Google’s Video David Battles Industry’s Goliaths

Google (NASDAQ: GOOG) challenged the entrenched providers of video compression software when it bought small  firm On2. The search company took On2’s advance video compression product and open sourced it. The company made the software, called VP8, available without license fees much the way that its Android operating system is.

The powers that control video compression for both consumer electronics and the web may have tried to block Google’s plans, at least according to a government investigation. Google has become the David to the Goliath of the dominant corporate powers in the video industry.

The Wall Street Journal reports that “These firms pay royalties to an organization called MPEG LA, which is the target of the formal antitrust probe, the people familiar with the matter said. MPEG has amassed pools of patents covering widely used video formats and collects royalties for its members.”

Several things are at stake between Google and the companies that hold patents in the MPEG patent pool. The first is what each company is paid for contributing its patents to the MPEG pool. These include consumer electronics and software giants such as Cisco, Hitachi, and Mitsubishi. Their interests in keeping MPEG intact are driven by profit.

The other large motivation for MPEG members is that its compression is currently the standard for old hardware used in the television industry and some new software for Internet streaming and downloading. VP8’s challenge to the group is similar to the one that Android’s open source mobile OS has posed to Apple (NASDAQ: AAPL), Research In Motion (NASDAQ: RIMM) and Nokia (NYSE: NOK). Good free products often trump good paid ones

Should Google win the legal and regulatory war with MPEG the shift in the control of video compression could be the largest changing of the guard in the industry for decades. Google will have proven once again that it can be an immense disruptor of an established industry.

Google’s investors will be left with the same question they have about Android. Google has built the best technology, but how does it make the company any money? VP8 does not answer that question because the software is free. And, that means Google is still nothing more than an immensely successful online advertising company.

Douglas A. McIntyre