I agree they would probably benefit from open sourcing it. However I don't think they can. In order to "fully open source" it, they would have to include an open source H264/mp4 decoder. Which would probably not be allowed by everyone who owns H264. Alas.
You are confusing licensing of code and patents. You can have an implementation that is Open Source. The problem is licensing the patents and eventually having that license trickle down to "sublicensee". Usually this does not work.
So technically the code is Open Source but each distributor must get a patent license... that is restricted to redistributing binary form only.
(I deliberately did avoid the use of the word Free Software, as this actually might not be true if the code is licensed under the Free Software license GPL).
You are right that you might be able to claim "open source" while still requiring a patent licence under the letter of the 'open source'. However that would definitly go against the spirit of "open source" and it would not be viewed by anyone as actually open source at all.
"Free Software" vs "Open Source" would not be relevant here, since both FS and OS would view this "you-still-need-a-patent-licence" clause as incompatible with FS & OS.
There are a few bits in the new GPLv3 that say "if you release under GPLv3 then you have to give everyone a patent licence". However I don't know how that works if you don't have a full patent licence…