A Completely Speculative History & Future of H.264 and WebM

1. Several years ago, Google decides something needs to be done about web video, because (1) H.264 requires royalties, which means that parts of the web are proprietary (even if it is a standard), and Google believes an open web is in its best interest, and (2) for similar reasons, H.264 is incompatible with the W3C, Mozilla's Firefox, and Opera, so it will never become universal anyhow. Google is willing to go to great lengths to solve this issue, including large sums of money and developer time.
2. Google approaches MPEG-LA (or major entities that are members), and quietly floats the idea of 'freeing' H.264, by way of a large one-time payment from Google, after which H.264 will be royalty-free, and can then be blessed by the W3C.
3. Negotiations fail. Google offers large amounts of cash, but it isn't enough for MPEG-LA, which believes it is close to having a complete lock on the market, which it can leverage for even more cash later on.
4. Google threatens to support a competing format with all its resources, thereby threatening the future profitability of H.264.
5. MPEG-LA decides to call Google's bluff.
6. Google makes good on its threat, buying On2 and freeing its VP8 video codec as part of WebM, a royalty-free format for web video. (Note: I'll use 'WebM' to refer to 'VP8', a lot of the time.)
   
7. Mozilla, Opera, etc. naturally support this move, as it is good for the open web. Apple and Microsoft, whose motivations are otherwise, do not support this move - they are both already heavily invested in H.264, and for them life would be simplest if WebM never existed.
8. As a reaction to WebM, MPEG-LA makes H.264's licensing less expensive, and for a longer period of time.
   
9. Google makes good on another part of its threat to MPEG-LA, removing H.264 support from Chrome. MPEG-LA is surprised Google is willing to hobble its own browser in order to get a leg up in this fight.
   
   (This brings us to the present time.)
   
   
   
10. Nothing much changes, at first. Most web video is seen through Flash anyhow. However, the block of WebM supporters, which is now Firefox, Chrome and Opera - whose share in the market is large, and growing - gets video providers on the web to pay close attention to WebM.
11. Flash introduces WebM support. Most video encoded for desktop viewing can now be encoded in WebM, and viewable through Flash or an HTML5 video element in Firefox, Chrome and Opera. Even video shown with DRM can be encoded in WebM, but must be shown in Flash. On the other hand, in the mobile space, a complete stack of hardware&software support is still really just present for H.264, and Apple doesn't support anything else, so video encoded for mobile viewing is primarily done in H.264.
12. WebM's video quality improves, in part benefiting from the fact that while open source and royalty-free, WebM is not a formal specification or standard, so rapid development and changes are possible. WebM becomes equivalent or superior to H.264.
    
13. Google switches YouTube to primarily use WebM for encoding video meant for desktop use. There is hardly any impact on users, due to most video being shown in Flash anyhow (which now supports WebM). However, video for mobile viewing remains encoded in H.264.
    
14. Hardware support for WebM begins to ship in a great deal of new mobile devices, and eventually in a majority of new mobile devices.
15. As a reaction to WebM's rise, MPEG-LA once more lessens the royalties for H.264, in an attempt to make it more competitive.
    
16. A new version of Google's Android ships, on a new flagship phone from Google, that has complete hardware and software support for WebM. The device primarily views YouTube video in WebM format.
    
17. Google, stating WebM's superior quality, begins to 'favor' WebM over H.264 on YouTube, for mobile content. More specifically, while both WebM and H.264 are supported, WebM content is encoded at higher quality levels (this is accomplished not by decreasing H.264 quality, but by adding a higher level of quality exclusively for WebM). The result is that mobile devices viewing YouTube give a better user experience if the device does so using WebM.
18. Apple makes the rational decision and supports WebM on new iOS devices - hardware support is already there, and Apple cannot compromise on user experience. Whatever monetary benefit Apple gains from MPEG-LA from H.264 is completely eclipsed by Apple's iOS business, so this is a no-brainer.
19. With the majority of new mobile devices shipping with WebM support (Android and iOS), smaller players (Blackberry, WebOS, Windows Phone) are forced to support it as well.
20. The online video market has its anti-DRM moment, just like online audio already had. Video is shown without DRM, which simplifies delivery and cuts costs, and piracy remains at the same levels as before (just as with audio).
    
21. Once it is clear H.264 has lost in the mobile space, and that DRM is no longer needed, there is no reason for Microsoft and Apple not to support WebM in the HTML5 video element, on Windows and OS X respectively, in order to ensure their users the best experience.
    
22. With DRM no longer an issue and widespread support for WebM in the HTML5 video element, WebM becomes the universal standard for video on the web, on both desktop and mobile. Content producers have little reason to even support a fallback to Flash - some do, but many do not, at little detriment to them or their users.
23. Google wins the fight, and the open web greatly benefits.
    

Some things that can change this future history:

• MPEG-LA deciding to make H.264 100% royalty-free. This will kill MPEG-LA's profits, but may still be worthwhile for MPEG-LA members, since if done properly - and promptly - it can ensure H.264 becomes the standard for web video. Whether there remains enough profit from H.264 (from hardware, services, etc.) for this move to make sense, is not clear. But if this does happen, WebM loses, but really Google wins, since it got what it set out to get.
  
• A new video format can appear, or a newer version of an existing format, which requires new hardware support but has benefits to justify the switch. Given the battle between H.264 and WebM, I would expect the new format's backers to learn the lessons of the past and make it free on the web (or, if they are not willing to do that - then to not even bother to create a new format). If such a new format appears, and becomes the universal standard for web video, the result is that Google wins in this case as well.
• The fight gets taken to the courts. I doubt a simple injunction will be granted to either side, as both are powerful, influential, and have many patents to back up their claims - so there is no quick victory. Instead there is a lengthy court battle. To justify the cost, there must be a significant chance of large future profits, and if H.264 is already in decline, that might not be the case. However, it might still make sense for MPEG-LA to take Google to court, just to get it to settle for some amount of money, in which case Google wins overall, but MPEG-LA gets a little more money than otherwise. However, if the goal isn't a settlement, but an actual attempt to kill WebM, then things can get interesting. I don't think anyone can say for sure how that fight would turn out - does WebM infringe on H.264 patents? Does H.264 infringe on WebM patents (VP8 patents, granted to On2, and now owned by Google, which would countersue)? Perhaps both? Such a 'fight to the death' in the courts seems unlikely, in part due to that unpredictability, so all we can say for sure in this case is that several law firms will greatly benefit.
  

DISCLAIMER: I have no inside knowledge about any of this.