Goodbye to the Video Store (continued 4/5)

The terms of those agreements, however, are still up in the air. Initially, MPEG LA introduced a scheme that would require companies employing MPEG-4 in their technology to pay a 25 cents royalty for every machine with a copy of the codec incorporated, plus a “per use” fee of two cents an hour. In other words, if a viewer watched a video encoded in MPEG-4 from CNN's website, the news network would have to pay patent holders a royalty. Although the proposed amounts were small, MPEG LA made no allowance for differing content types, free or otherwise. If, for example, tens of millions of people suddenly began downloading a two-minute video clip of the World Trade Centre collapse, the ensuing royalties would bankrupt CNN within days.

Following an uproar from the industry, MPEG LA reworked its royalty arrangements. In July 2002, Mr Horn announced a modified structure that places annual caps on certain types of content usage. Other features include an option for media firms and electronics manufacturers to pay a one-time licensing fee, a per-subscriber charge, or a pay-by-the-minute rate. The last would value a downloaded copy of “Black Hawk Down” at about five cents.

Many in the industry believe that MPEG LA's final licensing terms could still suffocate innovation. Apple was forced to delay the release of the latest version of its QuickTime player (version 6.0), which incorporates MPEG-4. Initially, it declared the licensing terms too onerous. Apple relented once MPEG LA revised its terms. Douglas McIntyre, head of On2 Technologies, a software company based in New York that has developed a codec called VP5, has been one of the most vocal critics. His company recently posted a tome online, criticising MPEG= LA's strategy point by point. “It is a move by a few very large companies to dominate a market and fix prices,” says On2.

Mr McIntyre and others are counting on MPEG LA's draconian licensing rules to steer content creators and electronics firms towards an array of other video codecs. Anybody in the business of using video compression is bound to consider MPEG-4 as well as codecs from RealNetworks, Microsoft and Apple, admits Mr McIntyre. But he points out that other codecs work as well, if not better, and come with fewer licensing strings attached.

On2's own VP5 technology is one of several emerging codecs that provide potential users with a serious alternative. Streaming at 400 kilobits per second, about half the speed of a DSL connection, VP5-encoded video looks almost as good as images from a DVD. The company guards its compression technique jealously, but Mr McIntyre attributes most of the work to pre- and post-processing tools. These are methods for manipulating digital files before the video is compressed and after it is decoded. To that end, VP5 scrutinises data rates, making on-the-fly adjustments to image softness, colour tone, and pixel size. But with an accumulated deficit of more than $100m, On2 has been seeking new partners. It recently announced a deal to use its codec in chips for set-top boxes and mobile telephones produced by Texas Instruments.

Then there is Jordan Greenhall, a former executive of MP3.com, who amassed a wealth of experience as a broker of “content deals” for that renowned audio portal. Mr Greenhall now heads DivXNetworks of San Diego, California, which is marketing a video codec that aims to reproduce the experience of being in a cinema. DivX began as a cult movement when Jerome Rota, a computing and digital-video guru, wrote the codec in 1999 to help him crunch graphics. Word spread, and soon DivX video appeared Napster-like on file-sharing networks around the world. So far, more than 12m copies of DivX have been downloaded, and thousands of (mostly pirated) full-length feature films, television shows, music videos, and pornographic movies are circulating the Internet encoded in this popular format.