.

So a patent holder can't say, well, this is great. I'll give you the United States, but I'm going to hold Japan to myself. No, no. You as a user must have the comfort to know that if a patent holder's name shows up on this license, If they have an essential patent in another country other than what's listed, or those that are listed, that eventually they're going to be included.

That they can't come later and say to you, "I have an essential patent, and oh, by the way, I didn't include it in the MPEG LA license." You have the right to believe that they're not going to bother you for any essential patents that they may own. Some companies patent in 50, 60, 70 countries worldwide. They get very, very broad coverage.

And of course, it costs a lot of money to do that. Others focus on only a few countries. So the patterns of where these patents show up can vary substantially from one company to another. And remember, MPEG LA has nothing to do with the prosecution of these patents. We only receive them once they issue from a patent office and thereby qualify for inclusion.

This means, of course, that there's always more intellectual property in the pipeline, in the evaluation pipeline. There's more coming. Our independent patent experts are kept very, very busy. Between quarters, when we announce the new patents that go into the license, they are busily evaluating them, and when found essential, they come in. And a question possibly on your mind is, well, what about the dilution factor? And the answer is, no.

dilution factor to patent holders. And the answer is, those are the rules of the road. That's what patent holders understand. And the fact is, like any growing, emerging product, the more patents that come into a license don't make it less valuable to each patent holder. They make it more valuable to each patent holder because the product, the licensing product, is that much more acceptable to the market at large. More users, more royalties, more implementation, and therefore more success.

When they come in, they are added at no additional royalty during the current term of the license. MPEG-4 License, who owns these creatures that we're talking about? Who owns these patents that have been found essential by an independent patent expert? This is the current list. There are others in the evaluation pipeline. I'm not at liberty to say whether they own a central property or not.

The balls and strikes, as we call it, are called by an independent umpire. That will determine the extent to which other patent owners are included. But currently, there are 20 companies. Their promise to MPEG LA, and by implication to you, is that all of their essential intellectual property will be included.

That's the list, and of course it's also available on our website, in this case, mpegla.com. and then go to the MPEG-4 button which appears below, MPEG-4 visual button which appears below, and they will be arrayed there as well, as will the current portfolio of essential patents that they own. This program is new.

So, just like in the MPEG-2 program, at the initial part, the numbers of patents are fewer. But we have every reason to believe that with this many patent holders, who are known for owning patents worldwide, that it will increase substantially over the term of the program. We are still only in our first eight months of offering the license.

The license has been called variously complex. I'm trying to prove that that is not so. This is what you need to know about the license on one slide. And by the way, let me speak to the complexity before we go to this. What is perceived as complexity, well, first of all, licensing is a--tends to be a one-on-one discussion in education.

It's our business. And I don't mean it's our business like you can't get into it. I mean, it's our business to deal with our customers on a daily basis, which we do. We probably respond to, I mean, I haven't taken a recent estimate, but it could be as many as 1,000 emails a week asking particular questions about this license and our other licenses.

And people share with us information about their specific implementations and their specific business models, and we work with them to understand how the license will apply to them. In some cases, there may be some quirks, and we try to work with them to make the license fit within the limits of our authority.

When we get a situation where we believe, and by the way, we're fairly inflexible in terms of, because the whole key here is to have a non-discriminatory license. So we don't make separate deals with anybody. We have to assure ourselves that the same license will be applied on a non-discriminatory basis to everyone.

So when we answer these quirky implementation questions, we're very careful to stick to the absolute principles of the license. And we're very mindful not to do anything for one that we wouldn't do for everybody. So what we'll do for one, we would do for everybody. And these questions... Sometimes tax that consistency.

We have to be very careful. And we take that as a very strong creed for us that we must be very careful, and we are. If we see, though, that there's something developing in the marketplace that is not just a one-of, that is widespread, and that is really bothering users. It's something often that we will take to the patent holders and discuss as a possibility for a need to change the license. MPEG-2, we made a significant change early on. Actually, it took us a couple years to accommodate the DVD/DISC market.

When we went out, we found that the royalties which the patent holders had determined were frankly not ready for prime time when it came to enlisting disk replicators to the license. And we worked with some major disk replicators to understand their business model more thoroughly, recommended a change to the patent holders, which was approved, and then made those changes available to the market at large. And now today we have what we estimate to be 85% compliance by the replication industry. So we are not adverse to change.

But on the other hand, licenses like this have to be administered in a fairly, well, absolute non-discriminatory manner. And it is the only product we offer. We're not going to make different licenses for different parties. So, long way of saying, what about this complexity issue? Complexity came from a very well-intentioned thing, which was to try to accommodate different business models in this license where the patent holders thought and still believe there are significant differences in the way people do business.

