Google buy up will help cut YouTube costs

Google is buying On2 Technologies, a provider of digital video compression technology, giving the internet search leader a way to cut costs for its popular video-sharing site YouTube.

The all-stock deal valued at $106.5 million (£62.7 million) gives Google access to technology that can help shrink video files so they can be sent more easily across the Web.

Such compression is important given that YouTube users upload some 20 hours of footage per minute; by shrinking the files, YouTube needs to buy less bandwidth from internet access providers.

"They're trying to lower their bandwidth costs," said Laura Martin, an analyst with Soleil-Media Metrics. The cost of bandwidth is seen as one reason YouTube still operates at a loss.

Mountain View, California-based Google said On2 shareholders will receive 60 cents worth of Google class A common shares for each outstanding share of On2 they hold.

That represents a 57 per cent premium to the Clifton Park, New York, company's closing price Tuesday.

Sundar Pichai, Google's vice president for product management said Wednesday in a statement, "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."

Google expects the deal to close in the fourth quarter.

Google's shares fell $1.18, or 0.3 per cent, to $452.55 in late afternoon trading Wednesday, while On2's shares surged 20 cents, or 52 per cent, to 58 cents.