The R&D Tax Credit Aspects of Video Compression Technology

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        Some call it a “data diet”, consumers see it as a way to reduce monthly data and overage charges, bandwidth operators see it as a way to defer capital expenditures and reduce operating costs.  Whichever the case, video compression technology will revolutionize the delivery of video services to all types of internet connected devices such as smartphones, tablets, and television.

        The popularity of video streaming and broadband usage in general is growing exponentially, which also means operators are facing increasing strain on their networks.  Large bandwidth users such as Netflix and YouTube typically increase their bandwidth usage by about 25-35% each year.  According to Cisco, global internet traffic will reach 18 GB per capita, up from 6 GB in 2014.

        As more and more data-heavy services ride over the broadband superhighway each year, electrical engineers and broadband developers keep asking the same fundamental question: “Will our capacity to deliver bandwidth keep up with the human race’s ability to consume it?” - John D’Ambrosia, Head of Bandwidth Assessment Group at IEEE (Institute of Electrical and Electronics Engineers).    

        Video compression offers a practical solution which involves coding and decoding to eliminate redundancies in transmitted data. Algorithms effectively shrink the size of the audio or video file so that less bandwidth is used during transmission and storage.  This allows more Netflix movies, video games, and YouTube videos to be transmitted to users with less streaming time. 

        In addition, as users demand more services with fewer interruptions, at quicker speeds, they also demand higher definition and improved content.  These demands however, are at odds with each other since the general rule is the more video and audio content is compressed, the more it suffers in quality.  However, video compression technology ultimately addresses the trade-off between reducing the video bit-rate and maintaining the coded quality as close to the uncompressed content as possible. 

        Providing quality content at superfast speeds and without interruption can only be achieved with innovative methods to handle the underlying huge amounts of data. This requires constant research and development (R&D) efforts some of which result in innovative solutions.

        The federal government, America’s top research universities, and private broadband firms of all sizes have been spending heavily on R&D since the 1970’s in order to develop the robust broadband ecosystem that exists today.   Although measuring the effects of R&D spending is difficult, studies find that firms typically earn between 20% and 30% returns on their investments in the broadband industry.  In addition to the direct financial benefit, federal and state governments offer significant tax incentives to spur innovation, such as the R&D Tax Credit.

The Federal R&D Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 19, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year. As of this writing, proposed tax extender legislation would extend the tax credit through December 31, 2016.

Video Compression Innovation Challenges

        Although image compression has been around for some time, video compression is a relatively new technology that is probably in the infant stage of its development cycle. Video compression technology eliminates redundant data in order to transmit video content more efficiently.  It is based on the principle that most of the information in adjacent frames remains constant.  The amount of data lost on any given conversion is determined by the compression ratio. Generally, the higher the compression ratio, the more data and quality is lost in the compression process.

        Opportunities for innovation in the industry are abundant.  With consumers increasingly demanding higher quality broadcasts, the pressure is on to deliver a myriad of content in the most effective and efficient way possible.

Processing Requirements
        One particular challenge involves overcoming the large processing requirements that are needed to compress data on a massive scale.  The processing requirements needed to compress even a single frame of video (30 frames per second) are massive.  That capability is currently being delivered by rapid advances in semiconductor technology, another overlapping, innovative field that is also R&D intensive.
        In addition to increasing processing power, another practical solution involves the use of less complex compression formulas.  Improved compression efficiency comes at the expense of increased computational complexity.  Therefore, any practical implementation of advanced video compression technology means reducing complexity to a manageable level without sacrificing compression performance.  This often means simplification of algorithms.

Algorithmic Development
        Currently, there is a plethora of video compression algorithms and a few common, well known standards including MPEG-2, MPEG-4, H-264, and VP8.  Each of these standards as well as the less common algorithms differ in their design and specs since they are developed to address certain specific compression requirements desired by each user.  If you were to watch a movie in late 90’s you might notice a lot of pixilation.  This is because the compression algorithms used back then to make DVDs were rather primitive. 

        In the more modern era, YouTube can take an HD home video and display it within seconds to the entire world with better quality than the late 90’s movie which were made with the best film equipment available at the time.  To a large extent, this is because of the development of compression algorithms. 

        Much of the research in video compression technology involves creative ways of splitting signals and determining what’s negligible and can therefore be discarded. Some algorithms are actually more efficient in cutting down slivers of data and determining which parts are most powerful and should thus be kept and which can be pushed aside to reduce bandwidth. 

        One of the major concerns with most of today’s technological developments involves some aspect of privacy invasion.  The video compression industry is no exception.  Many internet users worry that the data they transmit across the broadband superhighway each day could be hacked, stolen and re-used without their permission and for illegitimate purposes.  Therefore, a fundamental concern is that encrypted data stays encrypted, even so the broadband provider itself or the video compression service provider cannot read the data. 

        This issue is exemplified nicely in the video surveillance industry.  Engineers are currently working to develop mechanisms that protect identity while ensuring legitimate security needs are met. The main concern is the fact that private citizens, who are not suspects, are being recorded and recordings are being archived through the use of video surveillance systems.

