Why is Google spending $106 million in purchasing the owner of decaying codecs?
1) Google has high hopes for HTML5, a standard set to handle video natively (i.e. there will a a <video> tag, as there is a <img> tag for pictures now, and no plugin will be required for the browser to play a video, unlike the plugins required now for flash, Windows Media or Real Audio). If Google open-sources the coming VP8 codec from On2, and forces it into HTML5, it would seriously hit Adobe Flash and Microsoft Silverlight proprietary strategies in favor of an open HTML5. Google can put a lot of pressure by incorporating VP8 into Chrome and migrating YouTube to support it.
2) Owning a video codec technology, as online video becomes King in the Web. Although h.264 is an open standard licensed by MPEGLA, Microsoft owns their own propriety Windows Media codecs. Imaging Windows introducing ad insertion, or search within videos, or interactive video objects within the video coding technology ahead of others. What would be the effect to Google’s search and advertising “bread and butter” in a video-centric Web? Can you imagine Google paying licenses to archrival Microsoft?
3) Is $106m too much? Google might be making the simple maths? What would be the impact on their market cap, if Microsoft releases a video codec with ad/search features? What would be the impact on Microsoft stock if Google is able to master the video codec technology and do that first? Note that just the announcement of this acquisition make Adobe shares drop 3.5%!!
It is not the saving in licenses or bandwith what drives this acquisition. This is about strategy, defending from Microsoft, and taking control of its own future. Google will not make direct revenue from this $106m acquisition, but if it succeeds in getting VP8 widely adopted into HTML5, they are going to be better positioned that anyone to defend their Advertising and Search business in video too.
Online 3D video, interactive objects within video, search within video contents. All that will come and Google wants to be the one to bring it and not depend on standard bodies, or worse, its major competitor.
Coverage of this news by other blogs:
GigaOM, Google: You Buy Some, You Sell Some
NewTeevee, Watch Out, Flash; Google Buys On2
StreamingMedia.com, Google’s Acquisition Of On2 Not A Big Deal, Here’s Why