As Flash Video Rises, On2 Shares Fall

Adobe Systems, whose Flash video product dominates the Web video industry, made a smart move today: The Valley-based software giant announced that it is adding support for a high-definition video compression format called H.264 -- the same format used on Blu-Ray and HD-DVD discs, on Apple's iPhone, and in other important places.

The winners: big media, independent filmmakers, and anyone else who wants to distribute hi-def video using Flash's near-ubiquitous plug-in. The loser: Clifton Park, N.Y.-based On2 Technologies, which, until today, provided the best-possible video compression format for Flash video. On2 does not own the H.264 format, whose patent royalties are administered by a firm called MPEG Licensing Authority. Adobe will still support On2's format, meaning On2 will still earn royalties, but many content creators will choose the new, higher-quality format, making On2's video format less relevant.

On2's Q2 revenue jumped 66% year-over-year from $1.53 million in 2Q06 to $2.55 million in 2Q07, "primarily attributed to increases in sales of our Flix and Adobe Flash related products," the company said in its 10-Q. After today's announcement that Adobe would add support for a rival video format, On2 shares fell 20% on the Amex market on more than twice their normal trading volume.