A look at On2 Technologies and why Google wants it

A look at On2 Technologies and why Google wants it

Summary: It's not very often that Google makes an acquisition and the target inspires a collective "who?" But that's what happened when the search giant bought On2 Technologies, a penny stock trading in obscurity on the American Stock Exchange, for 60 cents a share.

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It's not very often that Google makes an acquisition and the target inspires a collective "who?" But that's what happened when the search giant bought On2 Technologies, a penny stock trading in obscurity on the American Stock Exchange, for 60 cents a share. And unless you've followed the wonderful world of video codecs On2 may still be a bit of a mystery.

Here's a look at On2's business and Google's grander plans.

What does On2 do?

According to On2's annual report, the company owns a series of video compression technologies that help transmit video over bandwidth constrained cellular networks and high-def over the Internet. On2 has a proprietary platform that includes video codecs VP6, VP7 and VP8, Flix Pro, a Web development platform, Flix Publisher, a series of Web browser plug-ins, Flix Engine, a server transcoding platform and Flix DirectShow SDK, a library for video content creation. What will Google do with this? In Google's statement, the company noted that video compression should be part of the Web platform. Simply put, On2's technology will be lumped into the Chrome browser, YouTube and other key areas.

Is On2's technology a threat to Adobe's Flash platform now that Google owns it?

While some folks view the Google purchase of On2 a threat to Adobe's Flash it's unclear what'll happen. For starters, Adobe is a customer of On2's. The company reports in its SEC filings:

In 2004, we licensed our video compression technology to Macromedia, Inc. (now Adobe Systems Incorporated) for use in the Adobe Flash multimedia player. In anticipation of Adobe using our codec in the Flash platform, we launched our business of developing and marketing video encoding software for the Flash platform. Flash encoding has become an increasingly important part of our business. In December 2008, we entered into a license agreement with Sun Microsystems for the use of our video compression technology in the JavaFX platform and anticipate further growth for our encoding and transcoding businesses as a result of this transaction.

In fact, On2 notes that it is the video engine for Flash 8 video. What will Google (not to mention Adobe) do now? Google could open source On2's proprietary technology, which competes with a bevy of standard compression specifications from industry groups. Or it could just continue to license On2's technology to Adobe. The licensing of On2's Flash encoding tools accounted for 27%, 41%, and 64% of its revenue for the fiscal years ended December 31, 2008, 2007, and 2006, respectively.

Another wrinkle: Google and Adobe could become tighter in their battle with Microsoft. Indeed, On2 has been upbeat about its relationship with Adobe.

We continue to believe that VP6 will be an important part of the Flash video ecosystem for three reasons: (1) Adobe has in the past provided backwards compatibility with all generations of Flash video codecs; (2) VP6 has certain performance advantages over H.264 (e.g., HD VP6 content may be played back on a lower-powered processor than HD H.264 content); and (3) there is a vast amount of existing VP6 content that consumers want on portable and mobile devices.

Will Google embed itself into multiple areas with On2?

It's quite possible that Google could use On2 to embed itself into multiple areas. On2 caters to hardware and software developers that create everything from teleconferencing services to video instant messaging to surveillance to mobile television and video transported via wireless networks. On2 also offers custom engineering and consulting services and a cloud-based pay as you encode service built on Amazon EC2. What will Google do with this stuff? On2's technology will be sprinkled into a host of side ventures.

Who highlights On2's customer roster?

Aside from Adobe and Sun, On2 notes that Move Networks and Skype are also customers. It's unclear whether these customers will think differently after Google completes the deal.

What competition does On2 face?

On2 listed H.264, a standard codec that is the successor to MPEG-4, as a primary competitor. The company said:

We believe that our technology is superior to H.264, and that we can offer significantly more flexibility in licensing terms than customers get when licensing H.264. H.264 has nevertheless gained significant adoption by potential customers because, as a standards-based codec, it has the advantage of having numerous developers who are programming to the H.264 standard and developing products based on that standard. In addition, a number of manufacturers of multimedia processors have done the work necessary to have H.264 operate on their chips, which makes H.264 attractive to potential customers who would like to enable video on devices. For example, Apple Inc. uses H.264 in its QuickTime® player and has thus chosen H.264 for the current generation of video iPods. Finally, there is already a significant amount of professional content that has been encoded in H.264. These advantages may make H.264 attractive to potential customers and allow them to implement a solution based on H.264 with less initial development time and expense than a solution using On2’s proprietary video codecs might require.

On2 also competes with a lot of household names.

We believe that the principal competitive factors in our business include technological innovation, versatility of products, pricing, availability of content, ease of integration with and availability of use on low-cost processors, customer service, service offerings and the flexibility to adapt to changing market conditions. Our video compression technology competes with that of companies such as Microsoft and RealNetworks and with standards-based codecs such as MPEG-2, H.264, MPEG-4 and several codecs that position themselves as “MPEG-4-based.” Companies such as Apple, Inc. and DivX, Inc. also have popular players that they have derived from standards-based technology; Apple’s QuickTime player is based on H.264, and DivX uses a variant MPEG-4 and H.264.

