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Watch Out, Flash; Google Buys On2

Google (s GOOG) today announced it bought On2 Technologies (s ONT) in a stock-for-stock transaction worth $106.5 million. On2 has historically been a core underpinning of online video with its encoding and compression technologies. However, the company is not an obvious pick for Google, especially given that its main VP6 product is much less dominant than it used to be. The purchase makes it evident that Google is preparing to make a video infrastructure play.

Just about everyone that powers online video or has their own Flash player, including Adobe (s ADBE), continues to pay On2 licensing fees for its VP6 video codec. However, in the last couple of years, the industry has largely chosen H.264 as VP6’s successor. Though H.264’s selling point is its high quality, a big part of the reason people moved away from VP6 was those On2 licensing fees. “It was like dealing with Tony Soprano every year,” said a source today. “If you were a day late…It was archaic licensing. It was just a nightmare.”

Still, VP6 is already installed on computers everywhere, and with Google managing its licensing (or even dropping it), the format could come back into power. The open-source video compression format of choice, OGG Theora, which is being pushed by Mozilla, has not won industrywide confidence, so it could be that Google is trying to substitute another contender. Google, with its Chrome browser, is one of the leaders of the new HTML 5 standard, which handles video natively and could eventually eliminate the need for Flash and Silverlight-type plug-ins.

Google Vice President of Engineering Vic Gundotra demonstrated YouTube mocked up in HTML 5 at a recent developers’ conference. There’s no indication YouTube will trade in Flash just yet, but clearly that’s figuring into people’s long-term visions. However, another funny twist is that, at least according to our source, YouTube itself is thought to use an open-source version of VP6.

We wouldn’t be surprised if Google goes ahead and open-sources On2 itself. From the press release:

“Today video is an essential part of the web experience, and we believe high-quality video compression technology should be a part of the web platform,” said Sundar Pichai, vice president, Product Management, Google. “We are committed to innovation in video quality on the web, and we believe that On2’s team and technology will help us further that goal.”

Shares of Google are essentially flat, off less than 1 percent at $449.98, while shares of On2, which is traded on AMEX, have rocketed higher by 49.7 percent to change hands for 57 cents. Adobe shares, meanwhile, are down 3.5 percent to $31.84.

34 Responses to “Watch Out, Flash; Google Buys On2”

  1. 1) Adobe has never paid On2 royalties for use of VP6. The license deal between them was a front end, upfront, one-time payment. The royalty and/or license fees earned by On2 with respect to VP6 are mainly derived from entities that are involved with encoding VP6 content using non-Adobe provided software tools.

    2) Can your unnamed source provide more explicit clarification of exactly how On2’s licensing/royalty fee arrangements are any more “archaic” than those of MPEG-LA which administers the licenses for MPEG-2, MPEG-4, and H.264? I guess having to pay anybody a license/royalty could be considered archaic as compared to not having to pay anything. Otherwise what’s your source’s real point?

    3) It is not so evident that the industry has largely chosen H.264 as the VP6 successor. H.264 has clearly, finally established traction – as was always anticipated would be the case. But the market for video is huge and encompasses a variety of applications for which H.264 may not be as suitable as VP6 to service. Via Adobe Flash VP6 continues to be deployed as widely or more widely for web based video than any other single video codec. I suspect that will continue to be the case particularly now that Google is going to own the technology. The big question is what else Google has in mind to do with On2’s proven video technology and how much interruption those plans will present to Microsoft, Apple, Divx, and various other MPEG/H.264 adherants.

  2. In addition to a big US “win” – the Google / On2 deal seals Asia for Google. On2 solutions are ubiquitous in China (do the DD), and as China goes so will Asia. Will be very surprised to see other large US or Asian players not start a bidding war for what On2 has to offer – or simply to thwart Google.

  3. It will be interesting to see how they go about integrating this to the rest of their technology, there are many ways in which they will try and apply it but they’ll have to focus to get anything done.

    Do you use it to help Youtube move forward (long form, higher quality etc) use it to include video in the Chrome OS, make self-serve video advertising easier, improve video support in Android, open source it as a spoiler for Adobe….who knows. Maybe it will disappear into a throng of engineers never to be seen again.

  4. interesting cstrategy, competing woth the highly proprietary media business, by buying up propriatary media codecs to release them as open source. btw, you could have mentioned that ogg theora is based on the open sourced VP3.2 codec of ON2.

    what will be the audio codec for this chrome video standard? now google has to buy and open source AACplus from Nero AG.

  5. It would not surpirse me to see this heavily tied to their OS work (both android and Chrome). Given that both platforms are designed to run on lower powered processors, H.264 is a challenge to playback at full frame rate, especially for HD. VP6 on the other hand is much friendlier on legacy machines and netbook type devices.

    i guess the bigger point is they have lots of places they can apply this technology.