So it does have different gradations, different models for Internet and mobile and what we call unique use, which refers to cable and satellite. and for what we call stored video, which refers to packaged media or electronic transmissions of what I would call DVD equivalent videos. And we work with some content providers to try to understand their business models before issuing the license in order to make that happen.

Now this isn't, in all cases, ready to wear material, as they say. Not ready, off the shelf, go out to the market. We've taken it off the shelf, and the good news is that people talk to us. They tell us their business models, and we work with them very carefully. Recently, once again, I don't know if you've seen this, but there's been news of concern among Japanese broadcasters who wish to do a mobile broadcast service, mobile service.

And there's been some concern among mobile content providers. And we are working with them very carefully. And we are finding that in many cases, the distance between us was really to be educated on the terms of the license and how they would apply to their business model. And we believe that those objections will be overcome.

Not unlike any sales business, you have to meet the user and overcome the objections. That's the test here. One size fits all, but it may not answer all questions. But if it's done right, it can be adjusted for change, or it can be worked to work with individual business models. All right, the summary. Here's the way the license works.

Generally in patent rights, you have what are called a right to make, a right to sell, and a right to use. and I'm sure people can divide them in other ways, but I'm just keeping it simple. Make, sell and use. So the way the license is constructed for MPEG-4 Visual is that manufacturers pay royalties for the right to make and sell decoders and encoders.

That responsibility falls upon them. Who is a manufacturer? A manufacturer would be the end supplier of a product. a manufacturer of a DVD player, the one whose brand name appears on it. In the internet and PC area, it would be the fully functioning, the manufacturer of the fully functioning product.

It would be someone who provides the fully functioning software that then gets downloaded, for example, to a PC for further use. They pay royalties for the right to make and sell the decoders and encoders. Now what's included in that right to make and sell, beyond the right to just simply manufacture it and sell it, is that the decoder and encoder may be used for personal use. No limitation.

And also, it may be used for what we call end-user to end-user communications. Those are all covered as part of the manufacturer's license. So if an encoder and a decoder appear in a handset, cell phone, mobile phone, The encoders and decoders may be used for people to send video to each other and to communicate with each other on a personal, private level.

No additional royalty is required for doing that. That is part of the manufacturer's license. Similarly, on a PC. Whether it doesn't have to be mobile, it could be on a PC. End-user to end-user communications are included. If people are IMing each other, videos, personal videos, family videos, whatever it might be, they're making some video creation, that's included in the license that the manufacturer pays.

Even though a mobile provider may collect money on a minute-by-minute basis for the time that the end users spend online, While they make their end-user to end-user personal communications, that is still covered under this manufacturer's license. No additional royalty. That's not considered the remuneration, which we're going to talk about in a moment.

Video providers, third bullet, do not pay royalties unless MPEG-4 visual material is provided for remuneration. What does that mean? Basically, all use is okay. At the point where you are remunerated as a video provider for offering the video, then an additional royalty is paid. The remuneration may be direct or indirect. It can be a subscription, it could be a per minute charge for video that's offered generally to the public.

It could be advertising supported, but it does not include self-advertising or promotion. So, Apple puts MPEG-4 video on its website in order to promote its self-image and its products and draw you to the website with items of value. They're not paid for including that video. They just offer it as a service to you and as entertainment for you.

That's part of self-advertising and promotion. Not remuneration, no royalty, even though it may sell their own products. If the only remuneration is that from selling their own products, that's okay. That's included. Let me put it this way, that gets into technicality. There is no additional royalty required, and the patent holders are not looking to bring legal actions against people who engage in that activity.

Fourth bullet, if MPEG-4 visual material is provided for remuneration, then video providers pay royalties for the right to use the decoders and encoders. So this is the only case where a use right, remember make, sell, and use. And the make and sell is included in the manufacturer's royalty.

Use is included in the manufacturer's royalty for certain limited purposes, including personal use and end-user to end-user communications. But where the video provider goes off and offers its video for remuneration, then there is a separate use right required. And that's where the video provider pays. That's the license in a nutshell.

Manufacturers pay in the model royalties for the right to make and sell. It includes certain uses. If a video provider uses the encoders and decoders for remuneration, additional royalties are paid. Otherwise, no. Okay, why is it structured this way? What does this have to do with the real world flow of commerce? Why is it different from other licenses that patent holders have engaged in over the years? And it is different in some respects, certainly, as you can see.

