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Lawrence Horn is like a high-tech casting director — only he won’t be saddling the world with the next “Ocean’s Twelve.” Instead, Horn scours the globe for intellectual property, finding all the patents for a given technology and lumping them together in one convenient package, called a patent pool, which his company, Denver-based MPEG LA, then licenses. It can take a lot of wooing and negotiating to get a patent pool off the ground, so it’s not surprising that Horn, 55, has an ample reserve of both frequent-flier miles and patience. Like a Hollywood epic, a pool’s payoff can be enormous. Horn, a lawyer and the company’s vice president for licensing and business development, administers MPEG LA’s most lucrative pool for a technology called MPEG-2, which covers the video compression tools that make it possible to squeeze full-length films (and all the extras) onto DVDs, stream video over the Internet, and send high-resolution television over cable lines. The 9-year-old pool consists of 650 patents from 24 holders, and has some 800 licensees — including industry giants like Apple Computer Inc. and Warner Home Video Inc. MPEG-2 has been a royalty gold mine. Each time a DVD player is sold, the pool receives $2.50 for the MPEG-2 decoder the player contains. Each time a prerecorded DVD disc is sold, the pool pockets 3 to 4 cents. These royalties are split among the patent holders in the pool, and MPEG LA takes a 10 percent cut, according to one person with knowledge of the company’s business model. Tom Cruise’s agent should have it this good. In 2004, 37 million DVD players were sold in the United States, and 1.5 billion DVDs were sold in North America, according to the Digital Entertainment Group, an industry association. That translates into over $15 million for MPEG LA’s coffers. The pool also picks up royalties from other products and services — such as on-demand television or computer DVD drives — that use the MPEG-2 patents. Yet even as the MPEG-2 owners rake in the royalties, patent pools still can’t seem to shake their reputation as a necessary evil. No patent holder goes into a pool completely happy about the idea: Grouping one’s patents with everyone else’s patents, and licensing them en masse according to non-negotiable terms means giving up a lot of the very control that a patent confers. Sharing IP can bring other forms of trouble, too, particularly with antitrust regulators. Pools can be structured to fix prices, stifle competition, discourage innovation, or divide markets. Yet increasingly, going it alone is a luxury companies just don’t have. More and more products are built according to standards that incorporate bits and pieces of IP owned by many different companies — so many companies that getting all the necessary licenses in place can be a difficult task. If the task is too difficult, a new technology may never get off the ground, leaving IP owners with patents that no one wants to license. That leaves IP owners with a tough decision: They can take a chance with a pool, hopefully spurring a market for their IP; or they can go it alone and possibly never see that market materialize. MPEG LA has bet its whole business that companies won’t — or can’t — go it alone, and in the standards-based world of video compression, it’s been a savvy wager. But as MPEG LA tries to bring its patent pool model to new areas, it’s finding the going a little rougher. Its latest pool revolves around digital rights management, the technology used to ensure that digital content (think music downloads) is used only in ways its owner wants it used (think no copying). The pool launched in January after two years of development and a lot of fine tuning. But it is still very much a work in progress. And the progress may be coming slower than MPEG LA would like. Bumps in the road are a relatively new thing for MPEG LA. In the past it has not only been able to get companies to share IP, but also share it in ways that haven’t raised flags at the antitrust division of the Department of Justice. Pools have been around since the mid-19th century, and not all of them have been as lucky. Time and again, pools have been shut down for bad behavior. As recently as 1998, the Federal Trade Commission barred a pool consisting of the only two companies marketing FDA-approved equipment for a particular type of eye surgery. Summit Technology Inc. and VISX Inc. had structured their pool so that they were the only licensees, and they required a $250 payment for every surgical procedure — in effect fixing a $250 floor on the surgeries. Since MPEG-2 launched in 1997, MPEG LA has formed six pools, all related in one way or another to video. One pool is based on a more advanced compression technology, called MPEG-4; another revolves around the IEEE 