Consumer tech rip-off from patent pools

Steve Pociask President, American Consumer Institute
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When you buy a DVD, personal computer, digital television or another audio/video capable device, you may be paying more for something than you should be.

That is because manufacturers must pay fees on each device they produce in order to have access to a bundle of technology patents.

The problem is that most of these patents have expired and access to the patent should be free.

That is right. Some manufactures and inventors must pay a license fee per device for the MPEG-2 patent pool that represents a collection of over 1,000 patents related to audio and video compression technology.

These patents are required by manufactures to make such common household devices as personal computers, digital set-top boxes, DVD players, digital television sets, digital cameras video game systems and digital video recorders.

Most of the MPEG-2 patents have expired, but they still remain bundled with the other essential patents.

Instead of manufacturers being able to freely to use these expired patents without paying any royalty associated with them, Denver Colorado-based  MPEG LA, the MPEG-2 administrator, continues to collect the full licensing fees from manufacturers who pass these fees along to – you guessed it – you, in the form of higher prices on these tech goods.

The patent pool was started, with the early nod from the Department of Justice (DOJ), when the number of patents stood at 1,048.  By the middle of June 2013, the number will have fallen to 416.

How much are more are consumers potentially paying?

Since January 1, 2010, MPEG LA has collected a per device fee of $2 for a decoding license, $2 for an encoding license and $2 for a consumer products license for the MPEG 2 pool. However, if the $2 fees decline in proportion to the number of active patents, price would fall by half – from $2.00 to $0.93 by June 2013, as shown in the chart (below).


Value Based on Unexpired Patents (Image courtesy of American Consumer Institute Center for Citizen Research, 2013).

Value Based on Unexpired Patents (Image courtesy of American Consumer Institute Center for Citizen Research, 2013).


The fact is that, since January 2010, MPEG LA still collects the same price for its MPEG-2 licenses, although its effective value (based on the number of patents) has sharply declined.

Essentially, manufacturers are paying for something that should be free, and consumers are footing the bill.

Besides the obvious — the fact that consumers are paying something extra for which they receive no extra benefits — there is other concerns that raise anti-competitive risks for consumers.

For one, keeping all of the patents in the same bundle at the same price effectively extends the length of monopoly rights for these expired patents. Longer monopoly rights means less competition and less innovation, and that ultimately raises consumer prices.

In addition, the practice resembles another potential antitrust problem — “tie-in” arrangements — where manufacturers are forced to buy some product that they don’t want in order to acquire the essential product.

Had the DOJ not approved this patent pool long ago, it is highly likely that this forced bundling might be considered an antitrust violation.

To be clear, patent pools definitely can be an efficient way to facilitate access to essential patents, but there is no rational explanation for not pricing the pool to reflect the diminished value of the smaller-sized patent pool. By extending the life of patents within the pool beyond their legal limits, society faces less innovation, less investment and higher consumer prices.

That is just bad public policy.

It is time to stop nickeling and diming consumers. Either fix these patent pools or let’s have the DOJ to second look at these arrangements.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute.  For more information, visitwww.theamericanconsumer.org.

Steve Pociask