Google To Acquire On2

On2 Technologies, whose VP6 video codec is used by Adobe as part of its Flash video ecosystem, will be acquired by Google, with the deal set to close in the fourth quarter of this year.

On2 is set to announce earnings for its second quarter, which ended June 30, tomorrow after the market close. Its last quarter, which ended March 31, the company narrowed a series of quarterly losses that has been plaguing it for quite some time, but revenue declined to approximately $4 million, a drop of about 10% year over year.

One of the constant themes that I've heard over the years, starting with the very first interview I did with then-CEO Doug McIntyre, was the theme of innovation and constant tweaking of the technology. McIntyre felt that the company was one of the few innovators left in the industry, and plunged ahead on rolling funds back into research and development to help the Clifton Park-based R&D team continue to innovate.

Google seems to agree.

"We believe high-quality video compression technology should be a part of the web platform," said Sundar Pichai, vice president, product management, Google, in a statement. "We are committed to innovation in video quality on the web, and we believe that On2’s team and technology will help us further that goal."

The On2 R&D team had its start with a key project at Rensselaer Polytechnic Institute, but it has branched beyond the core technology as it moved from streaming to real-time, two-way communications. In fact, while its best known client in the U.S. is Adobe, On2 has numerous clients in Asia and Europe that use its technology for video IM and video chat.

Besides VP6, VP7 and the new VP8—touted by On2 as better than H.264—Google will also pick up embedded H.264 solutions, thanks to On2's acquisition of Hantro a few years ago.

The fact that Google is acquiring both proprietary and standards-based compression technology provides for a two-pronged approach. YouTube, which Google also owns, has been converting content into H.264, but the On2 proprietary codecs also allow Google to choose to output VP8 content that can be played back on machines with lower power consumption and processor requirements. This means Google can cover the spectrum of web video, including video play back on some mobile devices and older computers which cannot play H.264 content smoothly.

The innovation, at least according to On2's interim CEO, Matt Frost, will continue under Google.

"After intensive review of On2 products, Google confirmed our long-held beliefs as to the quality of our video technologies," said Frost in a press release. "On2 will continue to improve, support and sell our products throughout the transition. We’re thrilled that On2 is joining one of the world’s most innovative companies and we believe that Google shares our ambitions."

On2 was facing a dwindling cash reserve, which last quarter dropped 24% to $3.2 million, and its stock had also recently slipped to about half of its 52-week high of $.65 per share. Google, however, is offering an amount closer to the 52-week high, saying it will convert each share of On2 into 60 cents of Google stock, for a total of $106.5 million in newly-issued Google stock.

"$0.60 per share represents a premium of approximately 57% over the closing price of On2’s common stock on the last trading day immediately prior to the announcement of the transaction," the companies announced in a joint press release, "and a premium of approximately 62% over the average closing price of On2’s common stock for the six month period immediately prior to the announcement of the transaction."

The acquisition is subject to On2 shareholder approval and standard regulatory clearances.