This reflects the attempt by the patent holders to align with what we call the real-world flow of MPEG-4 commerce. It was their belief that they put too heavy of a royalty on the manufacturer. More than a nominal royalty on the manufacturer, that it would chill the market and would not allow the promoters of this technology to offer the technology widely. So they did not want to put it all there.

And in many cases, especially with MPEG-4, which of course is in QuickTime, they The technology is such that decoders and encoders will often be given away for free. They'll often be given out widely in order to get the most massive distribution for the technology. So the patent holders wanted to assess the royalties mostly where value is received.

In other words, those who can afford to pay should pay. And if the manufacturer is not realizing the bulk of the revenue here, the entire burden should not be on them. It should be assessed where a video provider who is making money can afford to build the royalty charge into their business model. That's the concept. So, in this case, royalty follows revenue. Royalty follows remuneration in terms of the additional royalty that's required over and above what I think is a very nominal and reasonable royalty in the marketplace for the manufacturer.

Also, the license has as an objective, as I said earlier, and this is the source of some of the complexity which people perceive, that it is to be used across different business models. And in certain cases, different business models require different royalty formations. For example, in the case of what we call unique use, which is a cable or satellite, traditional cable or satellite, conditionally accessed communication.

There is a use royalty that is paid one time upfront. It's equivalent to about five years' worth of royalties that would be paid by an internet or mobile provider over the course of five years. But it's a one-time upfront payment of $1.25. We'll get to those particulars in a minute.

As a result of the market discussion that took place following the QuickTime conference, the patent holders also understood the need to provide caps. And in some cases, there was not a direct connection between the amount of usage and the revenue realized. In fact, there might be a great disconnect between the two. So they said, okay, we should provide caps so that there's a limitation on any royalty burden that may attach to a video provider. And so when we look further at the details here, we'll see that there are caps built into this model.

Similarly, the patent holders understood, at MPEG LA's direction, that often the biggest development in this area starts with early stage adopters, not unlike yourselves, who use this technology in ingenious ways, in clever, creative ways that would not be possible, frankly, in the halls of a big company. Some of you may be from big companies, my apologies.

But often the best way to get a technology to be widely used and widely implemented and to foster many creativity -- many creative solutions is to get it in the hands of many users and have them develop and show the way. So into this license are built threshold levels below which no royalties are payable at all.

In the manufacturer's case, for example, there are no royalties for the first 50,000 decoders and first 50,000 encoders each year. In the video provider case, if someone has a service that goes out to 50,000 or fewer subscribers in a year, there is no royalty charge. So even though you may be remunerated, for the first 50,000 subscribers, any remuneration you receive is not charged a royalty. This was built into this also. And the hope, of course, is that small users become large users. But initially, we should minimize the impact so that the market can build.

And finally, you'll see in the detail that there are some alternative royalty options, some requiring no royalty reports at all. Again, to minimize the burden on users from having to fill out very difficult forms. Well, actually they're not very difficult, but to have to even report and record usage when their usage is at a very low level.

And in some cases, for big companies, instead of having to catch all that data, they have the option of a lump sum payment so they don't have to actually record things on a minute-by-minute basis. Okay, let's look at the manufacturer's part of the license first, down to the detail level now.

I said that a manufacturer pays royalties for the right to make and sell a decoder, an encoder. It's the end product in most cases. It's the fully functioning product in the Internet and PC case. We talked about the fact that there are different business models that are encompassed by the license, which may be the source of some people's feeling that there's some complexity that is difficult to swallow.

This is an example of where a decoder or encoder software is provided for a computer. The manufacturer who would pay the royalty here would be the company that provides the software, the fully functioning software that is downloaded to the computer. So just because I show a computer there, it was difficult for me to make a picture of software. So I used a computer instead, which is utilizing this software.

And indicated are several, four out of the five, business models covered by this license. And they're indicated to show one thing. If the decoder and encoder is usable across all four of those business models, or three, or two, or one, and all of them are sub-licensed in one decoder, the manufacturer does not pay the royalty four times. The manufacturer pays the royalty once. So for a single licensed product, there is only one royalty, and that royalty on a decoder is 25 cents. And that royalty on an encoder is 25 cents.

And the one product, as I just said, can be licensed across one or more of the sublicense categories which address different business models. Once again, it's to encourage manufacturers to make this stuff, not get into too much complication when it comes to limitations on the use, potential use, of their decoders and encoders. The decoder royalties at 25 cents per unit and the encoder royalties at 25 cents per unit are each subject to a $1 million annual limitation.