        One solution being developed at Florida Atlantic University in Boca Raton, FL involves the selective encryption of objects that reveal identity (e.g., faces, vehicle tags) in surveillance videos. Objects in a video can be encrypted to ensure privacy and still allow decryption for legitimate security needs at anytime in the future. Selective encryption is effective because it allows the monitoring of activities without revealing the identities of those being monitored. When a suspicious activity needs to be investigated, the identities can be uncovered with proper authorization.

Cloud-Based Video Processing
        As video data travels the internet, economical, fast, and high quality delivery of content becomes critical to support user demands. However, the specific formats and standards being used to compress, package, and render this content is changing at an increasingly rapid pace. Systems built with special purpose hardware will struggle to keep up with these changing demands, while software implementations will be unable to meet performance, density, and cost-benefit considerations.  Cloud based processing offers a potential solution to this issue.

        Many portable electronic devices aren’t powerful enough to run the software programs required to perform graphic-intensive applications. Sophisticated movie editing or architectural design tools, for example, will soon be accessible to hundreds of millions of internet connected smart phones, tablets, and devices through the cloud. For consumers, it will provide the ability to fast forward and rewind streamed movies in real time. 

        Some of latest innovations in this area involve eliminating buffers that are typically used to store a few seconds or minutes of streaming video. Though buffers allow time for any lost or delayed data to be resent before it's needed, they create a lag that makes it impossible to do real-time work.  Bypassing the buffers involves using creative strategies to fill or hide missing details that would otherwise be corrected in the buffering process. In some cases that means filling in entire frames by extrapolating from frames received earlier — so that the eye does not detect a problem should some data get lost or delayed.  Doing so saves milliseconds so that responses can be generated to users without a delay.

Industry Players
        Users of bandwidth and video compression technology are extensive and broad.  They range from individuals with smartphones, small businesses, large cable companies, and industry giants like Google and YouTube.  Figure 1 below demonstrates some of the largest beneficiaries of the technology.

Figure 1: U.S. Peak Internet Traffic Produced by Companies’ Networks

        Aside from these large users, there is a wealth of different businesses of all sizes developing and utilizing the technology as well. The growing use of broadband along with the limited capacity of the current broadband network infrastructure has opened up new opportunities for innovative start-ups and established companies who know how to effectively shrink data. 

        Onavo, based in Menlo Park, CA, helps iOS users reduce the amount of bandwidth they consume each month.  The company uses a cloud-based solution that runs on Amazon Web Services to compress as much data as possible so users can consume more data without running over their monthly data usage limits.  Originally a Tel Aviv based company founded in 2010, Onavo was acquired by Facebook as part of the parent companies’ collaborative initiative, which aims to eventually connect everyone across the world to the internet. Using data more efficiently is a key component in that mission. 

    Opera Software, with operations in Mountain View, CA, also offers data compression services.  Their signature product The Rocket Optimizer provides mobile operators with a 60% boost in bandwidth capacity across smartphones, laptops, and tablets.  It can effectively optimize more than 90 percent of videos, which now make up the majority of transmitted mobile data.  Not only does it provide benefits for users who will consume less data overage charges but it also provides a huge benefit for bandwidth operators.  The company estimated that it could actually help a tier one carrier save $100 million annually in deferred capital expenditures and operating costs.  

        Goldman Sachs recently invested $20.5 million in a high frequency trading technology company that provides telecom capabilities to financial firms using advanced video compression technology.  The deal for partial stake in the New York City based Perseus demonstrates the value that large financial firms place on high-speed trading capabilities where microseconds can mean the difference between significant profits or losses.
        Perseus derives the majority of its profits from banks like Goldman by providing the ability to execute trading orders at near instantaneous speeds using its patented Perseus technology.  Patented technologies are excellent candidates for the R&D tax credit under the patent safe harbor provision.   “We see a great opportunity in the financial technology sector in general, and Perseus in particular,” said Terry Doherty, Vice President in the securities division at Goldman. “They have the potential to dramatically shift the way that the global markets engage by introducing the fastest and most secure managed services the industry has ever seen.”

        Igolgi Inc. is a North Brunswick, NJ company with  a wide range of software products for optimizing content on multiple platforms.  Their codecs are written from the ground up with algorithms to leverage multi-core CPU architectures and to work around limitations.  They have also developed patent pending adaptive load balancing techniques that enable them to scale operations efficiently and effectively.

        Ooyala Inc. Was founded in 2007 in Santa Clara, by former Googlers Bismark and Belsasar Lepe and Sean Knapp. It is one of the world’s largest video platform companies and prides itself on R&D and innovation which is at the heart of any successful business strategy in the industry.  CEO Jay Filcher had this to say about the company - “We continue to raise the bar for innovation on behalf of our customers, driving new standards of efficiency, quality and scale to meet the needs of multi-screen, multi-platform video businesses.” 


        With an increasing amount of data-heavy services emerging each year, broadband providers face a daunting task; discovering how to transmit an enormous amount of data across limited infrastructure at lightning speeds and with high quality.  Federal and state research and development tax credits are available to support and stimulate the efforts.   

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Manager with R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

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