You'll also notice that Google Video can play videos inline not only from Google's sites, but from many other popular video sites (some notable exceptions: AOL Video, MySpace, Yahoo Video).
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Google Video started by close-captioning TV shows, then moved to hosting videos, searching videos on the web and now the natural evolution is to come full circle back to close-captioning videos. Maybe in the future Google Video will bring back playlists and we'll be able to watch a selection of videos, like in YouTube Fast Search.