Thursday, August 6, 2009

Google To Acquire On2 Technologies for $106.5M, How Disruptive Is It Really?

The big news yesterday was that Google announced they would acquire On2 Technologies for an all-stock deal valued at $106.5M. On2 is the developer of the high quality VP series of Truemotion video codecs, of which VP6 replaced the Sorenson Spark video codec for Adobe Flash player 8 and above and is the core of On2's video encoding software suite of Flix Standard, Pro, Exporter, Live, Engine and Directshow SDK. The VP6 is a proprietary codec and has been a direct competitor to H.264, the dominant compression standard for high-quality web video, IPTV and Blu-Ray disc also known as H.264/AVC/MPEG-4 Part 10. On2 also developed the earlier VP3 codec of which the open source codec Ogg Theora is derived. On2 customers include Adobe, Skype, Nokia, Infineon, Sun Microsystems, Mediatek, Sony, Brightcove, and Move Networks.

In a letter to on2 Flix customers, Frank Galligan, Vice President of Engineering said that they are thrilled to become part of the Google family and gave the rationale for why Google is acquiring On2. He said:
"Google has indicated to us that they are continually looking to improve video quality and delivery on the web, and that our video technologies will allow them to do even more with their products and initiatives. They have indicated that they are interested in all parts of our video technology. With Google Video, Google Talk and YouTube, among others, they have a substantial interest in developing tools and technology that will better support more high quality video on the Internet. Google has indicated that they believe that our team and technology will help Google make higher quality video available online."
While it's too early to discuss specific product plans until the deal closes, Mr. Galligan said that all existing agreements will remain in effect under their existing terms and that they expect that Google would honor its obligations under existing contracts.

So how "disruptive" will this be for the online video industry?

There's been a lot of speculation that Google is purchasing On2 to take advantage of the advanced V7 and V8 codecs for either open source the codecs and make them license-free. Such a move would create serious competition to the other major video compression technologies of H.264, Flash and Silverlight all of which are proprietary codecs. Could Google be looking to to avoid the licensing fees for H.264? Will Google open source On2's technology to disrupt HTML5? Is Google looking to bake the high quality video compression technology into YouTube to speed up videos and lower bandwidth costs?

This all sounds like a big deal that's going to give Google the edge to disrupt the fabric of the online video landscape and "win the online video format war" and with the acquisition Google acquires technology that it can embed within its Android and Chrome OS platforms. This may cause companies like Adobe, Microsoft and Apple to take a financial hit and force them to support whatever new video codec that Google brings to market. Also, with the situation regarding browser-based decoding for tag in HTML5 at a stalemate and undefined, Google could help change the tide by open sourcing On2 VP technology.

According to Dan Rayburn, who wrote in a two-part post that debunks many of the theories posed in the blogosphere, it's really not a big deal.

"While one could assume that Google will do something with VP8 and Chrome tying into the new HTML 5 standard, is that the reason to spend $100M to acquire a codec? I don't think so. While many want to automatically assume Google will always be successful in whatever they do, simply because they are Google, they have never done anything well outside of search and advertising, as far as generating revenue goes. If they want to challenge H.264, they'll lose. If they simply acquired On2 for their own use in YouTube and Chrome, ok, could work. But it won't have any major impact on the industry."
UPDATE 8/9/09: Check out Tim Siglin's new blog WORKFLOWED, which he launched following a discussion on Dan's post, Google's Acquisition of On2 Not a Big Deal, Here's Why. Tim says: 
"Dan listed off a series of reasons why Google may not have been interested in purchasing On2. A fascinating read, and a bit of a different take from the news article I'd written early this morning, which outlined the deal. In between writing mine and reading Dan's I had spent some time thinking through what Google might be up to, so I posted the following as a comment on Dan's blog: Google Purchases On2 - Additional Thoughts"
"I would pay special attention to what Google does with On2 on Android, because there is an opportunity for it to outshine rivals such as RIM and Apple. Just look at On2’s mobile video arsenal: It owns technologies for embedded video for mobile platforms (Hantro) and On2 TrueMobile System, a mobile video system designed to send video across the networks — including 2.5G, Edge, 3G and 4G networks — using On2’s VP7 technology."

"... my angle on this acquisition is one that no other commentator I've yet seen has taken: following in the footsteps of the Chrome web browser and the Android and Chrome O/S operating systems, Google's pending direct control over On2 is the company's latest move to wrest control of the Web from companies such as Adobe, Apple, Microsoft and Mozilla (specifically, the latter's under-siege Firefox web browser)
Also, with the current legal issues around Skype, Google could use On2's video technology could enhance its video communication suite of tools (Voice, Talk, Wave) to compete with Skype. With the open source movement gaining speed and online video growing at explosive rates it will interesting to see how disruptive this latest acquisition by Google will be for the web video. For now we can only speculate and since the deal won't close until the fourth quarter the effect of this merger won't be felt for months but the ripples within the online video landscape are already starting to appear.