I don’t track technology stocks well, and I certainly don’t understand the nuances of video compression. But my friend Jim Walker (www.mindpalace.com) is the one that told me to buy Cisco stock in 1996. I didn’t.

Now he’s hot on ON2. Here’s a recent press release the company issued. According to the release, ON2 is “addressing the growing market of video across different bandwidth-constrained networks and mass-market devices, for fixed and mobile video.”

I don’t understand it either, and since I’m $30K in debt I won’t be investing. But here’s what interested me about Walker’s post on a Yahoo message board (which is excerpted in the “more” section below).

• It is now clear that ON2 is going to play a central role in the digital video environment over the next 24 – 36 months. However, what is not clear is how valuable will customers find this role? This is the billion dollar question that remains unclear in a rapidly converging 3-screen video environment (handheld/phone, PC, HDTV).
• Will there be one guerilla winner-takes-all video format that is ubiquitous across all three screens, or a handful of viable and useful compression technologies – in which ON2 is one of many good solutions?
• ON2, in partnership with Adobe, seems to have a strong hand here at the beginning of 2007, but there are other players at the table who have not really applied much attention to the issue of video compression. SONY, Apple, Microsoft and many others have the talent and resources to develop and rapidly distribute a new and compelling compression codec.
• Or, will it make sense for all the players to quickly recognize ON2/Flash video as a universal video medium, thereby essentially allowing ON2 to flourish into a significant new player? Sort of the video equivalent of the Swiss banking system: neutral and highly efficient at what they do.

With today’s PR it is now clear that ON2 is going to play a central role in the digital video environment over the next 24 – 36 months. However, what is not clear is how valuable will customers find this role? This is the billion dollar question that remains unclear in a rapidly converging 3-screen video environment (handheld/phone, PC, HDTV).  

Will there be one guerilla winner-takes-all video format that is ubiquitous across all three screens, or a handful of viable and useful compression technologies – in which ON2 is one of many good solutions? 

ON2, in partnership with Adobe, seems to have a strong hand here at the beginning of 2007, but there are other players at the table who have not really applied much attention to the issue of video compression. SONY, Apple, Microsoft and many others have the talent and resources to develop and rapidly distribute a new and compelling compression codec. For example – a surprise release of a new super-enhanced version of Quicktime, optimized for both iPOD and home theaters – would likely capture a wide swath of enthusiastic users. 

Or, will it make sense for all the players to quickly recognize ON2/Flash video as a universal video medium, thereby essentially allowing ON2 to flourish into a significant new player? Sort of the video equivalent of the Swiss banking system: neutral and highly efficient at what they do. 

In such a winner-take-all scenario, the ON2 “hockey-stick valuation” could easily exceed $ 1 billion, especially if they make significant inroads on the mobile phone and HDTV side of things. From a content development perspective, the opportunity to design once in the FLV – SWF file format, and then deploy to every mobile phone, computer, and HDTV in the world will create a pretty compelling virtuous circle of adoption. 

On the other hand – in spite of the ubiquity of Flash, the compression market could remain fragmented and out of the sweet spot of the profit zone of the video eco-system. In this scenario, ON2 remains in business, and revenues certainly grow from today’s level just based on the overall growth of the market – but there is no huge homerun valuation growth. 

What is more interesting though, is the potential for ON2 to emerge as the universal video encoding and playback software platform of choice. If the market does end up aligning in this fashion, then there is a very very large upside from here indeed!