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Codec decisions used to be an engineering sport. Today, they are capital allocation decisions with legal risk attached.
For most of the H.264 era, codec choices were technical and reversible: you ran some tests, watched the BD‑rate curves, and rolled out what looked best on your ladder. If it disappointed, you could back it out with little more than engineering time and some bruised pride. Standards adoption was driven by capability and efficiency, and content owners didn’t have to think about patent pools or contingent liabilities. That was the province of consumer electronics and mobile vendors.
That assumption is no longer true. The ecosystem around how publishers use codecs, including royalties, pools, bilateral licensors, and even how auditors and regulators think about “probable” obligations, has changed in ways that directly affect your P&L. The bits still matter, but they are no longer the only or even the dominant factor in a deployment decision at scale.
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Content royalties become real
Multiple pools now explicitly assert content‑side royalties for internet video, covering HEVC, VVC, AV1, and VP9. First was the Avanci Video Pool, which applies to “Internet video streaming companies that are providing internet video streaming services to its users using any of the five standards – H.265 (HEVC), H.266 (VVC), VP9, AV1, and MPEG-DASH.” Then came the Access Advance Video Distribution Patent Pool (VDP) program, which claims content royalties on the same four codecs, but not MPEG-DASH.
While Avanci has not yet publicised its royalty structure or identified any licensees, Access Advance has done both. Its rate structure, shown in Figure 1, is available here, and Access Advance has announced six licensees, including Roku.
Certainly, just because a pool is formed doesn’t mean that its premise is valid. No court in the United States has yet ruled that codec patents apply to streamed content. While a German court ruled that patents applied to streamed content in Netflix vs. Broadcom, that case was later overturned because the patent was found invalid, not because the appellate court held that encoded content didn’t give rise to a royalty obligation.
Patent assertions from non-pool members
However, patent pools are not the only actors setting precedents. More compelling evidence that content royalties are here to stay comes from licensing agreements signed by prominent codec patent owners and licensees, like Amazon. In March 2025, Nokia announced a patent agreement with Amazon, covering video technologies used in both “streaming services and devices.” The fact that Amazon, a company with vast legal and financial resources, chose to settle rather than litigate suggests Nokia’s claims had merit.
While Amazon was the first licensee ever identified by Nokia to have signed a streaming content licensing agreement, it’s not the only company. In addition to Amazon, Nokia disclosed two prior deals with unnamed services that used “our patented multimedia technology in their video streaming service.”
What do these agreements mean? First, while they don’t carry the weight of legal precedents, they are persuasive evidence that content-side codec royalties are commercially reasonable and would likely be referenced in any court proceeding.
Second, these agreements evidence that, in addition to claims from the two patent pools, all prominent publishers that use HEVC should also expect to hear from Nokia or other patent owners that haven’t joined the Avanci or Access Advance pools. Enforcement will never hit everyone at once, but it won’t stop with marquee targets.
And that takes us back to the original premise. Codec selection, long the sole purview of compressionists, must now be scrutinized by both legal and accounting departments.
The accounting reality of codec royalties
For public companies, the accounting rules on expense recognition are mandatory, not optional. Obligations that are both probable and estimable generally must be accrued, while obligations that are reasonably possible but not yet estimable must be disclosed in footnotes or risk sections. When licensors publicly signal intent to pursue content royalties for the codecs you use at scale, that moves you out of the “purely hypothetical” zone and into the realm of formal risk management. Private companies face fewer disclosure rules but do not escape economics or governance; boards, investors, and acquirers increasingly expect a clear view of potential codec‑related obligations.
All this suggests that if you’re an engineer considering an advanced codec like HEVC or AV1, you should include both the legal and accounting departments in the decision loop sooner or later. And you’d better be prepared to provide financial documentation that proves that deploying the new coded makes financial sense even if the royalty potential becomes a reality. Back-of-the-envelope calculations supported by RD charts definitely won’t suffice.
HEVC/AV1 for 4K/HDR – full speed ahead
In my view, advanced codecs fall into two use cases. Many premium content publishers deploy HEVC (and now AV1) to enable HDR or affordable 4K distribution. You see this in Figure 3 from a mid-2023 report by InterVideo. Despite the controversy surrounding HEVC royalties, which were imposed solely on devices and not yet on content, most first-tier publishers had deployed HEVC to enable 4K/HDR.
That’s because they either had to adopt HEVC or relegate themselves to second-tier status. In that context, higher costs, including royalties, are simply a cost of doing business. While HEVC was the only HDR option through 2024 or so, AV1 is available for both Dolby Vision and HDR10+, though the installed base of compatible TV sets is smaller than HEVC.
Figure 3. Codec adoption by major publishers in 2023.
