On2 Shareholders Finally Agree to Google Deal — What’s Next?

On2 shareholders finally agreed yesterday to allow the encoding company to be purchased by Google (s GOOG), after the search giant raised its bid by $26.5 million earlier this year. But with the acquisition now set to close this week, questions are arising as to just what Google’s plans for the encoding company are.

Under terms of the deal, Google will provide 0.0010 of a share of Google Class A Common Stock for each share of On2 common stock, as well as 15 cents a share in cash, bringing the total value of the deal to about $133 million. It will close after some six months of haggling since Google made an initial offer of $106.5 million in August 2009.

When the deal closes, Google will own all of On2’s video compression technology, which includes the VP6 and VP8 video codecs. At the time it was first announced, many believed that the deal could allow Google to circumvent On2 licensing fees or collect them from third parties like Adobe (s ADBE) or Move Networks. The suggestion was also made that Google could use its control of the new VP8 to push it as the dominant codec for YouTube.

But YouTube has thrown its weight behind H.264 for encoding of its HD videos, as has much of the video industry. In fact, YouTube’s recently released HTML5 implementation is based on H.264 as opposed to the open-source Ogg Theora encoding format, which was formed out of On2’s VP3 codec. So it seems unlikely that Google plans to use its control of On2 to push others to adopt its codecs.

Google could adopt some of On2’s video encoding and transcoding technology into YouTube’s back end to speed the encoding of user-generated content that gets uploaded to the site. YouTube said last year that about 20 hours of video are uploaded to the site every minute, so having a more robust encoding solution might help the company to speed the amount of time that lags between when a video is uploaded and when it becomes available on the site.

Google could also leverage some of On2’s wireless technology in its quest to increase adoption of video on Android mobile phones. As Om pointed out last August: “[On2] owns technologies for embedded video for mobile platforms (Hantro) and On2 TrueMobile System, a mobile video system designed to send video across the networks — including 2.5G, Edge, 3G and 4G networks — using On2’s VP7 technology.”

Google is expected to close on the On2 acquisition “on or about Feb. 19,” so it probably won’t be long before we find out what the company has in mind for On2’s technology.

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