• by Laurie Sullivan  @lauriesullivan, August 5, 2009

Google reported Wednesday that it will acquire On2 Technologies, which provides digital video compression technology, in an all-stock deal valued at $106.5 million.

Google says On2 shareholders will receive 60 cents worth of Google class A common shares for each outstanding share of On2 they hold. The deal should close in the December quarter.

On2's technology compresses video files, allowing people to send large clips across the Web. Its portfolio includes proprietary TrueMotion codecs used in Adobe Flash and Skype. Its video compression is also used in mobile video and embedded devices.

Earlier this year, the company released a video encoder that supports full-frame 1080p video. Hantro 8270 enables mobile phone designers to add the latest video decoding capabilities.

No word on the assets and patents that Google acquires in the deal, but a Google spokesperson says the On2 acquisition emphasizes the company's efforts to improve the quality of video on the Web.

The advanced video compression technology will allow the Mountain View, Calif. company to do more with its own products and initiatives, according to a Google spokesperson. "Between Google Video, Google Talk and YouTube, among others, we have a substantial interest in developing tools and technology to better support more high-quality video on the Internet," he says. "On2 Technologies has a talented engineering team and compelling technology, and we think an acquisition is the most prudent way to move forward to improve the online video experience for Google, as well as the broader developer community."

ABI Research Digital Media Analyst Zippy Aima says Flash has become the dominant format for Web-based videos. While the acquisition allows Google to position itself as the video infrastructure provider, it also may enable the company to capitalize on the fact that On2's VP6 codec is installed on computers. She also believes that Google could eventually offer the VP6 codec for free to developers who want to compress video files.

U.S. Internet users viewed 16.5 billion online videos in May -- slipping slightly from nearly 16.8 billion, sequentially, according to comScore Video Metrix. In the same month, YouTube served up 6.6 billion versus 6.8 billion, respectively, according to the research firm.

Today, 71% of the U.S. online audience already watches Internet video, and the number of streams consumed should more than double by 2013, driven by video content from users, professional studios and marketers, according to Forrester Research.

Forrester Senior Analyst Bobby Tulsiani says the number of streams per person will grow because many more people are generating content and uploading clips from vacations and travel videos to the Web. In a report titled "Five Rules To Drive Video Traffic," released in March, Tulsiani writes that the demand to upload clips is growing so quickly that YouTube reports that 13 hours of content is uploaded per minute.