Deploying for Efficiency – you need to prove your case
Deploying advanced codecs for bandwidth efficiency is a different story. The simple breakeven formula for adopting a new technology is implementation costs divided by bandwidth savings. Prior to 2024, the implementation costs were largely encoder integration and player testing.
When content‑side royalties enter the picture, the math gets more fragile. Every dollar of royalty directly offsets bandwidth savings, and those savings are already dropping due to falling CDN prices. Under serious scrutiny, the efficiency‑only value proposition can easily flip from “obvious win” to “at best break‑even, at worst a long‑tail liability” if you cannot drive enough coded hours onto the new format.
For publishers considering deploying new codecs for pure bandwidth efficiency, RD-curves and back-of-the-envelope math no longer cut it. Savings from better compression must exceed all incremental costs: encoding, storage, cache inefficiencies, operational complexity, and the opportunity cost of engineering attention.
As I’ve written about here and here, the numbers are challenging, and that was before content royalties. If you have to pay a monthly royalty, the breakeven math becomes even more challenging.
In 2026, if you can’t quantify both the upside and the downside in a way that your finance and legal teams can interrogate, you do not have a codec business case; you have a lab experiment with significant consequences.
Before you adopt a new codec, you should:
From a pure analytical perspective, before you adopt a new codec purely for bandwidth efficiency, you should:
- Set the baseline: Ensure that you’re using H.264 as efficiently as possible
- Identify the potential savings and other benefits: Understand how much advanced codecs like HEVC and AV1 will save you with your content
- Model the potential savings: Understand how this will translate to actual bandwidth savings, given your distribution patterns
- Estimate the costs of new codec adoption: Including duplicate encoding and storage, testing, engineering time, cache inefficiencies, and royalties.
- Model the complete picture: Compute the overall financial gain or loss from deploying a new codec.
None of this is new; none of this is groundbreaking. But the potential for content royalties means two things for codec engineers. First, the potential implementation cost rose significantly. Second, legal and accounting need to be involved.
Over the next few weeks, I’ll publish articles on each of these topics to help you understand what’s involved in the analyis and to provide some guidance.
What Beyond H.264 provides
Some streaming publishers may have the resources to perform this analyis in-house. Go forth and conquer, and I hope you find this and the articles to come helpful.
For other publishers, Beyond H.264 is a course I’ll launch in February 2026 to turn this analysis from improvisation into process. As you would expect, the course will follow the outline of the articles above, but will provide more analytics tools and templates to assist your analysis. The course will walk you through the decision model step by step, so you can model cost and benefit in your own context, using your own content and distribution patterns.
Equally important, the goal is to create a shared language across engineering, legal, and finance so that codec proposals stop dying in translation and start reading like the capital allocation decisions they are. At the end of the process, you will have a defensible way to say yes or no: a decision you can explain to your board, your auditors, or your future self when the next pool launches or the next demand letter arrives.
A little bit about me
Many of you know me as the codec guy; what you may not know is that I was once both a CPA and an attorney (though tax-focused, not intellectual property). Perhaps because of my accounting major, I’ve always sought to characterize codec-related decisions in financial terms.
You can check out some of my previous articles below. The point is that this is a field that I’ve studied from multiple angles over a long period, and that I have the technical skills and knowledge in both codec deployment and financial analysis to deliver worthwhile results.
Computing Break-Even on Codec Deployments – Streaming Learning Center
https://streaminglearningcenter.com/encoding/computing-break-even-on-codec-deployments.html
Presents a general break-even framework for new codec deployments, modeling implementation, encoding, storage, and delivery savings, with a Google Sheet to compute hours of viewing to breakeven for codecs like AV1, VVC, and LCEVC.
Saving Streaming Costs: Adding a New Codec – Streaming Learning Center
https://streaminglearningcenter.com/codecs/saving-streaming-costs-adding-a-new-codec.html
Explains how to calculate hours of viewing needed to recover incremental encoding costs when adding a new codec, with tables for hours-to-breakeven across bandwidth and encoding cost assumptions.
Choosing an x265 Preset: an ROI Analysis – Streaming Learning Center
https://streaminglearningcenter.com/encoding/choosing-an-x265-preset-an-roi-analysis.html
Quantifies quality vs. encoding time across x265 presets and discusses how slower presets can reduce bandwidth costs and ladder bitrate, framing preset choice as a return-on-investment problem for VOD distribution.
Choosing an x265 Preset – An ROI Analysis – OTTVerse
https://ottverse.com/choosing-an-x265-preset-an-roi-analysis/
Presents similar x265 preset analysis with explicit discussion of how to breakeven on increased encoding costs via reduced delivery bandwidth, tailored for OTTVerse’s audience.
LCEVC Excels in Full Ladder Live Use Case Testing – Streaming Learning Center
https://streaminglearningcenter.com/encoding/choosing-an-x265-preset-an-roi-analysis.html
Models the potential savings from LCEVC over alternative codecs.
