April 2002|If On2 Technologies ran TV commercials they'd probably be like those old Avis car rental spots which claimed, "Because we're Number 2, we try harder." Indeed, when it comes to the market for video codecs, On2 is clearly an underdog, going up against heavyweights like RealMedia and Microsoft Windows Media, not to mention license-free standards like MPEG-1, -2, and -4.

The On2 crew are not beginners, however; you may remember the company as the Duck Corporation and their codec technology as TrueMotion. Nowadays, the company goes primarily by the On2 name, and the TrueMotion codec is designated as the "VP" line of codecs, with the latest and greatest being the proprietary VP4. The company has made its earlier, less-advanced version (VP3) available to open source community.

Of course, On2 thinks its video compression technology is the best available. "Our codec provides the highest quality at the lowest data rate, and that's what most people are looking for," says On2's president and CEO Doug McIntyre. "MPEG-2 is a great codec, but to get broadcast quality requires about 10 Megabits per second. We can deliver almost identical quality at one-tenth that throughput," he brags.

On2's try-harder business strategy includes targeting a more specialized niche—set-top boxes—and concentrating on a specific geographic area, the Far East. "Asian countries have a huge amount of broadband in the home," says McIntyre, pointing specifically to South Korea, where he says 40% of all homes have DSL. "The penetration is high and therefore the demand for content is high." Add to that the fact that Asians are churning out set-top boxes at prices significantly lower than Americans and Europeans, and you start to understand why Asia is the only place in the world where the set-top box market is really happening and why On2 is targeting it.

In the past few years, On2 has struck a number of key deals to supply its codec technology to Asian set-top box manufacturers and VOD service providers. In December, for example, On2 announced a deal to collaborate on a set-top box for Korea-based Picosoft. The new box, which On2 is helping to design, will be deployed to enable VOD in the Korean market, and ultimately, will be distributed throughout most of Asia, including Japan and China. The company had previously announced deals with two Japanese companies—Media Commerce Solutions (a partnership of SGI, Toppan Printing, and NTT Software Corporation), and QB, K.K. (formerly known as StarDSL), a VOD service.

Perhaps even more important to On2's competitive strategy has been the decision to make the VP3 codec available to the open source community. By doing so, the company hopes to create a groundswell of grass roots support, especially among application developers.

"Being open source helps drive adoption and evaluation," says McIntyre. He's hoping that those who try VP3 will get hooked on it. Like junkies, they will have to move on to the harder stuff, which is VP4.

McIntyre sees this strategy as a way of staying competitive with the entrenched powers. "People always say: why use a proprietary codec when we can use MPEG for free? And I guess our answer to that has been to make our source code open," says McIntyre. Providing open code, he says, "is a flanking maneuver on the MPEG committee, quite frankly."

But if a company gives its technology away, how does it make any money? Well, you give away a slice of the pie, but never the whole thing—a taste, not the dish. And you always hold back the latest and greatest version. You give away the Chevy, but not the Cadillac; the burger, but not the prime rib.

In On2's case, it has made its previous version of it codec (VP3) open source, while keeping the latest incarnation—VP4—proprietary. The company also makes money selling its TrueCast Server software and by licensing its VPVision personal video recorder (PVR) software. The company has also licensed its TM2X codec for use in Sega Dreamcast and Saturn consoles.

After spending many years as an also-ran, On2 may not be an outsider for much longer. Its codec is already available as a component download within QuickTime 5, and the company recently announced a major coup—a licensing deal with RealNetworks, which will result in On2's VP4 codec being integrated into RealPlayer. RealNetworks has also made an equity investment in On2.

And so On2 Technologies is assaulting the market leaders with a combination of smart technology and smart business strategies. Will On2 ever be number one? I guess it depends on how hard they continue to try.