MOUNTAIN VIEW, Calif. -- Internet search giant

Google

(GOOG) - Get Report

has thrown down $106.5 million to acquire privately held video compression specialist

On2 Technologies

in an attempt to bolster its multimedia story.

This is not the firm's first foray into the video space. Google spent a whopping $1.65 billion to acquire YouTube in 2006, although a major question mark still hangs over its ability to turn the video sharing phenomenon into a profit machine.

With online video traffic consuming vast amounts of bandwidth, however, Google appears to be laying the foundations for a much more robust service. In addition to advanced compression technologies, On2 also develops encoding and publishing products, as well as video-enabling chips for mobile devices.

"Today, video is an essential part of the Web experience, and we believe high-quality video compression should be part of the Web platform," said Sundar Pichai, Google's vice president of product management, in a statement released Wednesday. "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.

Under the terms of the deal, each outstanding share of On2 common stock will be converted into 60 cents worth of Google class A common stock in a stock-for-stock transaction. The acquisition, which is subject to On2 shareholder approval and regulatory clearance, is expected to close in the fourth quarter of 2009.

Google defended its YouTube service during its recent

second-quarter

earnings call. Critics have pointed out that the company spends an estimated $500 million a year on YouTube, without getting much in return. But company executives said advertising, such as pre-roll ads, were gaining traction and could soon pull the video business out of the red ink and into profits.

The tech bellwether is also confronted with a rapidly changing competitive environment, which may explain its decision to strengthen its online video story. Google, which competes with

Yahoo!

(YHOO)

, is increasingly entering

Apple's

(AAPL) - Get Report

sphere of influence through its

Android

and

Chrome

operating systems. Earlier this week, for example, Google CEO Eric Schmidt

stepped down

from Apple's board of directors, highlighting the increased

competition

between the two firms.