Sorry for the long reply. Will try to provide some "color" and respond to questions posed here...
The ColorDMD patents (there are three now, each of which went through multiple iterations of reviews by the US patent office) cover a very specific implementation for real-time coloring of monochrome pinball frames... both hardware and method. it does not cover the general idea of colorizing a video frame.
The patents contribute a unique method of masking and hashing pinball video frames in order to recognize the frame using unique static attributes while ignoring dynamically varying content (like player scores). The technique is applied offline in order to create a lookup table of corresponding color information which is then indexed and applied in real-time while the game is playing. The patent goes into extensive detail as to how these operations are performed.
The Pin2DMD founders willfully and knowingly implemented the patent both in the Pin2DMD editor as well as the playback hardware. This is indisputable, as the documentation for the editor and the GUI itself includes the same terminology (hashes and masks) created and used in the patent.
The only point of contention is that since they reside in Germany, and the patents apply to sales/use in the United States, they believe they are justified to copy and use whatever they want without legal recourse. They have also argued that software patents aren't allowed in Germany and expressed their general contempt of the US patent system on the forum and in private emails.
This is a legal argument by the way, and ignores general ethics which is really what should prevail in a small community.
The same group has done this to other projects. They have created and sold knock-offs of PinDMD, the Run-DMD clock, and PinSound. Besides the ColorDMD mehtod of colorization, Pin2DMD also incorporates the work of SmartDMD, and the simple grayscale-to-color mapping used by DMD Extender. There's very little in Pin2DMD that can be classified an innovation as it's all knockoffs or direct implementation of other projects.
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Regarding claims that competition is needed to breed innovation, I'll point out that the entire ColorDMD system was created in the absence of competition, and that countless innovations to tackle difficult animation sequences and incorporate full motion video, have continued to be introduced on every title in the absence of any real competition.
ColorDMD was borne simply out of the desire to make a contribution to the pinball hobby, and only continues with the support of the community.
We're pinball hobbyists like you. We created something that people seem to enjoy and have continued to invest heavily both in time and financial resources. We continue to enlist the support of other community members and provide compensation for their efforts. We often invest in and support titles that have little demand or return, out of love for the hobby and the platform.
ColorDMD is not "the man".and attempts to "stick it to the man" through willfull infringement by Pin2DMD and others now seeking to do the same have been unwarranted.