Google has recently transitioned from the H.264 video codec to VP8 and with it introduced HD streaming to Google Hangouts. Google started rolling out the change to users in the last few weeks, but it will still be awhile before this rolls out to everyone.Google introduced VP8 back in 2010 as an open and royalty-free format allowing users to watch video in browsers without the need for any additional plugins. Google claims that streaming HD video to ten participants using the H.264 codec would have required too much processing power. Using VP8 allows them to stream higher definition streams at lower bit rates.
The industry is now moving toward adopting WebRTC, which will allow users to launch video chats in the web browser without the need for apps and plugins. Google isn't the only company to push for the new technology, but it has integrated the necessary bits into the desktop and Android versions of Chrome. Google would eventually want to utilize WebRTC within Hangouts, but the standard needs time to mature before the transition can be made.
source - Android Police | +Vic Gundotra | +Chee Chew