Abstract-This paper proposes the differential energy watermarking (DEW) algorithm for JPEG/MPEG streams. The DEW algorithm embeds label bits by selectively discarding high frequency discrete cosine transform (DCT) coefficients in certain image regions. The performance of the proposed watermarking algorithm is evaluated by the robustness of the watermark, the size of the watermark, and the visual degradation the watermark introduces. These performance factors are controlled by three parameters, namely the maximal coarseness of the quantizer used in pre-encoding, the number of DCT blocks used to embed a single watermark bit, and the lowest DCT coefficient that we permit to be discarded. In this paper, we follow a rigorous approach to optimizing the performance and choosing the correct parameter settings by developing a statistical model for the watermarking algorithm. Using this model, we can derive the probability that a label bit cannot be embedded. The resulting model can be used, for instance, for maximizing the robustness against re-encoding and for selecting adequate error correcting codes for the label bit string.