1394 standard — commonly known as FireWire — which allows digital devices to pass data back and forth at high speeds (it’s what enables Apple’s iPod to pull thousands of songs off a computer in a matter of minutes). The FireWire pool has 341 licensees, and charges a royalty of 25 cents for every product that uses one or more of the pooled patents. The 4.4 million iPods Apple sold in its fiscal year 2004 put $1.1 million in the 1394 pool’s wallet — and that’s not counting all the camcorders, external hard disks, and other devices that use the standard. Given the success of MPEG LA’s pools, it’s little wonder that Horn is on the prowl for more. “We’re always trying to expand the use of the model,” says Horn. “I’m speaking at all sorts of world forums, looking at all sorts of industries.” MPEG LA isn’t the only company looking to develop pools. Via Licensing Corp., a spin-off from Dolby Laboratories Inc., has already issued patent calls for nine different pools (the company, which is in a quiet period, declined to comment for this story). Like MPEG LA, Via Licensing has focused largely on technology standards related to compression. Branching out beyond the pool-friendly world of compression technology hasn’t been easy. Since 1997, Horn has been touting biotechnology as the next big area for patent pools. He’s even published a paper on the subject. It would seem an odd industry to target, and even Horn concedes that “the mind-set is not exactly to pool.” Biotech, after all, isn’t big on common standards, but rather on proprietary technology. For a while, however, it looked like Horn might have been onto something. Concerns that fragments of DNA, sequenced by the Human Genome Project, would be patented by private companies led researchers to fear that they’d need a slew of licenses to develop diagnostic tests and drugs. Pools could simplify the process. But the sequencing patents didn’t come to pass. And neither did the pools. “It’s a challenge, and we haven’t quite broken through,” says Horn. In the past decade pools have become something like the licensing version of Donald Trump: increasingly popular, even if they still seem a bit suspect. This rebirth owes much to a set of guidelines released by the FTC and the Department of Justice’s antitrust division in 1995, which spelled out the “significant pro-competitive effects” of carefully crafted (i.e., well-behaved) pools. “Particularly in fields like software and telecommunications, where standardization is important, you need rights to a lot of different technologies, which means you need rights to a lot of different patents,” says Tom Boeder, the head of the commercial litigation group and an antitrust specialist at Perkins Coie, in Seattle. “If a pool contains complementary patents, that’s almost always viewed as a plus.” MPEG LA was the first company to exploit this kinder, gentler take on patent pools. The company was the brainchild of Baryn Futa, who was the chief operating officer at Cable Television Laboratories in the early 1990s when he was approached by a committee known as the Motion Pictures Experts Group, or MPEG, which was working on a new technical standard for data compression. The committee didn’t know what to do about the IP, which was held by many different companies — a complication that could bog down widespread acceptance of the standard. Futa was asked to come up with a solution. The idea he hit on was pooling. With funding from Cable Television Laboratories, Futa hired a patent lawyer, Kenneth Rubenstein of Proskauer Rose, to look at the hundreds of patents claiming some relation to MPEG-2 and pick the ones essential to implementing the standard. There turned out to be 100, owned by nine different entities: Columbia University, Fujitsu Limited, General Instrument Corp., Lucent Technologies Inc., Matsushita Electric Industrial Co. Ltd., Mitsubishi Electric Corp., Philips Electronics N.V., Scientific-Atlanta Inc., and Sony Corp. Over the next few years, Futa pitched the pool concept to the patent owners, and locked up agreements (the pool has since expanded as new MPEG-2 patents have been issued and added). He also drew up a plan for how the pool would work — emphasizing that it would be open to anyone, that patent holders and licensees were still free to skip the group license and enter into their own agreements with each other, that an independent evaluator — Rubenstein — had decided which patents were essential to the pool, and that licensees would all pay the same royalties. Futa then submitted his plan to the Department of Justice, asking for a business review letter, which he received in July 1997. The letter suggested — but did not guarantee — that the antitrust division would take no enforcement actions against the MPEG-2 pool. “If someone sues us on antitrust, we show the letter and