It must be a slow news day because I’ve received an inordinate number of calls about Google’s purchase of video compression provider On2 Technologies for about $106.5M, a relatively small sum in the heady world of Internet valuations, for a company that’s been steadily losing money on less than $20M in annual revenue. But the On2 purchase may be the clearest indication yet of the designs Google has on video beyond the PC, especially the living room, and what it believes will be necessary to win there.
By the living room I refer, of course, to the future of television, and in particular the idea that video distribution to TVs and mobile devices will evolve to be more like the Internet, an environment which Google has found most hospitable to its brand of products and services. In video, however, Google has admitted that profit from YouTube has proven more elusive than originally thought. (At the last earnings call, however, Google CEO Eric Schmidt did say, “YouTube is now on a trajectory that we’re very pleased with.”)
Still, YouTube has been slow to penetrate the living room, where the real money is. Working with microprocessor designer MIPS Technologies, Google has already positioned Android for set-top deployment (see NYT coverage here), while also raising its involvement with addressable TV advertising with pioneer Visible World (see WSJ coverage here). The cable industry’s Canoe Ventures has played into Google’s hands by suddenly halting its already delayed addressable TV project. Make no mistake: bringing some Google targeting magic to TV ads could still be the company’s next gold mine.
So what does this have to do with On2? Three things:
First, Google gets some important embedded infrastructure. On2 brings a wealth of online video distributor relationships who have been licensing its technology for some time, including Adobe, whose Flash platform continues to power the majority of online video (although Adobe has recently been migrating Flash from On2 VP6 to H.264), and, perhaps even more significant for TV, Sun Microsystems, whose JavaFX platform is embedded in the infrastructure of most standard advanced television platforms. Although On2 compression faces strong competition from H.264 from the MPEG group, Google can use it to help ensure that video compression remains competitive and non-exclusive. It may chose to open source the technology to achieve these goals, as has been its pattern with other core technologies, but in any case they can use the acquisition to assure the quality and economics of online streaming continue to improve.
Second, it’s even more important to Google’s living room goals that the public Internet continues to develop into a reliable way to deliver high-def video to TVs in a “net-neutral” way: in other words, without cable, satellite, or IPTV telcos charging for quality of service or otherwise limiting video access to screens. This would allow Google, for example, to deliver “out-of-band” advertising options to broadband-connected set-tops that could be targeted using Google technology. Offering household targeting to broadcasters and advertisers, Google could beat Canoe Ventures to a lucrative exchange for targeted TV ads. But for that to happen, video compression needs to continue to make strides while remaining low cost. Many other things need to happen as well, such as the penetration of broadband TVs and STBs. Needless to say, this is a very disruptive notion for TV, so resistance will be strong. But compression could be an important factor.
Lastly, as Google moves to balance control of video standards among companies that include Apple, Microsoft, and Adobe, ownership of On2 gives them leverage to ensure its platforms (Android, Chrome browser, Chrome OS, Apps and Gears) include native video capabilities that are independent of control or licensing by any of its potential competitors. (For a deeper look at this landscape, check this blog post from EDN Senior Technical Editor Brian Dipert.)
All in all, I think more “ads by Google” on video screens beyond the PC are coming fast.