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Form 10QSB for ON2 TECHNOLOGIES INC
22-Jul-2004

Quarterly Report
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A potential trend that we are currently monitoring is the possible emergence of H.264 as a competitor in the video compression field. H.264 is a standards-based codec that is the successor to MPEG-4. Although we believe our technology is superior to H.264, H.264 may become widely adopted by potential customers because, as a standards-based codec, there are numerous developers programming to the H.264 standard and developing products based on suchstandard. In addition, there are certain customers that prefer to license standards-based codecs.
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Cover Story: H.264 to Displace MPEG in Video Compression

The H.264 high-efficiency coding standard for video achieves a data compression ratio two to three times higher than that of MPEG-2, and twice that of MPEG-4.

A new video encoding method nicknamed the "mammoth Codec" is attracting the attention of engineers in a wide range of equipment development sectors. The primary reason is the high data compression ratio, significantly better than that offered by existing Moving Picture Coding Experts Group Phase 2 (MPEG-2) or MPEG-4 Visual schemes. Many authorities working on international standards for encoding technology feel that little further improvement can be expected in the compression ratio, making the new technique a trump card that closes out the current series of MPEG-based Codecs, which began with MPEG-1 (Fig 1).

Development began on the mammoth Codec with the overriding goal of achieving the highest possible compression ratio. Developers tried a variety of methods for high-efficiency coding of video data, applying large-scale encoding tools and complex processing. And the resulting scale and complexity earned the new technique the "mammoth" nickname from members of the International Telecommunication Union, Telecommunication Standardization Sector (ITU-T) working on it. Joint standardization on the encoding scheme has been essentially completed by the ITU-T and International Organization for Standardization/International Electrotechnical Commission (ISO/IEC), and now it is stepping up to center stage under a new name: H.264/MPEG-4 Advanced Video Coding (AVC).

Coding Efficiency

The evaluations of engineers involved in standardization and implementation processes indicate that the data compression ratio of H.264 is 2 to 3 times higher than the MPEG-2 used in current DVD systems, and 1.5 to 2 times higher than MPEG-4. For the same image quality as DVD the new technique can be achieved at a coding rate of about 2Mbps, or 1Mbps for image quality equivalent to a home-use video cassette recorder (VCR), as shown in Fig 2.

H.264 imagery is now being evaluated by standards organizations and exhibition visitors. At the general meeting in Hawaii, December 8 to 12, 2003, the standards body presented a report on the verification test used for subjective evaluation of imagery coded and decoded by the H.264 Codec. Professionals from broadcasting, standardization and other fields packed the studio to produce the evaluation data used in the report.

"H.264 was found to be superior at all resolutions. Regardless of the content of the test image, it maintained that image quality when the coding rate was dropped to about half. In some cases, MPEG-2 encoding required a coding rate of 6Mbps to match the image quality achieved by H.264 running at 1.5Mbps," said one video encoding engineer present at the meeting.

H.264 has demonstrated that real performance is just what preliminary results indicated it would be. Utilizing the technology in actual products and services will vastly reduce the capacity needed to reduce video, and allow data transfer rates to be dropped. While MPEG-2 is the most common approach in digital broadcasting, and MPEG-4 in video distribution for mobile phones, H.264 is likely to be used first in applications demanding even higher compression rates.

More and more application sectors are clamoring for H.264, such as mobile phone video. A variety of new equipment is appearing to offer for mobile video, including mobile phones, digital cameras and personal servers, and the pixel counts of imaging devices are soaring. Video image quality is fast approaching the level of camcorders, and display resolution is rising to keep pace. As users become capable of easily shooting video, video content is becoming much more common. Crucial semiconductor memory capacity, however, cannot keep up with the speed of evolution in video, leading to more and more mobile gear with internal hard disk drives (HDD), even at the cost of bulk.

Another key application sector is networks. Both wireless and wired networks are tending towards best-effort type transfer rates, where speeds are not assured. In asynchronous digital subscriber lines (ADSL), for example, the difference in peak data transfer rates between short-haul and long-haul links is widening fast. This means that even though you pay the same amount for video distribution service, image quality will drop with distance. If the entire network is matched to distant users, then near-by users cannot utilize high-speed data transfer at all. H.264 fills this gap neatly.

The high data coding efficiency of H.264 can be used in products now, without waiting for next-generation technologies, and it is already being tapped in the optical disk sector. Sony Computer Entertainment Inc (SCE) of Japan will be using H.264 video encoding in the PSP, the portable game system now being developed. H.264 is also being considered for use in the HD DVD next-generation optical disk standard using blue-violet laser light sources, and the HD DVD9 standard designed to make it possible to store two hours of high-definition TV (HDTV) video on existing single-sided, 2-layer DVD media.