we have a good-faith reliance on the DOJ’s opinion,” says Horn. “It shifts the burden of proof to the other side.” With the business review letter in hand, Futa launched the pool, and MPEG LA. The patent holders, along with CableLabs, contributed the equity. Futa then hired Horn to head up the licensing program. The two had known each other since the 1980s, when Horn was the general counsel of the Public Broadcasting Service in Washington, D.C., and Futa was the general counsel of an industry trade group, the National Association of Public Television Stations. Futa, Horn and several other employees also own a small ownership stake in the company. (MPEG LA hired its first general counsel, Kate Whyte, in July 2004, and still turns to Rubenstein and Proskauer for patent matters. For contract and litigation issues the company works with Sullivan & Cromwell.) Video compression may have been the easy part. MPEG LA is discovering that not all technologies are equally amenable to pooling. The most successful pools — the company’s own MPEG-2 pool along with two pools related to DVD technology (the DVD 6c patent pool, comprised of Hitachi Ltd., IBM Corp., Matsushita, Time Warner Inc., Toshiba Corp. and Victor Co. of Japan Ltd.; and another pool comprised of Philips, Pioneer Corp. and LG Electronics) — follow technical standards used in hardware products. Often in these cases, there are rival technologies battling for acceptance, and no one will sell any products until a standard is picked. “This is going on now with now with next-generation DVD technology,” says professor Robert Merges, director of the Berkeley Center for Law & Technology. Sony’s Blu-Ray standard is competing with a standard pitched by Philips. Digital rights management is another story. While there are emerging standards, there is also a lot of proprietary technology already in use. Since DRM is implemented in software, not hardware, a whole host of different solutions could coexist on the same PC. Microsoft uses one form of DRM in its software products; Apple uses another for its iTunes Music Store. DRM customers simply want an effective way to lock up content, so it’s irrelevant to them if different types of DRM systems are incompatible. Indeed, many companies, notably Apple, have been actively opposed to any kind of interoperability. It’s better for business if a song downloaded from iTunes can play only on an iPod. So while the big DRM vendors are pushing for standards, they’re also pushing their own proprietary solutions. A pool might help expand the market, but the key DRM players are already busy licensing. InterTrust Technologies counts Microsoft among its licensees; ContentGuard has Time Warner, Thomson and Sony (along with Microsoft) on its roster. “We see a bilateral licensing business in addition to pools,” says Bruce Gitlin, vice president of business development at ContentGuard Inc., one of the major DRM patent holders. The bottom line: DRM patent holders have less incentive to join a pool, particularly if they think it may hurt their own ability to compete. Samsung has not yet joined the DRM pool, which launched in January. In December, however, Horn named Samsung as one of six essential DRM patent holders including, ContentGuard, Inter-Trust, Matsushita, Philips and Sony. Horn, who says he’s hopeful Samsung “may come in at some point,” doesn’t see the company’s absence as a liability. (Samsung did not return calls for comment.) Others aren’t so sure. “What MPEG LA is trying to do is a wonderful idea, but people have to feel that once they get a license from MPEG LA, they’re done,” says Bill Rosenblatt, president of GiantSteps Media Technology Strategies and editor of the industry newsletter DRM Watch, who served as a consultant to Microsoft’s outside counsel in its recent DRM patent dispute with InterTrust. Moreover, MPEG LA’s pool covers a rather narrow implementation of DRM, known as Open Mobile Alliance DRM 1.0, which is geared towards mobile devices like cell phones and PDAs. “It was the easiest way to start,” says Gitlin. “There was a defined specification already published, and products using that specification.” That means a ready market for licensees — and royalties. MPEG LA will be charging $1 per device (which could be a handset with DRM functionality embedded, or a software download that gives a phone DRM functionality). It will also get 1 percent of any transaction involving DRM-enabled content (such as a song downloaded to a phone). For Horn, the focus on mobile DRM isn’t a concession but a start. “This is the first of what we think will be many licensing pools,” he says. As new standards emerge, so too, Horn hopes, will new pools. But breaking in a new DRM pool may prove harder than breaking into the content it protects.

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