I was planning to write this post some time ago, now I’ve got the last piece of puzzle .
Myth: H.264 – is proprietary codec, Theora – is open.
Facts: H.264 – is open international standard ISO/IEC 14496-10 , there exist open/free reference code and several open source implementations. Theora – is nonstandard codec with unpredictable roadmap, distributed as open source .
Myth: One have to pay royalties to use H.264 on web site
Facts: No if your video content is free (i.e. you are not selling videos on title-by-title or subscription basis), at least till the end of 2015 . This date has been moved several times, chances are it will be moved yet again. After that date one will have to pay $2500/year if service has less than half a million users; $5K – if less than 1M users; $10K – over 1M users. The bill very reasonable even for startup. Additional protection is that license terms are fixed for five years, and royalties can not be increased by more than 10% at renewal. 
Myth: One have to pay for H.264 encoding and decoding applications.One have to pay if using browser with H.264.
Facts: Yes, each developer of H.264 encoding/decoding application or library has to pay $0.20 for each copy sold. If you are an end user there is no grounds to worry, it is application developer/distributor responsibility to pay the royalties. Paid application have royalties already included. Free applications like IE, Safari, iTunes, Flash will obviously remain free, as corporations will wave those royalties for users. Moreover some of the SW companies are among H.264 licensors, so they probably have special conditions agreements and pay much less if anything. It is not clear, but companies like Mozilla, Firefox maker, may be among losers, as they don’t have a way to pay royalties if they are found to have to. 
Myth: Theora – open source codec, therefore it could be no problems with patent infringement.
Facts: Video codecs (and audio too) is a knowledge area with extremely high patent density. Everything one can imagine has already been patented, that’s what millions bucks research budgets are spent for. So probability of Theora being patent-clear is zero.
Myth: On2 donated original (VP3) code which Theora is based on, and warranted no legal actions against anybody using it or its modifications. So no patent worries.
Facts: A) There is only protection from On2 legal actions  B) Development of Theora went quite a bit from original VP3 code, so it now may infringe some patents unintentionally. C) There is no warranties that original VP3 technology does not violate third party patents including ones in H.264 patent pool. D) Another fact to keep in mind, even obtaining MPEG-LA license does not warrant one is all covered, there could be other panets out of MPEG-LA pool . E) We’ve got first confirmation that legal actions against Theora are possible – by Steve Jobs .
Myth: With broad support for
Video tag in browsers Flash Video will die.
Facts: Not that soon.
Video tag provides way fewer controls to developer – e.g. no caching and buffer size control. Live streaming is not supported yet, and is not in roadmaps.
Who is in which camp among SW giants?
Fact: Apple, Microsoft are among H.264 licensors pool; Adobe, Google are not.  Google seems to be trying to build its own video patent portfolio by acquiring On2 company .
Why industry seems to like H.264 codec more than free open source solutions?
This codec is now supported by Adobe Flash, MS Silverlight, Apple iTunes/QuickTime, it is supported by a lot of mobile phones, camcoders, digital television etc. And its support will become only wider. For all industry players it is very beneficial to have single universal standard codec, it allows for great technology reuse, simplifies and makes development cheaper, it benefits technology convergence. And after all it is just a very good codec delivering very good quality in wide bitrate ranges.
We will see major perturbations if Theora success starts threaten business of big guys.
1. Changed spelling to Firefox, as was required
2. Actually, H.264 use for free internet broadcast will remain royalty-free till the end of 2015 , as pointed out in
3. One more good article: http://www.engadget.com/2010/05/04/know-your-rights-h-264-patent-licensing-and-you/
Another very good article on On2-Google VP8 now: http://x264dev.multimedia.cx/?p=377 It nicely describes overall quality of VP8 code, and patent issues with VP8 and MS’s VC-1. The later was also thought patent-free initially.
1. H.264 page at MPEG LA site: http://www.mpegla.com/main/programs/AVC/Pages/Intro.aspx
2. List of H.264 patent pool licensors – http://www.mpegla.com/main/programs/AVC/Pages/Licensors.aspx
3. MPEG LA FAQ http://www.mpegla.com/main/programs/AVC/Pages/FAQ.aspx
4. Summary of H.264 license terms by MPEG LA – http://www.mpegla.com/main/programs/AVC/Documents/AVC_TermsSummary.pdf
5. Theora codec page: http://www.theora.org
6. On2 statement about VP3 license: http://svn.xiph.org/trunk/theora/LICENSE
7. Apple prepares to go after open source codecs: http://blogs.fsfe.org/hugo/2010/04/open-letter-to-steve-jobs/
8. Official H.264 standard http://www.iso.org/iso/catalogue_detail.htm?csnumber=52974
9. Google acquires On2 Technologies – http://www.google.com/intl/en/press/pressrel/ir_20090805.html
10. H.264 will remain free for internet broadcast till end of 2015 http://www.mpegla.com/Lists/MPEG%20LA%20News%20List/Attachments/226/n-10-02-02.pdf