SCE adopted H.264 in its PSP game platform because it enabled them to fit about two hours of video, the equivalent of a DVD-quality movie, onto only one of the UMD optical disks the firm uses, 6cm in diameter and with a capacity of 1.8 Gbytes. Even with MPEG-4 Visual the same data would require about 3.6 Gbytes of capacity.

Developers of play-only media for HD DVD and HD DVD9 are taking advantage of high-efficiency coding to accelerate their timetables for commercialization and widespread adoption in the market. One key reason is that existing DVD manufacturing technology can be easily adapted.

With existing MPEG-2 technology, about 20 Gbytes is needed to store a 2-hour HDTV movie. In the HD DVD standard, the single-sided capacity of the play-only disk was set to 15 Gbytes, specifically to match the capabilities of the photolithography systems used to manufacture current DVD media. HD DVD9 uses single-sided, 2-layer 8.5 Gbyte DVD media, and the manufacturing technology has already been completed.

Equaling Video Cameras

Another application hoping to accelerate plans through high-efficiency coding is digital cameras. As Nobuhide Dotsubo, general manager, Engineering Department 2, Technical Engineering BUDI Solutions Co, Consumer Group, Sanyo Electric Co, Ltd of Japan said, "We want to make use of an encoding technology with a higher data compression ratio so we can achieve longer recording times for a given storage capacity. We are using MPEG-4 now, but we are not wed to it." Video photography is now on a par with camcorders, at video graphics array (VGA) resolution, or 640 pixels x 480 pixels, and 30 frames/s. Camcorders, however, still have the advantage when it comes to recording time.

Sanyo Electric is a leader in the fusion of digital can video cameras, and the firm1s DMX-C1 released in November 2003 adopted MPEG-4 encoding instead of the prior Motion JPEG in order to achieve a 30 frames/s rate. A 30-minute video, however, requires a 512-Mbyte SD memory card, with a street price of \25,000 to \30,000. A recording time of 60 minutes, equivalent to DV tape, will demand either one of the 1-Gbyte cards slated for release in the near future, or poorer image quality. While the bit cost of compact memory cards is dropping, a high-efficiency coding scheme like H.264 should make it possible to store 60 minutes of video in a smaller capacity.

Mobile phones, where video photography functions are rapidly becoming standard, will run into the same problem eventually. Resolution, frame speed and other capabilities are pretty much on a par with those of digital cameras, with mobile phones shooting quarter VGA (QVGA) imagery at 320 pixels x 240 pixels and 15 frames/s.

Performance is still rising sharply. Of the Freedom Of Multimedia Access (FOMA) 3G handsets announced on December 18, 2003 by NTT DoCoMo, Inc of Japan, for example, the D900i from Mitsubishi Electric Corp can shoot QVGA imagery at 24 frames/s. A growing number of handsets can be connected to TV sets to view video, and it is likely the demand for higher-fidelity imagery will continue to rise.

95% of All Households

With H.264 the performance differences imposed on the network by distance will be effectively eliminated. About 75% of broadband access in Japan is handled by ADSL, with a subscriber base of over 10 million. The peak data transfer rate is still rising, and has already reached 40Mbps. ADSL, however, is a best-effort service, and does not assure any data rate floor, so that only a very lucky few actually enjoy this 40Mbps performance. With H.264 it would be possible to distribute DVD-quality imagery at even 2Mbps. This would reach some 4 to 5km from the centers, covering about 95% of all households in Japan.

Even with wireless, performance is dependent on distance from the basestation, and because communication rates vary with environmental conditions, service is best-effort for existing Personal Handyphone System (PHS), NTT DoCoMo1s FOMA, CDMA2000 1x EV-DO service from KDDI Corp (au) of Japan, and VGS service from Vodafone KK of Japan. Better display resolution is improving image rendition across-the-board while H.264 offers the potential to maintain high image quality and frame rates even at higher resolutions.

Licensing, Compatibility

Widespread adoption of H.264 will require international standardization and assurance of compatibility. Some of these issues are already on the verge of resolution.

Standardization is advancing on two fronts: HD DVD and HD DVD9 standards within the DVD Forum, and terrestrial digital broadcasting for mobile equipment. The state of progress differs depending on licensing conditions.

H.264 is a leading candidate for use in HD DVD and HD DVD9, along with Windows Media Video (WMV) from Microsoft Corp of the US, a hybrid of MPEG-2 and H.264, and MPEG-2 itself. On November 17, 2003, MPEG LA, LLC of the US announced licensing conditions for H.264, and seems to have broken the logjam on standard selection. Image evaluation is complete, and the steering committee is now ready to make the final decision on what the DVD Forum will use. The decision was put off in the past because the licensing conditions for H.264 were not nailed down.

