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 ...