What's the Microsoft hook?

Every Google story has some Microsoft angle to it and the On2 purchase is no different. On2 noted that Microsoft is becoming a significant competitor. On2 said:

A continuing trend in our business is the growing presence of Microsoft Corporation as a significant competitor in the market for digital media creation and distribution technology. In 2007, Microsoft released Silverlight, a rich Internet application that allows users to integrate multimedia features, such as vector graphics, audio and video, into web applications. Silverlight may compete directly with Flash. If Silverlight gains market share at the expense of Flash, it could have a negative impact on our Flix business. In addition, Microsoft VC1 format also competes in the marketplace with H.264 and our VPx technologies. We believe that our VPx technologies have the same advantages over VC1 as they do over H.264.

Although we expect that competition from Microsoft, H.264 developers, and others will continue to intensify, we expect that our video compression technology will remain competitive and that our relatively small size will allow us to innovate in the video compression field and respond to emerging trends more quickly than monolithic organizations like Microsoft and the MPEG consortium.

Then in a sentence that probably won't be written again once the Google deal closes, On2 noted that some customers find it appealing to work with a smaller company.

What exactly will Google do with On2's hardware business?

On2 has a hardware business where it develops digital electronic hardware designs (known as register transfer level designs or RTL) of video and audio codecs to manufacturers of computer chips and multimedia devices. A licensee of On2's RTL design might use that product to implement a video decoder on a chip with the decoder built into the circuitry. What would Google do with this business? Sounds like a netbook-Chrome OS play of some sort doesn't it?

Are any of On2's businesses worth keeping?

Probably not if all you do is look at the financial picture. Google could just open source everything On2 has and not blink an eye. Here's the annual financial picture, which isn't even a rounding error in Google's world:

Topics: Enterprise Software, Google

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23 comments
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  • Wasn't

    an earlier version of an On2 codec released as open source which morphed into Theora?

    Unless you are talking 2X reduction or better at the same "quality" we need fewer codecs, not more.
    wkulecz
    • Ogg Theora

      ...was On2's VP3 codec. It is an inferior codec to today's standards of VP6, H.264, and VC-1.
      Joe_Raby
  • It could still be copmtetition for Adobe

    Replace Flash on youtube with a different codec. Preferably with one that is less processor intensive for iPhone and company. Google can still license to Adobe as normal, but just quit using flash. That would hammer Adobe.....
    mtgarden
    • i don't think so.

      Youtube is mainly a flash flv server, so every new codec most pass through Adobe.
      magallanes
  • RE: A look at On2 Technologies and why Google wants it

    This directly relates to the HTML5 video codec issue.
    alanhogandotcom
    • The issue is with third-party support

      Apple says they would rather use Quicktime-wrapped video formats, be they H.264 or otherwise, so that they can license out the player.

      Microsoft wants to use Silverlight because it has certain advantages that HTML and AJAX don't offer at this point in time (Silverlight is a subset of .Net framework).

      There has been very little response to the proposed Ogg Theora open source codec too. Nobody uses it.
      Joe_Raby
  • I'd love to see the technology be "Opened."

    Imagine a world where we have a decent video codec in widespread use which DOESN'T have insane licensing fees attached to it. Maybe we would finally have a free interoperable codec standard we could incorporate into web standards. Let online folks compete based on content rather than the amount of cash they have for licensing codecs.
    BillDem
    • Someone has to make that technology though

      ...and people can't live off good intentions.
      Joe_Raby
  • Not as efficient as the competition

    VP6 runs poorly on Intel Atom systems compared to VC-1 in Silverlight, which Microsoft heavily optimizes for low-bandwidth decoding. VC-1 also looks better at the same bitrate.

    On2 has never been that good with optimizing their codecs for GPU acceleration either, and with software API's like CUDA and DirectX VA and Compute, H.264 will help Nvidia to leverage their stake in GPGPU. CUDA applications are written with H.264 encoding in mind. On2 codecs underutilize the GPU.
    Joe_Raby
  • RE: A look at On2 Technologies and why Google wants it

    Sounds fucked strange!
    How can a company with 3 times net loss(51M$) than its revenue(16M) sold for 100M$??????
    freelysolo
    • Easy Price Explanation

      The main contributors to the magnitude of the loss:
      $33.2M in asset impairments (something got written off)
      Operating expenses mostly doubled for a 25% increase in Revenue.

      No balance sheet or cashflow statements to see what their reserves look like, but I'm guessing they were low for the stock to be $0.60

      SO it's a strategic trade sale priced at the value added to the acquirer, rather than on the fundamentals of the business.

      It means the deal is worth a lot more to Google than $100M
      paulzag
  • It's no h.264

    As a flash dev who has focused on online video delivery for many years I found it interesting that Google will possibly acquire On2 though definitely not concerned. Most of the encoding tool are directed are very basic and not intended for the power users who actually have monetized their content. As media properties move away from video codecs such as On2 vp6 due to lack of image quality after compression and the bloated resources it takes to decode this format I start to wonder why they would do this. But with the release of html 5 video support and the hefty license you must pay to implement h.264 things start becoming a little clearer. My biggest issue with HTML 5 video is the lack of support for commonly used video codecs. If Google implements On2 vp7 and vp8 for the Chrome browser then I could see the video format wars gaining a new opponent.