Assuming that the DVD Forum selects H.264 and decoding chips begin appearing in DVD players, H.264 seems likely to spread rapidly. No doubt DVD recorders with internal HDDs will begin switching over to H.264 video encoding, and a range of transcoding ICs capable of converting between H.264 and other formats, like MPEG-2, will be needed.

While the licensing fees paid by audio-visual (AV) equipment manufacturers for coding and decoding chips will rise, they are still only about a tenth the cost of MPEG-2 (Fig 3). DVD recorders and other video recording systems are likely to incorporate networking functions in the near future, and will probably offer decoder or Codec chips capable of handling multiple encoding schemes, which will tend to lower the relative weight of H.264 licensing fees.

Debate Continues

In terrestrial digital broadcasting for mobile phones, however, H.264 is merely one of many possibilities. It attracted considerable attention as an encoding scheme that might replace MPEG-4, especially when it was thought that the baseline profile licensing fee might be dropped to zero when MPEG LA asked broadcasters to pay fees for MPEG-4.

The situation changed, however, when MPEG LA announced H.264 licensing conditions. While they may be cheaper than MPEG-4 in some cases, they did not change their intention to collect licensing fees from broadcasters.

The European Broadcasting Union (EBU), an organization of broadcasters in Europe, immediately released a statement opposing the fee, launching rising opposition to the proposed new standard. Japanese industry has also been taken aback, and although one source in the terrestrial digital broadcasting field commented: "We really have to make a decision in the first half of 2004 to be in time for the scheduled start of broadcasting," it remains unclear whether that decision will be for H.264 or not.

WMV9 Emerges as Rival

One strong rival has emerged in terrestrial digital broadcasting for HD DVD and mobile gear: WMV9. While results vary with the specific type of video being handled, it is thought to achieve approximately the same coding efficiency as H.264.

One of the attractive features of H.264 is that it is an international standard with open specs, but Microsoft is changing its traditional monopolistic strategy to open the technology. The firm has firmed up the WMV9 decoding technology and disclosed it to the Society of Motion Picture and Television Engineers (SMPTE). It is possible that an improved version of the coder may be developed, but Microsoft says imagery will still be able to be played back on a WMV9 decoder.

The strength of being an international standard has not eroded from H.264, however, and already a number of AV equipment manufacturers have expressed concerns about WMV9 based on the fact that it was a proprietary technology. As a source at one such firm pointed out, "It is not at all clear whether licensing fees will be paid to Microsoft or not. It is possible that when the technology is made open it may turn out that technology patented by other firms is included." In response, Microsoft replied that it hasn1t been decided yet, although it believes that only its own patents are involved.

Compatibility Issues

Another barrier that will have to be overcome before H.264 can achieve widespread use is assuring compatibility (Fig 4). In international standards, it is quite common for the official specification to be interpreted differently by different parties, and that would lead to mutually-incompatible encoders and decoders. Assuring compatibility is unusually difficult for H.264 because it makes use of so many coding tools and modes.

The absolute minimum testing is just about completed for commercialization, specifically (1) confirmation of stream-level compatibility, (2) definition of stream structure, and (3) definition of file structure.

Concerning stream-level compatibility (1), Teruhiko Suzuki, senior signal processing researcher, Imaging Technology Center, IMNC at Sony Corp of Japan commented, "We have been checking H.264 functions through stream conversion, one at a time, and are almost done." Verification of version 1 of the standard proposal is under way, with vague portions being rewritten and new detail added: basically, engineers are fixing bugs. The new, bug-free version is expected to be done in the first half of 2004.

The definition of stream structure, (2), is necessary for use in digital broadcasting and optical disks. In digital broadcasting, H.264 is broken down into MPEG-2 transport streams for storage, or MPEG-2 program streams for optical disks and similar equipment. This structure was finalized in October 2003.

The file format (3) required for use in PCs and like systems was finalized at the same time, as an extended version of the MP4 format used in MPEG-4. A draft proposal has also been submitted for the real-time transport protocol (RTP) needed to transport H.264 streams over the Internet, and is currently awaiting approval.

by Masayuki Arai, and Hirotaka Ito


Websites:
DVD Forum: http://www.dvdforum.org
ITU-T: http://www.itu.int/ITU-T
MPEG LA: http://www.mpegla.com
SCE: http://www.scei.co.jp/global/index_e.html
SMPTE: http://www.smpte.org

(April 2004 Issue, Nikkei Electronics Asia)