The all-stock deal valued at $106.5 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, Calif.-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 percent premium to the Clifton Park, N.Y., 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 $2.59 to close at $451.14 Wednesday, while On2's shares surged 18.7 cents, or 49 percent, to 57 cents.