    Video Player Developer
  • RE: A look at On2 Technologies and why Google wants it

    I agree this seems a likely scenario especially with their HTML5 iniiative. Youtube has enough reach to make people rethink why they are using Flash. This also will make people question Silverlight as well.

    It makes me wonder why Adobe did not purchase this On2 earlier.
    randall.shimizu9
  • I'd be surprised if they didn't open-source the codec

    Google make their money from monetizing content, not selling the tools used to create the content. They could open source the codec so an open-source movement would grow around developing personal tools for it, while still maintaining a professional tools line that can be bought by companies. If Youtube is ever to use the tool, it really needs to be something that's available in all browsers at low-cost. The less licensing fees (for video plugins) the better.
    davidcorley
  • RE: A look at On2 Technologies and why Google wants it

    Congrats to our neighbors over at On2 Technologies!
    They've got an awesome product, and it's great to see
    another big win like this for the area (especially right
    next door!).

    - Jesse
    Apprenda | Enabling Software as a Service
    Jesse Kliza
  • RE: A look at On2 Technologies and why Google wants it

    I don't know anything about On2 but does anyone know what codec technology Netflix uses for the content it streams through Roku? It certainly doesn't look like HD, but it's really extremely watchable on my 42" Samsung.
    jemd9
  • I just love it....

    ...when Google takes the initiative and conducts new research to create new technologies or new applications.
    adornoe
  • Video codecs and tools - Forbidden Technologies plc

    A good article. I have come across On2 (initially under their
    previous name) on and off for perhaps 15 years, and they
    have always seemed to be good people. It was very
    generous to provide Ogg Theora, for example, which is
    used on Wikipedia - and which you can export from
    FORscene and Clesh.

    My current company started off by selling our own Java-
    based video codecs / players back in 2001. Of course,
    back then, no one wanted 384x288 @ 25fps [you can see
    we are a European company!] playing back over modems.
    And in 2002, no one wanted 320x240 @ 25fps streaming
    over 2.5G on the new PDAs.

    People back then didn't realise the advantage of a high
    performance cross platform player which didn't need
    installation.

    So now we had this Java codec, and although we could not
    find a market in the UK, we had achieved the first step in
    our plan for World Domination (TM). You see, Java is not
    limited to a full frame rate video player - it can do
    anything - an important point which I come back to later.

    So at IBC (Europe's biggest broadcast show) in 2004, we
    launched FORscene, the world's first full frame rate web
    based professional video editing system for Broadcast
    Television - running in Java. This runs over the internet
    and on most PCs/Macs runs without any installation or
    configuration. As an added bonus, it doesn't need any
    security permissions to run as it works entirely in the Java
    sandbox - ie users don't have to trust the software in
    order to run it on their computers. On2 came round to our
    stand and we got on well together then.

    FORscene is now a mature technology, and illustrates the
    power of what can be achieved in Java. But it also brings
    me to question the need for an html video tag. By
    encoding codecs in Java, any web browser on any machine
    can already play back video. And more than that, they can
    do also do anything else, including frame accurate video
    post-production. And every time I upgrade my codec (or
    my Java editing applet), you don't need to update your web
    browser, as you will be able to use the latest version.

    There are two types of standards in the world:
    Those which are limiting, for example by telling you that
    you can only encode video bitstreams using On2, and if
    you don't have exactly the right version on a supported
    machine, you cannot use the standard.
    And those which are enabling for example saying here is a
    Java VM which you can use for anything, even things we
    didn't think of when we wrote Java. And being a standard,
    it will work on any browser on any computer - as will all
    the upgrades.

    I prefer the second option. And good luck to On2 - they
    are the next step for Google's video ambitions.
    sbstreater
  • RE: A look at On2 Technologies and why Google wants it

    What I see in all this talk is a disregarding of the issue of multiple video compression standards.
    How many will we have to use before usage iself weeds out the losers? I have so mamy codecs loaded right now the thought of adding more
    is very discouraging.
    redblanchard
    • You may be asking the wrong question

      You should not be concerned at using multiple video compression
      standards any more than you should be concerned that you are
      running software written in multiple languages on your computer. Are
      you going to be calling for a culling of the hundreds of programming
      languages people use? Of course not! The reason is that the
      languages are transparent to you as a user.

      You should not need to know which format each video is in - it should
      just work. That is why I like Java as a delivery platform - you can use it
      to play back video in any format, and as a user you don't need to
      install any special player. For this reason, it is a different category of
      infrastructure from just another codec.

      FWIW, I have just bought a new macro lens for my Canon EOS 5D Mark
      II and here is my first "Bugs" video:

      http://clesh.com/videos/view/Bugs-1250456386.pud/
      sbstreater