Thursday, August 27, 2009

Note to Skype - Be Afraid, Very Afraid, of Google's Deal to Buy On2

Google recently rocked the Internet video world by announcing that it is buying video codec provider On2. Although the deal faces many hurdles -- including shareholder lawsuits -- it is expected to close later this year.

By M&A standards, the deal is not huge (especially for behemoth Google) -- just a bit over $100 million in stock. So, why so much water cooler talk about this one? Precisely because it is Google. And, precisely because Google's intentions with On2 and its video codec technologies theoretically could shake-up the ambitions, long-term strategies, and overall success of some of the biggest tech titans ... including Skype.

Here's why.

Skype video depends upon On2 video codec technology. And, video chat has now become standard communications equipment -- in fact, it has now become extremely strategic indeed (my own previous company, SightSpeed, was acquired by Logitech for this very reason -- and Logitech's new Vid service is built upon SightSpeed technology).

Then, there is Google. Google Talk and Gmail Chat also feature video chat, among other things.

Where am I going with this? Google competes directly with Skype -- and, if Google holds the keys to the video chat castle (i.e., On2's video technology), Google may choose not to open the doors to that castle for Skype. Google could theoretically simply choose not to license On2's video technology to Skype, in which case Skype would have some serious internal strategic chatting to do (although, Google's actions certainly would be challenged on anti-competitive grounds in a very big way).

Even if Google's intentions are not so draconian, Skype still faces a very formidable foe in Google Talk and Gmail Chat. And, On2 technology certainly could be front and center as the company expands its video chat ambitions. Skype Journal's Phil Wolff writes an informative piece about just these very issues.

So, just when Skype thought it was out of competitive threats and major strategic vulnerabilities, "they pull me back in" (thank you Al Pacino). Maybe Skype should have made a play for On2 ...


jrystar said...

Why is it too late for Skype to make a play?

In fact, if Google may decide to cut out Skype, why couldn't they do the same with Java, Adobe and any other major user of On2 products, including the Chinese?

....and then, why couldn't one of them come up with an offer?

I believe this takeover has a ways to go.

Tapani said...

Thank you very much indeed for your valuable insight on this Mr Csathy.

Your own track record on strategic deals gives even more weight to your comments.

I myself have been following the online video space as an investor and on this deal I fully share your opinion. There must be a follow-up to Google / On2 deal, it is way too important to Google's competitors to be left untouched.

jrystar said...

Mr. Csathy, Oh how I wish you are right.

Sharpie said...

Thanks for your comments. Google is going to buy On2 for a song. This looks really good for Google if they can pull it off. And probably really bad for everyone else.

James said...

Go Vikes!!

Must be excited about Bret.
Monday night will be a real test.

Go On2 as well. We shareholders deserve better. Would you consider a seat on the BOD after the
Google offer is voted down?


Peter D. Csathy said...

Yes, more importantly, GO VIKES it is! Brett Favre was the right thing to do to at least motivate the Minnesota faithful ...

But, I digress from the main topic of my post ... again, I urge each of you to read the blog post from Phil Wolff that is linked in my post ... he wrote that several weeks ago immediately after the deal was announced and gives his perspective. Skype Journal is a very well respected blog.

Peter D. Csathy said...

One more thing -- I want to be very clear, because all of the discussions on the financial message boards -- these are my views only (at the risk of stating the obvious). This is my personal blog. And, given that lots of folks are scratching their heads about what Google plans to do with On2, it is natural that there are lots of "nervous" folks. And, for those reasons, it seems obvious to me there are many parties who would prefer this deal not get done -- but this is my surmising only.