Once upon a time in the dim and distant, when working on enterprise technology we just happened into a small technology company as it was celebrating. We asked why. ‘We’ve just put our rival out of business. IBM has just bought it.’
We merely pointed out that yesterday they were competing with an underfunded start up, now they were head to head with IBM, and the celebration came to an abrupt end.
It must be something like that at DivX this week as staff there heard that On2 Technologies, a company which had delivered the original codec IP from its VP6 codec, which powered Adobe’s dominant Flash format, only for it to be partially supplanted by an H.264 codec from MainConcept, now a subsidiary of DivX.
On2 then responded by putting its VP8 codec on the Adobe Flash rival Microsoft’s Silverlight which was deemed to be ‘open’ and claiming a 30% performance improvement over Flash. And the two companies have competed back and forth like this ever since.
Now everyone will have to rethink their gameplan ‘ and overnight Google has the kind of codec team that has stood the test of time, which can stand up to even Microsoft (one of the best codec IP teams in the world).
It is not a very well remembered fact that Google video relies on a piece of DRM technology borrowed from DivX , or at least it was (we haven’t heard that this has changed at all, but then again it hasn’t exactly brought Google access to premium content). But DivX might have had similar hopes of being acquired by Google instead of On2, both being smallish public US companies.
DivX has never quite had the right business model. First it offered codecs for free, and tried to license them to partners. It found that consumers used them for encoding pirated works ‘ no fault of its own, but that made Hollywood Studios suspicious. Then it developed its own DRM to get around that problem and it also managed to get chip makers to include DivX decoding on-chip in DVD player chips. The aim was to get lots of DivX encoded content out there, and force the world to embrace DivX content.
Next it chased the idea of licensing content directly and keeping it on a web service as a DRM protected web download, but then streaming came along from some of the major companies. The effect on its revenues of streaming has been devastating. Licensing revenues have fallen from $16 million in the first quarter last year to $13 million this quarter, while media and other distribution services fell from $4.9 million to $1.5 million, a 66% drop. On the sixth month figures this is even worse with last years half year media distribution revenues over $10 million and this half year just $1.6 million.
Meanwhile On2 Technologies revenues have been on the rise, tiny as they are, up to $5 million last quarter up from $3.3 million, and for the half year up to $9 million from $7.7 million. Add to this the fact that On2 Technologies has less money in the bank and the fact that in cash terms it had little more than 6 months of survival left in cash terms (despite its insistence that it had enough money for at least a year), while DivX actually has over $100 million in cash and short term assets, and this starts to look more like a fire sale from a beneficent customer than a strategic move. The purchase is expected to close in Q4.
But Google will acquire On2 at a huge premium to its share price the day before the deal was announced, paying $106.5 million in shares for the company, so there must be something in it for Google. Meanwhile the DivX share price fell on the day of announcement of the deal, not significantly but enough to register the disappointment that it was not DivX and that now it is up against Google.
By buying On2 Google may be able to improve the video capabilities of Android, which have been criticized by multimedia-heavy customers such as Sony Ericsson.
Also with On2, Google gains the Hantro system for embedded video on mobile devices, plus the On2 TrueMobile System, which sends video over wireless networks (EDGE, 3G and 4G). On2 also owns the Flix range of development platforms, for Flash video.
One immediate motivation might be to reduce the cost of running Google’s YouTube by reducing its hefty bandwidth costs, and also to increase its quality. But this already uses to the Flash Video codec, so perhaps there is nothing to be gained here. On the other hand a few percentage points improvement might pay for the whole deal.
“Today video is an essential part of the web experience, and we believe high-quality video compression technology should be a part of the web platform,” said Sundar Pichai, Vice President, Product Management, Google. “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.”
Just what Microsoft and Adobe think of this deal is open to discussion, but may be given away by future licensing deals for Flash Video and for Silverlight, which may now be more inclined to work with DivX.