You are definitely NOT able to distribute Xvid itself OR Xvid encoded videos with a commercial game in the United States.
The reason for this has nothing to do with the Xvid GPL license. The problem relates to the fact that Xvid uses MPEG-4 technology, which is a proprietary technology owned by MPEG LA.
As such, if you wish to distribute any video encoded with MPEG-4 techology in the United States (this includes DivX, too), you must purchase a license from mpegla.com.
I spent a lot of time, research, and money into investigating the legality of this, so you can trust this information.
Below is the reply to an e-mail conversation my lawyer had with MPEG LA regarding this issue. I hope it helps!
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Dear ------:
Thank you for your inquiry and interest in MPEG LA. We are pleased to be in touch with you and I will be glad to assist you with questions regarding MPEG-4 and our Visual License.
As you mentioned, the Xvid codec (and similarly, DivX) utilizes the MPEG-4 Visual (Part 2) Standard. Therefore, a product/service incorporating the Xvid or DivX codec makes use of the MPEG-4 Visual (Part 2) Standard, and as a result, NEEDS to be licensed under the essential patents in our MPEG-4 Visual License. Similarly, content encoded using the Xvid codec is encode using the MPEG-4 Visual (Part 2) Standard, and will benefit from coverage under our MPEG-4 Visual License.
More specifically, the MPEG-4 Visual License is effectively divided into two halves: (i) sublicenses granting the right to "make and sell" MPEG-4 Visual Products and (ii) sublicenses granting the right to "use" such MPEG-4 Visual Products to provide MPEG-4 Video to end users for remuneration.
When MPEG-4 Visual video content is provided for remuneration (for example, on a Subscription or Title-by-Title basis), the provider of such MPEG-4 Visual video content will benefit from coverage under the MPEG-4 Visual License and is responsible for paying applicable royalties for the use of the MPEG-4 Video Encoders and MPEG-4 Video Decoders in connection with the remunerated content.
In the case where an end user pays for MPEG-4 Visual video content on a Title-by-Title basis, the royalty is the lower of 2% of the price paid to the Licensee or $0.02 per title for video greater than 12 minutes. However, there is no royalty for a specific Title of 12 minutes or less.
From your description, it appears that your client's computer game product would include MPEG-4 Visual video content and would be distributed on a Title-by-Title basis. Therefore, you would benefit from coverage under the MPEG-4 Visual License.
The process to become a Licensee is very straightforward and normally takes only a few days. All that is required is to simply fill in the necessary information on the MPEG-4 Visual License agreement and return the signed document for execution by MPEG LA. After the License is executed by MPEG LA, we will then return a .pdf copy of the fully executed License to your for your files. Following that, our Royalty Services Department will communicate with you directly to provide detailed royalty reporting and payment instructions. Running royalties for products going forward are paid on a semi-annual schedule (i.e., twice per year) and Back Royalties for any products prior to concluding the Licenses are paid within 30 days of signature.
If you will please provide me with your physical mailing address, I will send you (via FedEx) an execution copy of the MPEG-4 Visual License along with some additional background information on MPEG LA.
I look forward to hearing from you.
Best regards,
Michael J. Zurat
Licensing Associate
MPEG LA
5425 Wisconsin Avenue, Suite 801
Chevy Chase, MD 20815 U.S.A.
+1 301 986 6660 Phone
+1 301 986 8575 Fax
mzurat@mpegla.com