Google is buying On2 Technologies, an upstate New York video compression developer, for $106.5 million worth of common stock. On2 is going out at roughly 60 cents a share, a 57% premium over the 38 cents it was trading at before the announcement Wednesday.

On2 creates advanced video compression technologies that power the video in desktop and mobile applications and devices. Its customers include Adobe, Skype, Nokia, Infineon, Sun, Mediatek, Sony, Brightcove and Move Networks.

According to Google VP of product management Sundar Pichai, "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. We are committed to innovation in video quality on the web, and we believe that On2's team and technology will help us further that goal."

He didn't say exactly why Google wants it.

The volume of online video is of course galloping and Goggle owns YouTube. On2's software also includes the widgetry for high-def video playback on mobile devices.

The little acquisition said its products would stay on the market during the transition. The deal is expected to close in the fourth quarter.

The company, scheduled to report its second quarter Thursday, has been cutting costs to husband cash. Revenues in the last quarter were down 10% to $4 million.

Tech Crunch remembers that the outfit had a market cap of over a billion dollar after going public in 1999 and in 2001open sourced its VP3 compression technology, now Theora, the widgetry being developed by the Xiph.Org Foundation as part of its Ogg project. Wikipedia says Theora competes with MPEG-4, WMV and other low-bitrate video compression schemes.

Tech Crunch and Silicon Alley Insider muse with the notion that Google might open source On2's VP7 and VP8 video codecs as alternatives to the proprietary H.264 codecs and, as Tech Crunch says, "use the VP8 codec for YouTube in HTML5 mode, basically forcing its many users to upgrade to HTML5-compliant browsers instead of using Flash formats."