Google’s Acquisition Of On2 Not A Big Deal, Here’s Why

This morning, Google announced they would acquire On2 Technologies for $106.5M. While the deal is not expected to close until sometime in the fourth quarter, many writing about this are already declaring that Google will now disrupt the online video industry by speculating that Google will open source On2's VP8 technology. While Google could go the open source route, there are a lot of reasons why that would not disrupt the industry and I think way too many people now want to say Google is going to win the online video war, when all the did was acquire a codec. (also see part two of my post entitled "Debunking Some Myths Of The Google/On2 Deal, Questioning VP8's Quality")

While many want to speculate that Google bought On2 so that they could use On2's VP8 codec instead of H.264 for YouTube and not have to pay licensing fees to MPEG LA, the cost to license H.264 is $10,000 per website. So even if Google had 100 websites, it would only cost them $1M a year. That's not the reason to go out and spend 100x that to buy On2. So H.264 licensing is not the issue. Also, some folks have written that by buying On2, Google now doesn't have to pay Adobe a Flash license fee for YouTube streaming. As anyone in the industry knows, Google doesn't pay Adobe any fee for Flash as YouTube doesn't deliver any of their videos via the Flash streaming protocol, (RTMP) from a Flash server. All of YouTube's videos are progressive downloads which come off of Google servers, so no license fee is paid by Google to Adobe.

While Google could very well switch YouTube over to VP8 and then force Microsoft and Adobe to include support for it, that would go directly against YouTube's own support of H.264 for their HD videos and more importantly, would kill any four screen strategy for the company. Like it or not, many industries have already adopted the H.264 standard for everything from set-top-boxes to video conferencing applications. I don't see Google trying to build up VP8 to try and disrupt H.264 when it's a standard that has been well adopted. Look at all of the devices like the iPod and others using H.264. If Google truly wants to have a four screen strategy for delivering YouTube outside of the PC, VP8 is not the way to do it.

In addition, VP8 is a codec, not a platform. Today, content owners are working to solve the problems of the entire video ecosystem and need a platform and third party solutions that tie into that platform. The codec is just one small piece of the entire system that's needed. Many hardware devices today have built in support for H.264, like encoding boxes, to help content creators solve problems with encoding. None of those boxes have support for VP8 today and very few even have support for VP6.

The other big thing to keep in mind that is that today, no one has seen VP8 in action. Everyone is assuming the quality is better than H.264, but is it? On2 has yet to prove that in the market and even if it is a better technology, you wont overcome the market standards already in place for devices. Also, while YouTube has a lot of power in the market, keep in mind that consumers don't know and don't care what codecs are. 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.