This past week, Google made the news yet again in online video, buying the company On2 for $106.5 million in stock. In talking to colleagues and scrolling through the blogosphere, I find there seems to be a significant amount of confusion surrounding this deal (myself included). Looking at the deal and its implications more closely, here's what I've found:
What On2 does: On2's key product is focused on video compression. A smaller (more compressed) file size means several things: faster download times, fewer delays and lower bandwidth usage. On2 also has software that optimizes video for both mobile and digital televisions.
The obvious reason why this matters to Google: On2 will make YouTube better and more profitable. Despite the recent positive messages on the site's revenue and eventual profitability, it's clear that YouTube is expensive to run because of the sheer volume of video that is uploaded and viewed each day. On2 is a solution to lower the cost of operating the site while at the same time delivering higher quality video. Sidebar on video quality -- On2 powers the current king of quality video, Hulu.
The other obvious reason why this matters to Google: mobile. While mobile is still one of the most polarizing topics out there, most agree that Google is positioning itself to be a force to be reckoned with when mobile finally does hit critical mass. On2 gives the company a solution to deliver quality mobile video on Android as well as on other handsets.
Other companies that this matters to: Adobe and Microsoft. Currently, Flash and Silverlight are the delivery platforms of choice. The On2 codec now gives Google the ability to drive adoption of its HTML5 plugin, which is currently supported by Chrome.
Hopefully, the strategic reasons for the deal make sense now: efficiency today and securing the right technology for future products. Seems like all the right reasons.
(Thanks to Dave Otten and Jeroen Wijering of LongtailVideo.com for their input and explanations for this Insider.)