Call for level-playing field on royalties

Replicators of DVD discs who, like kdg mediatech, pay royalty fees and, in so doing, are disadvantaged in the marketplace, are angry, laments PIERRE-ANTOINE BERTHOLD, CEO OF kdg mediatech. Count me among them. I object to being forced to compete with replicators that do not carry the same costly obligation and are obliged to pay no royalties to the so-called 3C and 6C groups.

And, as I have stressed recently, I believe that other honourable, royalty-paying replicators will not remain passive much longer about this destructive situation.

Our company, an optical disc pressing company with plants in Austria, Holland, France, Italy and the UK, has paid out tens of millions of dollars in royalties since it began producing CDs in 1985.

It becomes difficult for shareholders of companies to appreciate or understand that there are no dividends because you are one of the few playing by the rules.

The “rules” in question are those that stipulate that any pressing plant that belongs to a member company of either the 6C or 3C group of technology patent holders do not have to bear a royalty charge when replicating DVDs. But any plant that is not a unit of the aforementioned patent-owning club must stump up a 15% royalty payment.

Not only is the 15 cents on the dollar charge 500% higher than the 3 cents royalty levied for CD technology when CD was at its peak in Europe, but the licensing companies are paying too little attention to the realities of the marketplace.

They are damaging the market with their ill-advised cross-licensing practice. The more the DVD replication price goes down, the more the affiliated factories – as well as the non-compliant replicators – will benefit from their position.

Just because the members of these patent pools are big corporations that are well known, it does not follow that their marketplace manners are impeccable. Most of us have discovered – bitterly – that the very lengthy list of patents trotted out to justify the large royalty charge is, in fact, a smokescreen. The essential patents for the actual manufacture of discs are very limited.

As companies such as ours have no choice but to sign and agree for a fixed charge for the full list until the expiry of the last valid patent, it forces us to pay for what we do not need.

In a scrutinised verdict regarding CD-Recordable manufacturing, the US International Trade Commission, in an initial judgment made in mid-December 2003, concluded that Philips’ license agreement was iniquitous. A final judgement is expected at the end of March 2004.

As an instant answer to it, Sony is now offering to DVD-Recordable manufacturers a royalty charge as a small percentage of the product value.
It is depressing to see that the reward may go finally to the large Taiwanese manufacturers who were never in compliance with Philips/Sony and that most of the European replicators who paid up are now out of the business. They were unable to resist the unfair trading conditions.

What’s worse, DVD-Recordable manufacture will benefit from a reasonable royalty system and yet it is the symbol of a forthcoming piracy wave. And , meantime, the pre-recorded DVD, sole optical carrier that provides revenue to the IP rights owners, remains imprisoned in an absurd logic that destroys its loyal servants.

It is my view that technology patent holders owe to the compliant replicators a peaceful and fair use of what they pay for and that is not at all the case in our industry today.

I have heard the arguments that royalty payments are vital if they patent owners are to recover at least some of their R&D costs. But what’s deeply unfair is that any company today that is a member of the 6C or 3C groups can acquire a DVD pressing plant and make up to 15% or 20% additional margin at an equivalent turnover due to this incredible peculiarity whereby plants owned by licence holders do not pay royalties.

If that plant is bought subsequently by a company, say another replicator, that has nothing to do with the 6C or 3C groups, that company also benefits from non-payment of royalties. In such a case, it is ludicrous to argue that non-payment of royalties serves as compensation for the R&D expenses incurred and accounted for in the past by an unrelated business.

And there is another industry practise that perplexes me because it makes it difficult for independent plants to acquire top-tier accounts, such as the major studios.

One particular demand that Hollywood content providers make, and with which some replicators find it difficult to comply, is the demand for a large upfront payment to secure a contract. There is an interesting correlation between the companies able to provide such a cash advance and the ones benefiting from the royalty exemption for cross-licensing.

These contract advances are effectively interest-free loans, negotiated through head offices and repaid through plants across the globe. This system is not in anyone’s best interest, since I believe it does not foster optimum service for clients and, indeed, regional pressing plants may not even be given the order for business in their region.

Despite the built-in advantage of some big pressers and the downward pressure on prices, and therefore margins, there is still a place for independent factories. The ongoing consolidation that is creating huge global operations is, if anything, heightening the need for independent duplicators and replicators to take care of the growing market in areas that are not being serviced by the conglomerates.

With the capacity to produce 200,000 DVDs a day, kdg’s big plusses include highly effective internal communication, the ability to share capacity throughout its plants to keep production lines running at optimum levels – if moulds are always saturated; it keeps prices competitive – and the ability to benchmark.

This latter capability means our company can compare the production and systems of each plant against the others, and, without the unwieldiness of a large organisational structure, that is true process optimisation....

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