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Contents

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Forward: Legal Framework ....................................................................................... ....... .. 1
Application of the Top-Down Approach for Assessing FRAND Royalty Rates .............................. .. ..............

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Apportionment of the Aggregate Royalty Burden ................................................................. .............. .........1
Negotiations and Counteroffers ................................................................................................. ............. .......2

I. Introduction and Overview of Economic Analyses ............................... .......... ............ 3

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II. Economic Framework for Assessing FRAND Royalty Rates for HEVC SEPs ...................... 6

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III. Assessment of the Aggregate Royalty Burden for HEVC Using AVC/H.264 as a FRAND
Benchmark .............................................................. ...... ....... .................................. 9
A. Background .......................................................... ..... . ....................................................9

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HEVC/H.265...................................................................... .............. ............................................................9
AVC/H.264 ................................................................................. .......................................................................9
While HEVC Offers Comparable Efficiency Gains to H.264, the Val e of Compression Has Declined Over Time
as Broadband and Storage Costs Have Fallen ..... ...... .... ...........................................................................10
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B. MPEG LA H.264 Rates as a Comparable ...... .... ................................................................. 13
H.264 Represents a Comparable Tech ology Who e Pool Rates Have Been Accepted as a Basis for
Determining FRAND Royalty Rates ............... ...............................................................................................13
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H.264 Rate Structure and Effective Ro alty Rat s .............................................................................................14

Comparison to Effective Royalty Rates Us d in Microsoft v. Motorola .............................................................16

C. Calculation of the Range of Adjusted Aggregate Rates for HEVC Using H.264 Rates ................ 17
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Example Calculation of a Adjusted Aggregate Royalty Rate for HEVC Based on Improvements Relative to
H.264 ............. .......... ..... ...........................................................................................................................17
Explanation o Methodo gy..............................................................................................................................18
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Scenario 1: Val e of Imp oved Efficiency, Holding Video Quality Constant ......................................................20
Scenario 2: Value of Improved Efficiency for Improved Quality ........................................................................22
Scenari 3: Value of Reduced Mobile Data Usage .............................................................................................25
Scenario 4 Value of Increased Storage on Mobile Devices ...............................................................................27
Summary of HEVC Adjusted Rates .....................................................................................................................29
Consideration of Adjusted Caps .........................................................................................................................29
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IV. Effect of Alternative Standards on a FRAND Royalty Rate for HEVC SEPs ..................... 31
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A. Competing Codecs ............................................................................................................... 31

VP9 .....................................................................................................................................................................31
AV1 .....................................................................................................................................................................32
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VVC .....................................................................................................................................................................33

B. Effect of Alternative Standards on FRAND Royalty Rates for HEVC SEPs ................................. 34
Aggregate Royalty Burden for the HEVC Standard A Preliminary Economic Report for Unified Patents, January 2019
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Appendix............................................................................................................................ 38

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Effective rates for handset manufacturers ............................................................................................. ...... 8
Effective rates for streaming device manufacturers .......................................................................... ........ .40
Effective rates for connected TV manufacturers ......................................................................... .. .............42

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Aggregate Royalty Burden for the HEVC Standard A Preliminary Economic Report for Unified Patents, January 2019
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List of Tables

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Table 1. Expected Long-Run Aggregate Royalty Rates for H.264 .................................. ... ...
Table 2. Range of Adjusted Aggregate Rates for HEVC SEPs ................................. ... ........... 5

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Table 3. Expected Long-Run Aggregate Royalty Rates for H.264 ......................... ............ . 16
Table 4. Effective Rates for H.264 from Microsoft v. Motorola.................... ........... ........... 17

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Table 5. Scenario 1: Adjustment Factor, Holding Quality Constant (Snapshot, H.264 in 2008
v. HEVC in 2018)............................................................. ...... ......... ....................... 21

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Table 6. Scenario 1: HEVC Adjusted Rates by Device ......... ..... ....... ................................... 22
Table 7. Scenario 2: Adjustment Factor, Improved Quality (Snapshot, H.264 in 2008 v. HEVC

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in 2018) .................................................... . ........... ............................................... 24
Table 8. Scenario 2: HEVC Adjusted Rates by Device ...... ..................................................... 25
Table 9. Scenario 3: Adjustment Factor, Mobile Dat Savings (Snapshot, H.264 in 2008 v.
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HEVC in 2018) ............................. ...... .. ................................................................ 27
Table 10. Scenario 4: Adjustment Factor, Storage Costs (Snapshot, H.264 in 2008 v. HEVC in
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2018) ............................... ......... ............................................................................... 28

Table 11. Range of HEVC Adjusted Rates by Device .................................................................. 29
Table 12. Summary of HEVC Adj ted Enterprise Caps ............................................................. 30
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Table 13. Estimated 2018 Royalty Rates for the H.264 Standard – Handsets .......................... 39
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Table 14. Estimated 2018 Royalty Rates for the H.264 Standard – Streaming Devices ........... 41
Table 15. Estimated 2018 Royalty Rates for the H.264 Standard – Connected TVs ................. 42
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List of Figures

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Figure 1. Both HEVC and H.264 Targeted a 50% Bitrate Savings .................................... ... . 10
Figure 2. Both HEVC and H.264 Promised to Provide 2x More Storage ................. ... ......... 11

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Figure 3. Decline in Average US Broadband Prices, 2008 to 2018 ......................... ............ . 12
Figure 4. Decline in Average Storage Cost, 2000 to 2018............................... ........... ........... 13

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Figure 5. Development Timeline for H.264 and HEVC...................... ....... ........................ 19

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Figure 6. Usage by Codec, 2014-2017 ............................................ ...... ..... ......................... 36

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Forward: Legal Framework

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This forward provides an overview of some of the legal and practical aspects of FRAND that may a ise in the

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context of licensing SEPs to the HEVC/H.265 Standard. This forward is separate from the economic nalysis of
the rest of the report.

