A group of TV-set manufacturers is launching a new attack on the government's digital-tuner requirement by asserting that Zenith Electronics Corp. is charging exorbitant fees for rights to use crucial DTV patents.
Because of the government's failure to account for intellectual-property costs, the manufacturers say the FCC's projected price reductions on DTV sets are overly optimistic and retail prices will not fall low enough to make DTVs affordable to general consumers.
The complaints have created confusion at the FCC, where some staffers say they aren't sure whether intellectual property costs were adequately examined before the agency required nearly all TV sets be equipped with DTV receivers by 2007.
Industry sources say companies making complaints include Panasonic and Mitsubishi, although officials at those company wouldn't address whether they have voiced concerns to the FCC, citing that contracts to incorporate the technology—Zenith's vestigial sideband (VSB) modulation method—into receiver chips are confidential. Zenith's VSB technology was incorporated into the U.S. DTV standard in 1996.
Citing patent costs generally, Mitsubishi Vice President of Marketing Robert Perry says product profitability is difficult when royalties account for a disproportionate share of costs. "A government mandate, particularly for technology, can sometimes result in windfall profits for the patent holder."
Zenith officials counter that attacks on the company's patent fees are nothing more than another attempt by rival set makers to defeat the tuner mandate, which the Consumer Electronics Association has challenged in federal appeals court. CEA says the mandate will jack up costs for all sets, even though over-the-air tuners won't be needed by the 85% or more of Americans who one day will get digital service from cable or satellite. There's little likelihood the FCC will rescind the tuner requirement, but the arguments may be used to bolster CEA's court challenge.
According to some industry estimates, Zenith charges between $4 and $12 per set for rights to use 8-VSB technology. The charges are too high for the industry to meet the FCC's goal of driving down the price of digital tuners to $15, the critics are saying. That's because patent fees, unlike hardware-production costs, don't necessarily decline as production lines ramp up. "Zenith is going to profit dramatically," says one source.
Although Zenith officials won't reveal actual fees charged for 8-VSB rights, they say the cost is below $8 per set. "This is really an old argument that is part of their misguided attempt to derail the mandate," says Richard Lewis, Zenith's senior vice president for technology. Lewis says Zenith set the VSB fees to achieve a return on investment comparable to what other patent holders earn for key portions of DVD, cell phone and electronic- program-guide intellectual-property rights. "We're right in the middle."
At the commission, no one seems sure whether Zenith's patent fees were included in the economic studies used to predict the decline in DTV tuner costs. The primary study used to predict those costs, conducted by Cambridge, Mass., consulting firm Arthur D. Little, didn't address patent costs specifically. The study did, however, state that price reductions from economies of scale could take longer to achieve if costs for low-end sets are too high. Those supposedly cheaper sets are the ones most likely to be affected by high fixed costs such as patent fees, Zenith's critics say.
For example, total construction costs for a set that retails for $200 must be below $140 for manufacturers to earn an acceptable profit, one source says. That target is nearly impossible to meet if one element of intellectual-property fees account for 10% of total costs.
Zenith's supporters, however, reject attacks on the company. "We don't begrudge anyone's ability to profit from intellectual-property rights," says David Arland, government relations manager for Thomson Consumer Electronics. Set maker Thomson did not oppose the tuner mandate.
Daniel Eiref, marketing director for DTV chipmaker ATI Technologies, says Zenith's patent fees should be expected to drop as production grows. For instance, some MPEG technology rights used in DTV sets recently dropped from $4.50 per set to $2.50. "Over the long run, intellectual-property rights drop just like hardware. Zenith's could as well," he says.
Zenith's supporters also say the FCC should consider whether complaints about Zenith's patent fees continue after CEA and the cable industry reach an agreement on "plug-and-play" digital sets that will receive cable without the need for set-top boxes. CEA is said to be willing to drop its court challenge to the tuner mandate when the deal is signed.