So a company making decoders and encoders would never pay more than $2 million annually for the right to produce these decoders and encoders. The first 50,000 units of decoders, there is no royalty at all. and the first 50,000 units of encoders, there is no royalty at all. That's available, by the way, just to be clear for the record. That's available to one legal entity in an enterprise. So we don't let, if there's a conglomerate and there's multiple legal entities, the threshold's available only once to one legal entity each year.

But for most people, this will cover the issue because the manufacturing is generally done in a central place or under only one legal entity. And when that's done, the first 50,000 units, both of decoders and encoders, are exempt from royalty. The manufacturer still signs the license, but they report zero royalty on the first 50,000 units of each.

That's the manufacturer. Just to show you the manufacturer in a handset setting. Once again, the market is changing rapidly, so PCs and handsets and PDAs all start to merge. But for sake of understanding, it's the same result. A handset might receive internet video, it might receive mobile video. The decoder that's in there is used for both.

So only one royalty applies to the decoder, only one royalty applies to the encoder, 25 cents each. Again, the million dollar caps for decoder, million dollar caps for encoders annually apply, and the 50,000 unit thresholds also apply, below which no royalties are payable. This illustration also shows that the right, the left, the right, the left, the right, the

Let's look at the video provider situation.

Now remember, this is only a situation where somebody is making money offering the MPEG-4 video. Otherwise, no royalties are payable under this license. So this... License, this illustration, excuse me, shows different examples, different sources of video being provided to a computer. and in each case, it is the provider of that video, if they are charging remuneration, if they are being remunerated, who would pay the royalties.

There are three choices for them. They can pay 25 cents per subscriber per year. So if they have a subscriber for one day or if they have a subscriber for one year, 25 cents for the subscriber. It doesn't matter how little or much they use the service in a period of a year. One subscriber is charged one royalty to the video provider.

Alternatively, they may meter it based upon actual usage. And this long set of numbers comes out to about two cents an hour for each use. And the third alternative, if they want to avoid all reporting and they know they're going to have enormous usage and enormous remuneration, they can choose a lump sum option. which is the $1 million annual fee for their video provider service per legal entity. Again, this is subject to a 50,000 annual subscriber threshold, below which no royalties are paid.

And you see the same example played out in the handset situation. It does not differ. Whether it's mobile or internet, the consequences are the same. As I may have mentioned earlier, unique use cable satellite is subject to a paid up amount per decoder and encoder, which allows use in that connection at $1.25 per unit.

Stored video is a separate category. Stored video, when we're talking stored video, we're normally talking a DVD disk, or DVD disk-like, I should say. Physical media with data on it. Or an electronic download or electronic streaming of something that is stored or storable or usable for a minimum of 20 plays in 365 days. Something that is really permanent to the user and resides on its desktop and is sold, important, sold on a title-by-title basis. So if it's not sold on a title-by-title basis, then it's not subject to the stored video rates.

And the idea here is simply that where it is made available, sold on a title-by-title basis, The transaction, the sale of that stored video is able to carry the royalty in that transaction because it stands on its own and is basically economically independent as a unit of commerce. But it must meet those qualifications to be considered stored video. Otherwise, it's part of the Internet and mobile video coverage. Finally, as we've said before, everybody pays the same royalty rates. So a big company is not treated better than a small company.

Patent holder is not treated better than a non-patent holder user. Everybody's treated the same. Licensee data is protected as confidential. This is important. It may not be so important to the users in this room, but it's important to people like Apple and others who do not want, I think in most cases, their sales information shared with the patent holders in this program. We don't do that. We maintain the confidentiality of that information. When royalties are paid out to them, it is paid out in the aggregate. It is not broken down by user, by licensee, and so they do not know the specific sales information of particular licensees.

And finally, there's what we call a grant-back provision. It's not a grant-back to us. It's a grant-back for the benefit of any licensee. It would be unfair if a licensee took advantage of this license But itself held an essential patent, got all the rights on this license, and then itself held an essential patent which it denied to every other licensee or every other licensor who had made its intellectual property available in this arrangement.

So what the license requires is that if you take this license, Then you must also license any essential intellectual property that you own to all other licensees and licensors on fair and reasonable terms. So it forces the marketplace to collectively look and take advantage of and be able to use any essential intellectual property which may be out there.

I would note one other thing. In order to spur early adoption, the license has also provided for a grace period, so no royalties would be payable on products through the end of this year. December 31, 2003. Give people a chance to get used to it, get people a chance to understand the license terms and how they apply and gear up for reporting and so forth. And that's an important element as well.