Application of the Top-Down Approach for Assessing FRAND Royalty Rates

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The purpose of this report is to provide guidance to SEP holders and implemente s fo an in ial economic basis
for the total aggregate royalty burden for HEVC SEPs that may be used in a “top down approach. The top-down

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approach has been applied by courts to calculate FRAND royalty rates in In re In ovatio, TCL v. Ericsson, and
Unwired Planet v. Huawei. A top-down approach therefore provides one bas s upo which to make licensing
offers which may be seen as Fair and Reasonable. The TCL and U wire Plan t cases also confirmed using
“comparable” licenses as another potential approach to determining a FRAND rate. However, prior licenses may

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include “hold-up” value and thus must be used with caution depending upon the circumstances surrounding the
license. The legal framework governing SEPs differs in each c untry, so ntities should consult legal counsel in
the relevant jurisdiction(s) with regard to any specific license nego iations or disputes.

This report provides a framework for assessing the aggregate royalty burden for HEVC, as well as an initial
estimate of the range of values, which may depend on he use case and other economic factors. Users may want
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to use the economic framework laid out in this rep t to tailor their offers, or alternatively, could adopt the specific
figures in this report as one input for making a FRAN offer.

At its most basic level, a top-down appro ch takes n aggregate royalty burden for all SEPs to a standard, which
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is then apportioned among SEP holders. Th s, an offer may begin by outlining the basis for the aggregate royalty
burden and the apportionment of hat rate to an individual SEP or SEP portfolio. Additional factors should be
taken into account when making FRAND offers and licensees should act in good faith during licensing
negotiations.
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Apportionment of the Aggrega e Royalty Burden

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While this report does not specifically address the apportionment of the aggregate royalty burden, such
apportionment may depend on the specific SEP holder’s SEP portfolio, such as the size of the SEP holder’s
portfolio, th quality of the technologies in its portfolio, which includes both the validity, infringement and
essentiality of he patents as well as the economic value of the patents in the portfolio, or its regional portfolio
strength as it rela es to a prospective licensees sales:

 Size of the Licensor’s Portfolio. When apportioning the total aggregate royalty burden (“ARB”) for any
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pecific licensor, one factor to be considered is the size of the licensors SEP portfolio as compared to
the total number of patents that are essential to the HEVC standard. See, e.g., TCL v. Ericsson.
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Typically, a patent landscape, e.g. Unified Patents' online HEVC landscape, is required to do this
apportionment.

 Essentiality of the Portfolio. While highly intuitive, only actually essential patents will normally
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contribute to the value of the licensor’s portfolio. If a patent is not essential, that necessarily means that
there is a way to implement the standard without infringing the patent. In the 2G, 3G, and 4G space, we

Aggregate Royalty Burden for the HEVC Standard A Preliminary Economic Report for Unified Patents, January 2019
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know that the majority of patents declared to the SSO are not actually essential. See, e.g., TCL v.

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Ericsson.

 Quality of Portfolio. Another factor to consider is the quality of the patents in the licens r s portf lio.
This could include both an analysis of alternative technologies that were available to the patent at th

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time of standardization or alternative technologies that were actually proposed during the ad ption of
the standard. See, e.g., In re Innovatio. If the patents in the portfolio have good non-infr nging
alternatives, this would suggest they have less or no value depending on the alternative This type of

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analysis ensures that the licensor is not capturing the value of the standard but nly the ex ante value
of the patented technology. Similarly, the validity of the patents in the portfolio an be na yzed as invalid
patents should not have any value as they do not add to the state of th art

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 Geographic Strength of the Portfolio. The geographic or regional s rengt the licensor’s portfolio
can also be a factor to consider when assessing the strength of a ortfol For example, if the licensor
has ten valid and essential patents in the United States, but onl ne valid and enforceable patent in

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China, one would expect a FRAND licensing rate to be les in China that in the United States. For
example, in TCL v. Ericsson the court determined vari us different “regional” rates based on differences
in the size of Ericsson’s portfolio in the United States, Eu pe and the ROW.

Negotiations and Counteroffers

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Potential licensees should also act in good-faith nd, in general, timely respond to licensors. At least in certain
jurisdictions (e.g., Europe), there are times when a lic nsor must timely make a counteroffer in order to be viewed
as a willing licensee. For example, on factor o con ider during negotiations is what steps to take during
negotiations to avoid an injunction in Europe. Huawei v. ZTE is the seminal case in Europe that provides
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guidelines for FRAND license negotiations nd when an injunction can be obtained in a SEP infringement action.
In November 2014, the ECJ co cluded that efore seeking an injunction, an SEP holder must (1) alert the
infringer to the infringement and (2) provide a written license offer on FRAND terms. The ECJ held that an alleged
infringer which has not acc pted h ffer made by an SEP holder may invoke the abusive nature of an action
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for a prohibitory injunction or f r the recall of products only if it has submitted in writing, a specific counteroffer
on FRAND terms.
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Ultimately, actual l ensing negotiations will need to account for circumstances unique to the parties and
incorporate additional inf rmation that may become available during negotiations. Potential licensees should
seek the gu dance of counsel for their own specific circumstances. The economic model used in this report may
be updated to ccount for new information and assumptions.
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Aggregate Royalty Burden for the HEVC Standard A Preliminary Economic Report for Unified Patents, January 2019
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