video - What are the restrictions on h264 usage?

What do people mean when they say the h264 video codec is "patent encumbered"? What restrictions are there to the usage of h264? I've been using the free Handbrake transcoder to encode h264 videos and using the free VLC media player to decode h264 videos. I didn't have to pay a dime to encode and decode h264. So why is Firefox and Chrome shying away from supporting h264 in HTML5 and instead developing their own inferior codecs such as VP8 and Theora?

It is considered encumbered because there is a group (MPEG LA) which manages the portfolio of patents which make up the H.264 standard. The license for H.264 (AVC) states:

Includes right to manufacture and sell AVC encoders and decoders with the right of End Users to use them for personal and consumer (including internal business) purposes without remuneration but not for other uses

This means you don't have to pay to use H.264 software because that allowance has been bestowed upon you (but could be taken away from future implementations of the standard if MPEG LA so chose). For example, they could update the software but say this new version no longer has the allowance for free individual use, so you are stuck with outdated software.

The real reason Firefox, Chrome, et al., want to move away is that vendors and manufacturers do have to pay royalties, and again they could at any time lose access to future licensing. If H.264 becomes the de facto standard (which it is becoming, or has already become), then large companies who build their platforms on top of "encumbered" technologies like H.264 (e.g. YouTube, Vimeo, most Flash video sites, etc.) are then beholden to the whims of this monopoly which Google, etc. didn't like and had the resources to avoid (see WebM).