Chinese set-top box makers, MPEG LA face off over patent fees

Shenzhen, China — Chinese makers of digital set-top boxes are on a collision course with MPEG-2 patent owners over unpaid royalties, setting the stage for what will likely be intense haggling in coming months.

As Chinese set-top box makers ramp up production, the MPEG Licensing Agency is warning them either to pay $2.50 per set-top box or face legal action. Chinese companies are cringing at that number, saying it will wipe out most of their profit. They are countering with offers as low as 30 cents per box.

MPEG LA isn't in the mood to dicker. “We do not make concessions to one part of the world vs. another, especially because products find themselves all over the world and coming from all kinds of places,” said Larry Horn, president of MPEG LA.

MPEG LA is expected to meet with the China Video Industry Association in the next few weeks. Although the license fee is non-negotiable, MPEG LA has wiggle room on the payment terms for money already owed, Horn said. He could not say when a resolution might be reached.

The stakes are high. China is not only a major exporter of digital set-top boxes, but it is also one of the fastest-growing markets for digital terrestrial and cable TV. ABI Research released a report this week predicting China will be a leader in shipments, cranking out 75 million digital cable and 9 million IP TV boxes by 2012.

“The Asia-Pacific pay-TV industry still has considerable room for growth, especially in countries like China and India, where the base of potential customers is huge, but there is still relatively low pay-TV and digital penetration,” wrote Serene Fong, ABI's broadband research analyst.

Fong believes China will also be a leader in subscriber growth rates. Growing affluence in cities such as Shanghai and Hangzhou is leading consumers to spend more on TV and video services. Consumers are also eyeing technologically advanced set-top boxes for viewing digital broadcasts over traditional analog TV sets and accessing interactive services.

China's digital cable market is already nearing 13 million subscribers. “We think the market will probably double this year,” said Bob Krysiak, the president of Greater China for STMicro- electronics.

Broadcasts usually employ MPEG-2 technology. High-definition broadcasting isn't popular in China, so MPEG-4/H.264 isn't widely deployed.

Chinese system manufacturers have long resisted the power of licensing agencies like MPEG LA, a consortium of patent holders such as Apple Computer Inc. and Sun Microsystems Inc. that charge a royalty of $2.50 per system.

“Since Chinese companies did use their technology [in set-top boxes], it's reasonable for the MPEG-2 organization to charge the fee, although they charge too much,” said Bai Huang, a manager in the digital networking unit of Konka, one of China's top consumer electronics makers. Konka only recently signed a license, according to MPEG LA.

MPEG LA and patent holders have had trouble collecting royalties from Chinese makers of DVD players, which claim the combined fees of $15 to $20 per system are too high. That tussle dragged on for years, fanning the flames of discontent in China over its reliance on foreign technology. It also became a catalyst to accelerate local standards development.

–Cai Yan in Shanghai contributed to this story.

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