Why Adobe Should Acquire On2 Technologies

For Adobe (ADBE), it may now be time to take On2 Technologies [ONT] out of the market. With yesterday's announcement that Bill Joll has resigned as President and CEO of On2 and as a member of their Board of Directors, and the recent problems surrounding falsified revenue at On2, Adobe could swoop in and acquire the company for a very reasonable price. On2's stock price is nearing the lowest it has ever been in almost 5 years and sales for Q1 were only $4.5 million on a loss of almost $5 million for the quarter.

While there is much debate in the industry over On2's VP7 codec being replaced by H.264, the fact remains that there is no one single codec that will rule the world. VP7 and H.264 both have strengths and weaknesses and both are needed in today's market. While I have never seen numbers published on how much money Adobe pays On2 to license the VP6 codec, clearly it's not a lot of money with On2 still having single digit revenue each quarter.

If Adobe could acquire On2 for a reasonable price, it could take its line of Flix products and offer them to the market for free, or at a much cheaper cost than On2 charges today. Doing this would help accelerate Flash based video adoption and enable Adobe to offer a better live Flash encoder.

It's a safe bet to think that some of the technical resources and development skills at On2, especially in the Hantro division could also be useful to Adobe with regards to its mobile video strategy. And while Adobe is not paying On2 a lot of money for licensing the VP6 codec, acquiring On2 means it would never have to deal with another licensing contract, if Adobe wanted to renew it when it expired. I know many will ask and the answer is, no, I don't know when it expires.

On2 has some smart technology folks at the company, but its revenue should be more than it is today. The company has seen very little revenue growth over the past 12-18 months, all the while the market for online video continues to grow. On2 can't stay this small forever and like many companies in today's market, needs to be part of a larger organization to truly grow to the next level. On paper, this is one of those acquisition ideas where it seems to make a lot of sense from both a financial perspective and a product and technology one.

Disclosure: None

Comments

[Pangaea]

It's not a new topic, but as ever for Adobe you'd have to wonder, why buy the cow when you get the milk pretty much for free? Also Adobe definitely seems to be putting less emphasis on VP6 these days with heavy promotion of H.264. So I'm not sure it makes sense for Adobe from any perspective - especially financial, since as you point out On2 had losses larger then sales last quarter.

For On2 I'm not so sure it would make sense either as they would probably rather be an independent provider for their other customers. In other words I'm not sure that Adobe all of the sudden becoming a provider of codecs like VC-1 would go over so well around the community. Adobe would also then be getting into the business of trying to sell products to competitors of theirs.

So overall such a speculation sounds both messy and unlikely to me.

[johnb1234]

Who says they would have to sell to their competitors? The profits from the codec are very small, but to own it would give Adobe control over one of their competitors products.
No one codec will control the whole market, each will have its uses.
The losses were caused by bad management, this could be reveresed with much better management.

[bulrun100]

ON2 SHOTTING TO BE THE KING OF WIRELESS STAY THE COURSE DDDDDDDDOOOOOOOOOOOO NOT BE BOUGHT OUT!